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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 01-10076
APPLIED RESEARCH CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Colorado 86-0585693
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(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification number
8201 Corporate Drive, Suite 1120, Landover, Maryland 20785
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(Address of Principal Offices) (Zip Code)
Registrant's telephone number, including area code: (301) 459-8442
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of each exchange on which registered
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Common Stock, par value $0.0005 None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB. [ ]
The Registrant's revenues for the year ended May 31, 1996 were $8,957,464.
On September 12, 1996, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $177,059.
On September 12, 1996, there were 6,311,083 shares of $.0005 par value
Common Stock outstanding.
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APPLIED RESEARCH CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-KSB
PART I Page
Item 1: Business 3
Item 2: Properties 8
Item 3: Legal Proceedings 9
Item 4: Submission of Matters to a Vote of Security Holders 9
PART II
Item 5: Market for the Registrant's Common Stock and
Related Security Holder Matters 10
Item 6: Management's Discussion and Analysis of Financial
Condition and Results from Operation 11
Item 7: Financial Statements and Supplementary Data 17
Item 8: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III
Item 9: Directors and Executive Officers of the Registrant 18
Item 10: Executive Compensation 18
Item 11: Security Ownership of Certain Beneficial
Owners and Management 18
Item 12: Certain Relationships and Related Transactions 18
PART IV
Item 13: Exhibits, Financial Statement Schedules and Reports
on Form 8-K 18
Signatures 19
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant hereby incorporates by reference the following Documents:
PART III
Item 9: Directors and Executive Officers of the Registrant
Item 10: Executive Compensation
Item 11: Security Ownership of Certain Beneficial Owners and Management
Item 12: Certain Relationships and Related Transactions
The foregoing are incorporated by reference from the Registrant's
definitive Proxy Statement relating to its annual meeting of Stockholders,
which will be filed in an amendment within 120 days of May 31, 1996.
PART IV - EXHIBITS
1. Incorporated herein by reference from the Registrant's May 31, 1995,
Annual Report on Form 10-K, filed with Securities and Exchange
Commission on August 29, 1995.
2. Incorporated herein by reference from the Registrant's May 31, 1994,
Annual Report on Form 10-K, filed with Securities and Exchange
Commission on September 6, 1994.
3. Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on June 28, 1994, S.E.C. File No. 01-10076.
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4. Incorporated herein by reference from the Registrant's Current Report
on Form 8-K, dated June 14, 1994, filed with Securities and Exchange
Commission on June 21, 1994.
5. Incorporated by reference from the Registrant's Registration
Statement on Form S-18, as amended, filed with Securities and
Exchange Commission on June 21, 1989, S.E.C. File No. 33-11943-LA.
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
(A) BUSINESS DEVELOPMENT
Applied Research Corporation was organized under the laws of the State of
Colorado on March 26, 1986, as Dollar Ventures, Inc., for the primary
purpose of engaging in a merger with or acquisition of, one or a small
number of private firms. On December 29, 1987, Dollar Ventures, Inc.
acquired 100% of the outstanding shares of Applied Research Corporation, a
Maryland corporation, common stock in exchange for 5,000,000 shares of
Dollar Ventures, Inc. common stock. The acquisition was legally
classified as a reorganization. For accounting and financial reporting
purposes, the transaction was treated as a reverse acquisition at book
value.
Following the acquisition, Applied Research Corporation (the original
Maryland corporation) changed its name to Applied Research of Maryland,
Inc. ("ARM"), and Dollar Ventures, Inc. changed its name to Applied
Research Corporation ("ARC"). Additionally, ARC changed its fiscal year
end from April 30 to May 31. Applied Research of Maryland, Inc. is a high
technology company specializing in research and development, design and
fabrication of sensors and instrumentation, technical support services and
software development. On April 2, 1996, ARM filed a voluntary petition
for relief under Chapter 11 of the United States Bankruptcy laws. See
Item 6. Management's Discussion and Analysis of Financial condition and
Results of Operations.
ARSoftware Corporation ("ARS"), a Maryland corporation and wholly owned
subsidiary of the Company was formed in April, 1992, to diversify ARC's
business by developing niche markets in the computer software industry.
The objective of ARS is to develop and distribute scientific and technical
software to academic, commercial and federal, state and local government
entities. ARS is currently reselling existing products under licensing
agreements.
ARInternet Corporation ("ARInternet"), a Maryland corporation and majority
owed subsidiary of the Company was formed in November 1994, to diversify
the business base of ARC by developing niche markets in the computer
online services industry. The objective of ARInternet is to become the
place to go on the Internet for information useful to those in search of
scientific knowledge.
As hereinafter used, the term "Company" shall refer to Applied Research
Corporation and its wholly owned subsidiaries Applied Research of
Maryland, Inc. and ARSoftware Corporation and the majority owned (95%)
subsidiary ARInternet Corporation, except when otherwise indicated by
context.
(B) BUSINESS OF ISSUER:
The Company's wholly owned subsidiaries, Applied Research of Maryland,
Inc. and ARSoftware Corporation, and majority owned (95%) subsidiary
ARInternet Corporation, are operating entities.
APPLIED RESEARCH OF MARYLAND, INC.
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On April 2, 1996, ARM filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy laws. Under Chapter 11,
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certain claims against ARM (the "Debtor") in existence prior to the filing
of the petition for relief under the federal bankruptcy laws are stayed
while the Debtor continues business operations as Debtor-In-Possession.
Prior to the filing of the Chapter 11 petition, management of the Debtor
had been attempting to sell the assets of ARM. Subsequent to the filing,
the Debtor entered into an agreement to sell a majority of ARM's assets.
At a Bankruptcy Court hearing on July 30, 1996, this agreement was
subjected to counter offers, and another company purchased a majority of
ARM's assets for $2.1 Million. Completion of this sale is subject to
approval by the Debtor's principal customer of the transfer of certain
contract rights and obligations, which is expected to take approximately
60 to 90 days to complete. Completion of the sale is also contingent upon
obtaining the approval of a majority of the Company's shareholders. See
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation for additional information on the Bankruptcy
proceedings and the sale.
ARM is the principal business of ARC. ARM's activities are divided into
three divisions: Technical Services Division, Instruments Division and
ARInstruments Division, each of which is described in the paragraphs that
follow.
Technical Services Division
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The Technical Services Division provides scientific software design and
development, mathematical analysis, laboratory experiment design and
implementation, and scientific data analysis to support research programs
in the earth and space sciences, optics, electronics, and chemistry. Most
of these support services are performed on-site at U.S. Government
("Government") laboratories (NASA/Goddard Space Flight Center, the Naval
Research Laboratory, and the U.S. Naval Observatory). In addition, during
1993, the Company began work on a subcontract with Hughes Applied
Information Systems, Inc. ("Hughes") where the work is performed on-site
at a Hughes location.
Instruments Division
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The Instruments Division designs and fabricates specialized hardware used
to carryout spaceborne scientific observations. Primary emphasis is in
the development of ultraviolet to near infrared imaging and spectrographic
instruments for use in astrophysical and atmospheric research. The
Instruments Division has expanded into the manufacture of rocket and
spacecraft attitude-control sensors. The Company's classified contracts
are also carried out in the Instruments Division.
ARInstruments Division
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During its many years of performing under government contracts, the
Company has developed expertise in custom design and fabrication work. In
addition, members of the Company's technical staff have investigated and
researched other government and commercial applications for existing
technologies. The Company formed its ARInstruments Division
("ARInstruments") in fiscal 1993 to penetrate the government and
commercial instrumentation markets, and specifically segregate these
activities from other government contract operations in the design,
fabrication, and distribution of instrumentation products. During fiscal
1994, ARInstruments had begun research and development efforts related to
product development and initiated two patent applications. These patents
were granted during fiscal 1995 and, accordingly, the Company began
amortizing the costs associated with the patents during the year ended
May 31, 1995.
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ARSOFTWARE CORPORATION
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ARSoftware Corporation ("ARS") was established to diversify the Company's
business base by developing niche markets in the computer software
industry. Currently, ARS is reselling selected products to academic
institutions, industry and government agencies, focusing on end users
working on scientific and engineering applications.
ARINTERNET CORPORATION
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ARInternet Corporation ("ARInternet") provides a reliable, high-speed,
full-service link to the Internet, utilizing state-of-the-art networking
hardware and software with built-in capacity for expansion and
improvement. ARInternet had approximately 1,000 subscribers as of May 31,
1996. ARInternet offers monthly, quarterly, semi-annual and annual
subscription agreements, each requiring payment in advance. ARInternet
offers the ability to pay the subscription amounts by credit card to
facilitate payment.
ARInternet currently hosts, maintains, and provides gateways to numerous
free and commercial scientific databases, refers subscribers to on-line
research and document delivery services, and offers a variety of server
capabilities to facilitate information exchange. Specifically, ARInternet
offers all the "standard" connection options, such as e-mail, telnet, ftp,
WWW, gopher, finger, and so forth, which most people have come to expect
as the basic services of a dial-up account. However, in contrast to a
cheaper, "no-frills" basic account, ARInternet also offers enhanced
customer support in the form of a user-friendly, menu-driven interface,
excellent on-line and phone-in help, access to public ftp, gopher, and WWW
servers, electronic conferencing and publishing services, Internet
training, and a myriad of research services.
To facilitate access to its services, ARInternet has signed an agreement
with the SprintNet packet switching network to allow customers to connect
to ARInternet's Landover, Maryland, facility via a local telephone call
from most U.S. cities. ARInternet has installed an "800" number to
provide access to those subscribers currently residing outside SprintNet's
coverage range. Through its arrangement with SprintNet and installation
of the "800" number, the Company hopes to ensure that its subscriber base
is not constrained by geographical boundaries and to attract the more
mobile professionals in the Washington D.C. area.
RESEARCH AND DEVELOPMENT
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ARM conducts research and development activities in several areas. During
its many years of performing under Government contracts, ARM has developed
expertise in custom design and fabrication work. The Company formed its
ARInstruments Division ("ARInstruments") in fiscal 1993 to penetrate the
government and commercial instrumentation markets. ARInstruments has been
conducting research and development related to the development of a
proprietary technique and instrument, the BIO-UVB Meter, for directly
measuring biological effects of solar UVB. During the years ended May 31,
1996 and 1995, approximately $87,000 and $217,000 was spent, respectively.
Now that BIO-UVB Meter has been designed and the patents granted, ARM
anticipates such expenditures for the year ended May 31, 1997, should be
approximately the same as the fiscal 1996 level. The patents are among
the property being sold under the Consolidated Asset Purchase Agreement
approved by the Bankruptcy Court on July 30, 1996. See Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operation for additional information concerning the sale.
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ARS does not conduct any significant research and development effort. ARS
does, however, capitalize the cost of producing "product masters", in
accordance with Statement of Financial Accounting Standards No. 86.
During the years ended May 31, 1996 and 1995, approximately zero and
$27,000 was spent and capitalized, respectively. ARS does not anticipate
any such expenditures for the year ended May 31, 1997. ARInternet had no
research and development expenditures during the two years ended May 31,
1996.
INTELLECTUAL PROPERTY
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Patents, copyrights trademarks and trade secrets are the principal
protection source for the Company's intellectual property. The Company
also holds various copyrights covering its published materials and
proprietary software, most of which are derived from original works
created by employees of the Company, its subsidiaries or by independent
contractors hired under agreement for a specific project. The remaining
copyrights are held by the Company through licensing agreements with the
authors.
ARM applied for and has been granted two (2) patents relating to
instrument technology it has developed. These two patents are among the
property being sold under the Consolidated Asset Purchase Agreement
approved by the Bankruptcy Court on July 30, 1996.
All of the patents, copyrights, trademarks and licenses are considered by
the Company to be valuable property rights. The protection afforded by
these intellectual property rights and the law of trade secrets is
believed by the Company to be adequate. However, notwithstanding the
Company's intellectual property rights, it is possible for a competitor to
develop near imitations of the Company's products implementing
modifications, without violating those rights.
SEASONALITY
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Revenues for ARM typically are not seasonal, but will sometimes depend on
the availability of Government funding. The Government budgets and
operates on a fiscal year ending September 30th.
In the past, ARS revenues have been seasonal, with ARS typically showing
greater revenues in the second, third and fourth fiscal quarters. ARS
also had experienced inventory and accounts receivable variations due to
the seasonal nature of its business.
Revenues for ARInternet have not been seasonal.
CUSTOMERS - MARKETS AND MARKETING
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Predominantly all of ARM's revenues (99%) are derived from agencies of the
Government and prime contractors to those agencies. During fiscal 1996,
ARM had one customer that accounted for approximately 35 percent (35%) of
its revenue during the year. This customer, NASA, had 10 contracts with
ARM, of which one contract provided 20 percent (20%) and a second provided
13 percent (13%) of ARM's revenue. Another customer, Hughes Corporation,
had two contracts which accounted for 49 percent (49%) of ARM's revenue,
of which the largest accounted for 37 percent (37%). ARM also has two
contracts with the Naval Research Laboratory which accounted for 3 percent
(3%) of ARM's revenue. ARM also maintained one contract with General
Sciences Corporation, which contributed approximately 3 percent (3%) of
its revenue. The contracts held by ARM are among the property being sold
under the Consolidated Asset Purchase Agreement approved by the Bankruptcy
Court on July 30, 1996.
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ARS has no significant major customers.
ARInternet has no significant major customers. At May 31, 1996,
ARInternet had approximately 1,000 subscribers. At May 31, 1995,
ARInternet had approximately 350 subscribers.
On a local level, ARInternet reaches its target market primarily through
advertisements placed in the Washington Post. ARInternet intends to
increase its marketing efforts, particularly on a national level, by
placing advertisements in certain widely distributed scientific journals,
and, possibly, through direct mailings to members of its target market.
ARInternet benefits from word-of-mouth advertising as the number of
subscribers multiplies and ARInternet's exposure on the Internet
increases. Additionally, ARInternet participates in a number of e-mail
discussion groups and cultivates subscribers through ARInternet-sponsored
Internet training sessions.
BACKLOG
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ARM's total backlog of contracts as of May 31, 1996, was approximately
$27.5 million ($2.8 million funded and $24.7 million unfunded). This
compares with a backlog of approximately $33.1 million ($3.3 million
funded and $29.8 million unfunded) at May 31, 1995. If ARM were to
continue its current business, it would expect that approximately 30
percent (30%) of the total backlog as of May 31, 1996, would be realized
within one year. The contracts held by ARM are among the property being
sold under the Consolidated Asset Purchase Agreement approved by the
Bankruptcy Court on July 30, 1996.
ARS's backlog as of May 31, 1996, was approximately $5,000, consisting of
purchase orders that were received, but not shipped. These purchases
orders were shipped during June and July 1996. ARS's backlog as of
May 31, 1995, was approximately $20,000 also consisting of purchase orders
that were received, but not shipped.
ARInternet's backlog as of May 31, 1996, was approximately $27,600 which
related to prepaid subscriptions received in advance. This amount will be
earned during the current fiscal year. ARInternet's backlog as of May 31,
1995, was approximately $14,400 which related to prepaid subscriptions
received in advance. This amount was earned during fiscal year 1996.
GOVERNMENT CONTRACTS
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ARM's Government contracts contain standard clauses permitting the
termination of contracts and subcontracts at the election of the
Government. The Company's contracts with prime contractors also typically
contain similar clauses permitting termination of the contract at the
election of the Government. In the event of termination of such
contracts, the Company is entitled to receive reimbursement on the basis
of costs incurred plus a reasonable profit. The Company has not had any
significant contracts terminated at the election of the Government during
the past two fiscal years. The contracts held by ARM are among the
property being sold under the Consolidated Asset Purchase Agreement
approved by the Bankruptcy Court on July 30, 1996.
COMPETITION
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Both ARM and ARS face competition from other firms which provide similar
products and services. Some of these firms are larger and better
capitalized than both ARM and ARS. The Company does not consider any one
firm to hold a dominant position in the industry. ARM has established an<PAGE>
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excellent reputation within the Government scientific community and
therefore has created a niche market for itself. This is largely due to
its talented employees, more than 50% of which have PhD's. The contracts
held by ARM are among the property being sold under the Consolidated Asset
Purchase Agreement approved by the Bankruptcy Court on July 30, 1996.
ARInternet faces competition from many businesses offering Internet access
ranging in size from sole proprietorships to large corporations. The
services provided by these competitors vary from simply furnishing
Internet connectivity to providing a full complement of services including
e-mail, in-home shopping and banking, and complete on-line research and
document delivery services. Many of these competitors are larger and have
greater financial resources than ARInternet.
ARInternet intends to meet or exceed competitive demands by recognizing
that many disciplines and subdisciplines of science and technology exist,
each with its own needs and level of exposure to Internet resources. By
recognizing these differences, ARInternet provides its subscribers with
easy access to a suite of customized tools and Internet services unique to
the scientific community as a whole, and, more importantly, designed to
provide discipline-specific information, including access to public and
commercial databases, software archives, suppliers of products and
materials, print and electronic publication, and announcements of on-line
and traditional meetings in many different areas of science and
technology, many of which were previously unavailable from more
established sources.
EMPLOYEES
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At May 31, 1996, 117 full-time and 6 part-time employees were employed by
the Company and its wholly owned and majority owned subsidiaries. ARM
employed 110 full-time and 6 part-time employees while ARS employed 2
full-time employees at May 31, 1996. Subsequent to May 31, 1996, ARS
reduced its staff to 1 full-time employee.
ARInternet employed 5 full-time employees at May 31, 1996. Outside
consultants with specialized knowledge and experience in designing and
operating TCP/IP networks, client/server and database application
development, CD-ROM publishing and familiarity with biological and medical
resources and markets have been utilized to extend the Company's
capabilities and to enhance the range of services covered. As resources
permit and circumstances warrant, additional personal with specialized
talents and experience will be added to the present staff. Anticipated
needs include application software developers, customer service
representatives, database specialists, and technical assistants.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters are located at 8201 Corporate Drive,
Landover, Maryland 20785. This property measures 12,633 sq. ft. and is
currently leased by ARC at $16,960.79 per month through its expiration on
September 30, 1998. This space is occupied as follows: ARM, 7,283 and
2,789 sq. ft. of office and laboratory space, respectively, ARS occupies
1,551 sq. ft. of office space and ARInternet occupies 1,010 sq. ft. of
office space. The Company's corporate headquarters are expected to be
adequate to meet the Company's needs for the foreseeable future. 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.<PAGE>
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The Company's capital equipment consists primarily of furniture and office
equipment, laboratory equipment and computer hardware located at its
corporate headquarters. ARM's and ARS' capital equipment is believed to
be adequate to meet their projected needs for the foreseeable future.
ARInternet will require additional computer related equipment as its
customer base increases. The amount of such purchases required for fiscal
1997 will depend on growth and therefore cannot be reasonably determined
at this time.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company, nor ARS or ARInternet is currently a party to any
pending litigation or other material legal proceeding.
On April 2, 1996, ARM filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code. Under Chapter 11, certain claims
against ARM (the "Debtor") in existence prior to the filing of the
petition for relief under the federal bankruptcy laws are stayed while the
Debtor continues business operations as Debtor-In-Possession.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1996. <PAGE>
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MARKET INFORMATION
The Company's common stock commenced trading over the counter on November
23, 1987. The Company's common stock was listed on the Philadelphia Stock
Exchange on November 9, 1988, and began trading on November 17, 1988 under
the symbol "ARL.X". The Company's common stock continued to be listed on
the Philadelphia Stock Exchange until February 7, 1995, when it was
delisted for failure to meet the Philadelphia Stock Exchange's maintenance
requirements.
As a result of its delisting from the Philadelphia Stock Exchange, the
Company's common stock is now traded on the Over-the-Counter Electronic
Bulletin Board ("OTCBB") under the symbol "APLS". The reported high, low
and last prices, as quoted on the Philadelphia Stock Exchange through
February 7, 1995, and thereafter the high and low bid price as quoted on
the OTCBB system, are shown below for the period June 1, 1994 through
August 31, 1996. The high and low bid information as quoted on the OTCBB
represents prices between brokers and dealers and does not include retail
mark-ups and mark-downs or any commissions to the broker-dealer. The
prices may not reflect prices in actual transactions.
<TABLE>
<CAPTION>
High Low Last
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<S> <C> <C> <C>
FISCAL 1995
First Quarter 0.37500 0.12500 0.12500
Second Quarter 0.31250 0.12500 0.25000
Third Quarter 0.25000 0.12500 0.18750
Fourth Quarter 0.18750 0.18750 0.18750
FISCAL 1996
First Quarter 0.34375 0.12500 0.34375
Second Quarter 0.87500 0.25000 0.26000
Third Quarter 0.68750 0.15625 0.33375
Fourth Quarter 0.31250 0.06250 0.10000
FISCAL 1997
First Quarter 0.15000 0.06000 0.06000
</TABLE>
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NUMBER OF SHAREHOLDERS
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The approximate number of shareholders of record for the Company's common
stock as of September 6, 1996, was 420. This amount represents the number
of certificate holders and individual non-objecting beneficial owners of
the Company's common stock held in "street name".
DIVIDENDS
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No cash dividends have been declared on the common stock of the Company
for either of the last two fiscal years ending May 31, 1996 and 1995. In
addition, while there are no limitations on the ability of the Company to
pay dividends, management does not anticipate the declaration of a cash
dividend on any class of common stock of the Company in the foreseeable
future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
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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 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 Data,
and the Company's Consolidated Financial Statements, including the related
notes thereto, appearing elsewhere in this report.
On April 2, 1996, ARM filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code. Under Chapter 11, certain claims
against ARM (the "Debtor") in existence prior to the filing of the
petition for relief under the federal bankruptcy laws are stayed while the
Debtor continues business operations as Debtor-In-Possession. Prior to
the filing of the Chapter 11 petition, management for the Debtor had been
attempting to sell the assets of ARM. Subsequent to the filing, the
Debtor entered into an agreement to sell the majority of ARM's assets. At
a Bankruptcy Court hearing on July 30, 1996, this agreement was subjected
to counter to offers, and another company purchased the majority of ARM's
assets for $2.1 Million. Completion of this sale is subject to approval
by the Debtor's principal customer of the transfer of certain contract
rights and obligations, which is expected to take approximately 60 to 90
days to complete. The sale is also contingent upon obtaining the approval
of the Company's shareholders.
RESULTS FROM OPERATIONS - 1996 COMPARED TO 1995
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The Company's revenues for the year ended May 31, 1996, were $8,957,464.
This represents a decrease of $(632,649) or (7)% over revenues of
$9,590,113 for the same period during 1995. The decrease in revenues is
primarily attributable to a decrease in ARM's revenues of $(741,655) or
(8)% over 1995 revenues of $9,135,523 and to the decrease of $(167,414) or
(39)% in ARS' 1995 revenues of $429,335. Arinternet however, reported an
increase in revenues of $276,420 from 1995 revenues of $25,255. The
decrease in ARM's revenues was the direct result of a reduction in the
amount of direct labor and other direct costs incurred by ARM. ARS's
decrease in revenues was attributed to a reduction in marketing related
activities as well as the reduction in the number of marketing related
employees.
The Company's direct cost of services decreased $(599,317) or (10)%, from
$6,066,430 in 1995, to $5,467,113 during 1996. Of this amount, ARM and<PAGE>
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ARS contributed decreases of $(369,464) and $(285,837), respectively,
while ARInternet's cost of services increased $55,984. Notably, ARM's
decrease in its direct costs was caused by a reduction in its technical
staff as well as a decrease in subcontract and consulting costs. The
decrease in direct costs of ARS was primarily related to a decrease in
amortization of approximately $85,900 of previously capitalized software
development costs, the non-recurring May 31, 1995, write-off of
approximately $118,900 of previously capitalized software development
costs, as well as a decrease in the costs of products being sold.
Indirect operating costs decreased $(414,885) or (18%), from $2,349,084 in
1995, to $1,934,199 during 1996. Of this amount, ARM's indirect operating
costs decreased $(379,494) or (17%) and ARS's decreased $(39,391) or
(55)%. ARM's decrease is directly related to the reduced fringe benefit
costs incurred as a result of fewer technical 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 fiscal year.
General and administrative ("G&A") expenses increased $25,836 or 2%, from
$1,501,074 in 1995, to $1,526,910 during 1996. Of this amount, ARM's G&A
expenses decreased $(60,113) or (6%), while ARS decreased its G&A costs
$(128,879) or (41)%. ARInternet's G&A costs increased $214,828 or 113%,
reflecting a full years worth of operations during 1996 compared to only 7
months during fiscal 1995. ARM's decrease related to a decrease in bid
and proposal and research and development costs incurred in 1996, as well
as a reduction in ARM's G&A staff. The decrease in ARS's G&A expenses was
directly attributable to a $68,300 reduction in indirect labor charged
during the period, a $47,600 reduction in marketing related expenses, and
a $13,000 decrease in other expenses.
As a result of the foregoing, the Company realized operating income for
the year ended May 31, 1996, of $29,242 compared to an operating loss of
$(326,475) for the same period during 1995. ARM posted an operating
profit of $349,618 in 1996 compared to $286,202 during the same period in
1995. The increase in ARM's operating margin related to higher fees
(profit) being realized on its contracts during fiscal 1996 compared to
same period in 1995. ARM's 1996 indirect rates, in particular its G&A
rate, were lower than those experienced in fiscal 1995. ARS posted an
operating loss of $(118,026) for fiscal 1996, which loss represented an
improvement of $286,693 or 71% from the operating loss of $(404,719)
during the same period in 1995. This net improvement for ARS is directly
attributable to a decrease in salary and related fringe benefit expenses
of approximately $108,200, and reductions in marketing and other expenses
of approximately $60,600, a decrease in the amortization of previously
capitalized software development costs of approximately $185,800, offset
by an increase in the cost of goods sold of approximately $67,900.
ARInternet's operating loss of $(202,350) during the year ended May 31,
1996, was an improvement of $5,608 or 3% over the operating loss of
$(207,958) during the same period in 1995.
<PAGE>
<PAGE>
Interest and other expenses increased $114,031 or 21%, from $543,504 in
1995, to $657,535 during 1996. Net interest expense increased $31,560 or
9% from 1995. The increase in interest costs was the result of an
increase in interest on unremitted employee 401(k) contributions which
added approximately $49,200 of interest expense during fiscal 1996 when
compared to the same period in 1995. Penalties and other expenses also
decreased $6,592 during 1996. Compensation expenses associated with stock
awards increased $89,063, and resulted from ARC issuing stock as
compensation to two firms. 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 $(657,056) for the year ended May 31,
1996, compared to a net loss of $(895,313) during the prior year. This
loss reflects an increase in ARM's operating margins of $63,416, an
increase in ARS's operating margin of $286,693, and an increase in
ARInternet's operating margins of $5,608. This, net of the increase in
interest and other costs of $114,031, and the increase in professional
fees related to the bankruptcy case of $28,763, and the decrease in income
tax expenses of $(25,334), positively impacted overall margins by $238,257
when compared to fiscal 1995.
Loss per common share likewise decreased from $(0.15) in 1995, to $(0.11)
during 1996. During the year ended May 31, 1996, there were an average of
6,214,817 shares outstanding compared to 5,944,416 shares outstanding
during the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES - 1996 COMPARED TO 1995
- -------------------------------------------------------
Total assets decreased $(322,538) or (15)%, from $2,120,158 at May 31,
1995, to $1,797,620 at May 31, 1996. Total liabilities on the other hand
increased from $3,679,314 to $3,899,769 over the same period, an increase
of $220,455 or 6%.
The most significant reason for the decrease in total assets was the
decrease in accounts receivables of $268,168 and the decrease in other
current assets of $39,726. At May 31, 1996, the Company had $1,090,861
and $433,824 in billed and unbilled receivables, respectively. Billed
receivables increased $22,436 or 2% from May 31, 1995, while unbilled
receivables decreased $290,604 or 40% from May 31, 1995. The increase in
billed accounts receivable was primarily the result of an increase in the
amount of closeout billings outstanding, offset by a decrease in the
average amount billed due to the decrease in revenues. The decrease in
unbilled accounts receivable primarily related to preparing final invoices
on 14 old contracts during November, 1995, as a result of completing
government audits for FY 1991 through FY 1993 during the quarter then
ended.
<PAGE>
<PAGE>
The most significant reason for the increase in liabilities was the
increase in payroll taxes and withholdings which increased $490,904 from
May 31, 1995 to May 31, 1996. In addition, other accrued expenses
increased $146,557 during the year as a result of increased penalties and
interest associated with unpaid payroll taxes and 401(k) contributions.
The Company's working capital deficit continued to grow during the year
ended May 31, 1996, increasing from a deficit of $(1,781,905) to a deficit
of $(2,273,810). Adding to the Company's working capital deficit during
the year ended May 31, 1996, was an increase in unremitted payroll taxes
withheld of $490,904, from $481,576 at May 31 1995, to $972,480 at May 31,
1996.
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.
SUBSEQUENT EVENTS
- -----------------
The following is a chronology of the events leading up to ARM filing for
Chapter 11 under the United States Bankruptcy laws on April 2, 1996, as
well as a discussion of what has happened since the filing and subsequent
signing of an agreement to sell the majority of ARM's assets to a third
party purchaser.
IMPACT ON CASH FLOW DUES TO THE LOSSES FROM OPERATIONS/CONTINUED
INVESTMENT IN ARS/ARINTERNET.
----------------------------------------------------------------
Because of the continued losses incurred by ARM, ARS and ARInternet
(through November 1995, ARC incurred losses of approximately $(422,000))
as well as the cash drain on ARM by ARS and ARInternet during fiscal 96
(through November 1995, ARM funded approximately $157,800 of ARS and
ARInternet expenses, while an additional $46,800 was expended from
December 1, 1995 through April 2, 1996), ARM continued to fall behind on
remitting its federal withholding taxes throughout the first half of
fiscal 96. Through November 1995, ARM owed the IRS approximately $675,600
in unpaid federal withholding taxes plus an additional $200,000 in
interest and penalties.
DELINQUENT FEDERAL WITHHOLDING TAXES/FILING OF LIENS BY THE IRS.
---------------------------------------------------------------
During September, 1995, ARM made a $50,000 payment to the IRS for
delinquent payroll taxes. The IRS had demanded a $250,000 payment be made
on October 27, 1995, and when the Company was unable to meet this demand,
the IRS filed a lien against ARM on November 7, 1995.
<PAGE>
<PAGE>
As a result of the IRS lien, ARM defaulted on its loan agreement with
its primary lender, PrinCap, pursuant to a provision requiring it to remit
all federal payroll withholding taxes as they became due. Upon the filing
of the IRS lien, PrinCap issued a letter of default to ARM on November 14,
1995, under which no additional funding was granted and all residuals
received by PrinCap were applied to reduce the loan balances outstanding.
On November 17, 1995, ARM entered into an agreement with a new lender
("CFC"), and on December 4, 1995, CFC paid off the remaining outstanding
PrinCap loan balance of $651,491, plus $18,288 of accrued interest and
other charges. The agreement with CFC allows ARM to borrow 90% against
billed receivables on all assigned contracts. Since the new financing
agreement did not allow ARM to borrow against unbilled receivables, ARM
was required to pay off the $250,000 unbilled loan advance and the
approximate $35,000 equipment loan due to PrinCap at the time of closing
the new loan. To accommodate this, CFC allowed ARM a one-time advance of
approximately 97% against eligible billed receivables.
On December 1, 1995, the Company entered into a new installment
agreement with the IRS which required a $75,000 monthly payment to be made
starting with December, 1995, and continuing until the liability was paid.
As a condition of this installment agreement, the Company's new lender was
required to deduct the monthly payment from the Company's borrowings
against billed receivables and remit this directly to the IRS. The IRS
agreed to give CFC a priority security interest with regards to its loans
against billed receivables. The IRS and CFC initially operated under an
interim subordination agreement while the Company applied for a formal
subordination from the IRS. On January 30, 1996, the IRS issued a
Certificate of Subordination. Through April 1, 1996, the Company's lender
had remitted the first four payments. However, during the period from
November 14, 1995 to March 25, 1996, ARM only made one tax deposit of
$69,000. During this period ARM failed to remit approximately $472,500 of
current federal withholding tax deposits as was required under the
December 1, 1995, installment agreement.
Starting in October 1995, management of the Company started pursuing
the possible sale of ARM, the Company's government contracting subsidiary.
The Company enlisted a broker which made contacts with several companies
who appeared to be interested. Three companies expressed interest in
acquiring essentially all of the operating assets of ARM (principally the
government contracts). Discussions were ongoing with these parties from
late December 1995 through March 1996. During this period, no offers
acceptable to the Company were made. In late March 1996, management was
pursuing discussions with a potential buyer and as a condition of the
negotiations, had a meeting with the IRS to discuss the amount owed the
IRS as well as a potential settlement of the outstanding liability, which
as of April 1, 1996, was approximately $1,155,000.
FILING OF CHAPTER 11 PETITION BY ARM.
------------------------------------
Because ARM was in default of its December 1, 1995, installment
agreement with the IRS, the Company's assets were subject to immediate<PAGE>
<PAGE>
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, ARM was forced to file for protection under Chapter 11 of the
United States Bankruptcy Code on April 2, 1996.
On April 5, 1996, ARM received an emergency hearing with the
Bankruptcy Court to determine its request to pay its employees their pre-
petition wages as well as continue to operate the business. Prior to the
emergency hearing, ARM reached an agreement with the IRS and CFC (its
lender) to allow the company to continue to operate and borrow money from
CFC against its billed receivables. Under this agreement, ARM 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 will 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 (the final vouchers on 14 old contracts, which totaled
approximately $136,700). 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 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 had and would
continue to pursue the sale of the ARM's business. To that end, ARM
placed an ad 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, which was 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 biding, an offer was
accepted for $2.1 Million. The following is a list of the purchased and
excluded assets:
PURCHASED ASSETS EXCLUDED ASSETS
---------------- ---------------
- - All contracts rights - ARM's charter and status as a
including project contracts), corporation, its minute book, stock
- - All inventory, transfer records, and similar records
- - All books and records, relating to ARM's organization,
- - All furniture, fixtures and existence or capitalization, and the
equipment, capital stock or ARM,
- - All proprietary rights - Billed accounts receivable as of
(patents, etc.) closing,
- - All unbilled accounts - Intercompany receivables,
receivable as of the closing - ARM's rights to occupy real property
date. pursuant to leases of real property
and any leasehold improvements made
thereto.
- Any other property identified by
the Purchaser prior to the closing.
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 is expected to
be submitted to the Bankruptcy Court for approval during the week ended
September 13, 1996. The sale is subject to the successful novation of
ARM's government contracts. This is expected to take approximately 60 to
90 days from contract execution. The sale must also be approved by a
majority of the Company's shareholders. The Company plans to submit the
matter to a vote at the Company's Annual Meeting of Shareholders currently
scheduled for October 30, 1996. Upon notification of the government's
novation approval, and approval of the Company's shareholders, the sale
will be completed.
PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES.
-----------------------------------------------------------
Once 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 contracts rights plus the collection of the outstanding
accounts receivables (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 amounts owed to the
employees for accrued vacation (up to $325,000), the amount owed to the
401(k) Plan as of April 2, 1996, of approximately $676,000, as well as
their pre-petition claims for unreimbursed travel expenses of
approximately $50,000, and, 3) the principal portion of the tax amounts
owed to both the IRS and the various state authorities. In addition, it
appears that the various taxing authorities will receive a portion of the
pre-petition penalties and interest, but not the full amount. Although
these are the current expectations, there can be no assurances that these
amounts will be paid until the Plan of Reorganization is submitted and
confirmed by the Court.
<PAGE>
<PAGE>
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
ARS's and ARInternet's operating expenses during their start-up phases and
providing continued funding 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 May 31, 1996,
ARS has still not achieved break even operations. As of September 6,
1996, ARM has only one full-time employee and its sales are minimal.
Therefore payment of any of the amount its owes ARM is extremely doubtful.
On the other hand, ARInternet has essentially achieved break even
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 current fiscal year ARM 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 current fiscal year
(through April 2, 1996), ARM funded approximately $204,600 of ARS and
ARInternet expenses. From the period from April 2, 1996 on, because of
the 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 break even, 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 May 31, 1996, had approximately 1,000
subscribers and had essentially reached break even 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 assurances 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. In addition, ARC will continue to incur expenses to maintain its
statusas a public company. Although these expenses will be less because
of having less revenues and expenses, they will have to be borne by the
remaining companies.
<PAGE>
<PAGE>
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 $3.7 million at May 31, 1996,
will be either liquidated or discharged. This will decrease the Company's
interest and penalties costs that it had 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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page
Index to Consolidated Financial Statements and Supplementary Data:
- -----------------------------------------------------------------
Report of Independent Auditors 20
Financial Statements:
Consolidated Balance Sheets -
May 31, 1996 and 1995 21-22
Consolidated Statements of Operations -
Years Ended May 31, 1996 and 1995 23
Consolidated Statements of Changes in
Stockholders' Deficit -
Years Ended May 31, 1996 and 1995 24
Consolidated Statements of Cash Flows -
Years Ended May 31, 1996 and 1995 25-26
Notes to Consolidated Financial Statements 27-41
The Financial Statement Schedules and Exhibits
are Listed in Part III Item 13 18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
<PAGE>
PART III
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Part III, Items 9, 10, 11 and 12, are incorporated by reference from the
Registrant's definitive Proxy Statement relating to its Annual Meeting of
Shareholders which will be filed in an amendment within 120 days of
May 31, 1996.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Certain documents filed as part of the Form 10-KSB
Page
----
(1) The financial statements included are listed in
Part II Item 8 17
(2) Supporting Financial Schedules for the Years Ended
May 31, 1996 and 1995 42-48
(b) Reports on Form 8-K.
(1) On April 17, 1996, the Company filed a Current Report
on form 8-K dated April 2, 1996, reporting the filing
of a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code by ARM. That report included:
ITEM 3: BANKRUPTCY OR RECEIVERSHIP
(c) Index to Exhibits 49
All schedules not included herewith are presented in the
footnotes to the consolidated financial statements or are not applicable.
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Applied Research Corporation
We have audited the accompanying consolidated balance sheets of Applied
Research Corporation and subsidiaries as of May 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders'
deficit, and cash flows for the years then ended. In connection with our
audit of the consolidated financial statements referred to above, we have
audited the consolidated financial statement schedules as listed in the
accompanying index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Applied Research Corporation and subsidiaries as of May 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedules have been prepared assuming that the Company will continue as a
going concern; however, the Company had net working capital and
stockholders' capital deficits as of May 31, 1996, as well as a history of
losses. As discussed in Note 3, the Company's principal operating
subsidiary has filed for reorganization under Chapter 11 of the United
States Bankruptcy Code and is subject to a pending agreement under which
substantially all of its contract rights and certain other assets are to
be sold to a third party. This subsidiary has served as the main source
of cash flow for the Company and has provided continued funding (through
the date of the bankruptcy filing) to the Company's two other
subsidiaries, both of which have a history of losses and both of which
have substantial working capital and stockholders' capital deficits. The
foregoing factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The consolidated financial
statements and financial statement schedules do not include any
adjustments that might result from the outcome of this uncertainty.
FRIEDMAN & FULLER, P.C.
Rockville, Maryland
August 18, 1996, except for Note 3,
as to which the date is August 31, 1996
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1996 AND 1995
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash (Notes 2 and 5) $ 78,689 $ 15,028
Accounts receivable, net (Notes 3, 4 and 5) 1,524,685 1,792,853
Inventory, at cost 1,492 3,709
Other current assets 21,093 60,819
----------- -----------
TOTAL CURRENT ASSETS 1,625,959 1,872,409
PROPERTY AND EQUIPMENT, AT COST (Notes 3, 4 and 5)
Furniture and equipment 167,405 192,880
Computer equipment 462,206 464,557
Laboratory equipment 121,426 246,365
Leasehold improvements 22,322 22,322
----------- -----------
773,359 926,124
Less accumulated depreciation and amortization 640,589 776,807
----------- -----------
NET PROPERTY AND EQUIPMENT 132,770 149,317
INTANGIBLE ASSETS, NET OF
AMORTIZATION (Notes 2 and 3) 32,276 57,357
OTHER ASSETS 6,615 41,075
----------- -----------
TOTAL ASSETS $1,797,620 $2,120,158
=========== ===========
See accompanying notes to the consolidated financial statements
/TABLE
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
MAY 31, 1996 AND 1995
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
LIABILITIES
- -----------
CURRENT LIABILITIES
Liabilities not subject to compromise:
Notes payable, current maturities (Note 5) $ 689,563 $ 911,681
Notes payable to officers and directors,
current maturities 4,000 -
Accounts payable 162,314 549,295
Accrued salaries and benefits (Notes 6 and 7) 176,574 1,215,284
Accrued payroll taxes and withholdings
(Notes 2 and 8) 57,143 481,576
Other accrued liabilities 77,665 362,580
Billings in excess of costs and
anticipated profits 9,999 59,594
Deferred revenue (Note 2) 27,635 14,444
Income taxes payable (Note 9) 1,411 19,860
Provision for contract losses 60,000 40,000
----------- -----------
Total liabilities not subject to compromise 1,266,304 3,654,314
----------- -----------
Liabilities subject to compromise: (Note 3)
Accounts payable 403,812 -
Accrued salaries and benefits (Notes 6 and 7) 861,151 -
Accrued payroll taxes and withholdings (Note 8) 930,794 -
Accrued interest and penalties (Notes 7 and 8) 437,708 -
----------- -----------
Total liabilities subject to compromise 2,633,465 -
----------- -----------
TOTAL CURRENT LIABILITIES 3,899,769 3,654,314
NOTES PAYABLE, NET OF CURRENT MATURITIES
(Note 5) - 25,000
----------- -----------
TOTAL LIABILITIES 3,899,769 3,679,314
----------- -----------
STOCKHOLDERS' DEFICIT
- ---------------------
Preferred stock, $.10 par value, 40,000,000
shares authorized, none issued - -
Common stock, $.0005 par value, 60,000,000
shares authorized, 6,811,083 shares issued
and 6,311,083 shares outstanding in 1996
and 5,944,416 shares issued and outstanding
in 1995 (Notes 11 and 12) 3,155 2,972
Capital in excess of par value 1,140,529 1,026,649
Accumulated deficit (3,245,833) (2,588,777)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (2,102,149) (1,559,156)
COMMITMENTS AND CONTINGENCIES
(Notes 2, 3, 5, 7, 8, 10, 11 and 12) ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,797,620 $2,120,158
========== ==========
See accompanying notes to the consolidated financial statements
/TABLE
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1996 AND 1995
<CAPTION>
1996
1995
----------- -----------
<S> <C> <C>
Revenue (Notes 2 and 14) $8,957,464 $9,590,113
Operating costs and expenses:
Direct cost of services 5,467,113 6,066,430
Indirect operating costs 1,934,199 2,349,084
General & administrative expenses 1,526,910 1,501,074
----------- -----------
Total operating costs and expenses 8,928,222 9,916,588
----------- -----------
Operating income (loss) 29,242 (326,475)
Other expense:
Interest expense, net 379,173 347,613
Consulting expense associated with stock
awards (Note 11) 89,063 -
Penalties (Note 8) 162,778 180,979
Other, net 26,521 14,912
----------- -----------
Total other expense 657,535 543,504
----------- -----------
Loss before reorganization items and
income taxes (628,293) (869,979)
Reorganization items: (Note 3)
Professional fees (28,763) -
----------- -----------
Loss before income taxes (657,056) (869,979)
Income taxes (Note 9) - 25,334
----------- -----------
Net loss $ (657,056) $ (895,313)
===========
===========
Net loss per common share $ (0.11) $ (0.15)
=========== ===========
Weighted average number of shares outstanding 6,214,817 5,944,416
========= =========
See accompanying notes to the consolidated financial statements
/TABLE
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED MAY 31, 1996 AND 1995
<CAPTION>
Common
Stock Capital in Common
Par Excess of Stock Accumulated Stockholders'
Value Par Value Warrants Deficit Deficit
------ ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance May 31, 1994 $2,972 $1,026,649 $ 5,625 $(1,693,464) $ (658,218)
Refund of common stock
warrants paid (Note 11) (5,625) (5,625)
Net loss (895,313) (895,313)
------ ---------- -------- ------------ ------------
Balance May 31, 1995 2,972 1,026,649 - (2,588,777) (1,559,156)
Conversion of convertible
note to common stock
(Notes 5 and 11) 33 24,967 25,000
Stock awards (Note 11) 150 88,913 89,063
Net loss (657,056) (657,056)
------ ---------- -------- ------------ ------------
Balance May 31, 1996 $3,155 $1,140,529 $ - $(3,245,833) $(2,102,149)
====== ========== ======== ============ ============
See accompanying notes to the consolidated financial statements
/TABLE
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1996 AND 1995
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 9,189,228 $10,030,737
Cash paid to suppliers and employees (8,530,333) (9,262,801)
Interest paid (268,729) (292,449)
Income taxes paid (18,449) (5,474)
----------- -----------
Net cash provided from operating
activities before reorganization items 371,717 470,013
----------- -----------
Operating cash flows from reorganization
items:
Professional fees paid for services
rendered in connection with the
Chapter 11 proceeding (28,763) -
----------- -----------
Net cash used by reorganization items (28,763) -
----------- -----------
Net cash provided from operating activities 342,954 470,013
----------- -----------
Cash flows from investing activities:
Capital expenditures (61,175) (109,492)
----------- -----------
Net cash used in investing activities (61,175) (109,492)
----------- -----------
Cash flows from financing activities:
Proceeds from loans to officers and directors 4,000 -
Proceeds from equipment financing - 50,515
Proceeds of loans from receivables
assignment - pre-petition 6,299,537 7,146,885
Proceeds of loans from receivables
assignment - post-petition 1,430,489 -
Repayment of loans from receivables
assignment - pre-petition (6,568,076) (7,536,095)
Repayment of loans from receivables
assignment - post-petition (1,342,530) -
Repayment of notes payable to bank - (25,000)
Repayment of equipment loan - pre-petition (41,538) (8,977)
Refund of common stock warrants - (5,625)
----------- -----------
Net cash used in financing activities (218,118) (378,297)
----------- -----------
Net increase (decrease) in cash 63,661 (17,776)
Cash at the beginning of year 15,028 32,804
----------- -----------
Cash at the end of year $ 78,689 $ 15,028
========== ==========
CONTINUED
See accompanying notes to the consolidated financial statements
/TABLE
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
YEARS ENDED MAY 31, 1996 AND 1995
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Reconciliation of net loss to net cash
provided from operating activities:
Net loss $(657,056) $(895,313)
Adjustments to reconcile net loss to net cash
provided from operating activities:
Depreciation 77,722 71,884
Amortization 25,776 86,251
Loss from write-off of capitalized software - 118,917
Provision for contract losses 20,000 -
Consulting expense associated with stock awards 89,063 -
Changes in assets and liabilities:
Decrease in accounts receivable 268,168 434,757
Decrease in inventory 2,217 4,231
Decrease in other current assets 39,726 382
Increase in intangible assets (695) (50,529)
Decrease (increase) in other assets 34,460 (23,733)
Decrease in accounts payable - pre-petition (145,483) (177,849)
Increase in accounts payable - post-petition 162,314 -
Increase (decrease) in accrued salaries and
benefits - pre-petition (354,133) 314,793
Increase in accrued salaries and
benefits - post-petition 176,574 -
Increase in accrued payroll taxes
and withholdings - pre-petition 449,218 376,038
Increase in accrued payroll taxes
and withholdings - post-petition 57,143 -
Increase in other accrued liabilities -
pre-petition 75,128 269,657
Increase in other accrued liabilities -
post-petition 77,665 -
Decrease in billings in excess of costs
and anticipated profits (49,595) (93,777)
Increase in deferred revenue 13,191 14,444
Increase (decrease) in income taxes payable (18,449) 19,860
----------- -----------
Net cash provided from operating activities $ 342,954 $ 470,013
========= =========
Supplemental disclosure of cash flow information:
During the year ended May 31, 1996, the holder of a $25,000 note converted the
note into 66,667 shares of common stock of the Company (See Notes 5 and 11 for
additional information).
During the year ended May 31, 1996, 300,000 shares were issued to two companies
as compensation for their services under consulting agreements (See Note 11 for
additional information).
See accompanying notes to the consolidated financial statements
/TABLE
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995
1. ORGANIZATION
------------
Applied Research Corporation is organized under the laws of the state of
Colorado and is comprised of two wholly owned subsidiaries, Applied Research of
Maryland, Inc. ("ARM") and ARSoftware Corporation ("ARS"), and one majority
owned subsidiary, ARInternet Corporation ("ARInternet"). In addition, the
Company formed ARInstruments Division ("ARInstruments"), an unincorporated
commercial instrumentation division of ARM.
ARM is a high technology company specializing in research and development,
design and fabrication of sensors and instrumentation, technical support
services and scientific related software creation. ARM's major areas of
service include Astronomy and Astrophysics, Atmospheric Sciences, Meteorology,
the Space Sciences and Computer Related Analytical Services. On April 2, 1995,
ARM filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code. See Note 3 to the Consolidated Financial Statements for
additional information.
ARInstruments was formed in fiscal 1993 to penetrate the government and
commercial instrumentation markets. During its many years of performing under
government contracts, the Company has developed expertise in custom design and
fabrication work. In addition, members of the Company's technical staff have
investigated and researched other government and commercial applications for
existing technologies. The Company formed ARInstruments to segregate these
operations from the government contract operations in the design, fabrication,
and distribution of instrumentation products. During the fiscal year ended May
31, 1994, ARInstruments began research and development efforts related to
product development and initiated two patent applications. These patents were
granted during the fiscal year ended May 31, 1995. The costs associated with
obtaining these patent applications have been capitalized.
<PAGE>
<PAGE>
ARS was established in April 1992, to diversify the business base of the
Company by developing niche markets in the computer software industry. ARS is
currently reselling existing products under licensing agreements.
ARInternet was established in November 1994, to diversify the business base of
the Company by developing niche markets in the on-line computer services
industry. ARInternet is an Internet provider and plans on providing scientific
and other information to the scientific and engineering communities.
Applied Research Corporation maintains only minimal resources and derives all
of its income from its subsidiaries. As hereinafter used, Applied Research
Corporation or the term "Company" shall refer to Applied Research Corporation
and its subsidiaries, except when otherwise indicated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The accompanying consolidated financial statements include the accounts of
Applied Research Corporation and its wholly and majority owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
CONTRACT REVENUE
- ----------------
Revenue on cost-plus fixed fee contracts is recorded on the basis of
recoverable direct costs incurred plus indirect expenses and the allocable
portion of the fixed fee. Fixed price contracts are accounted for under the
percentage of completion method measured by cost of services performed to total
estimated cost of services. Revenue under time and material contracts is
recorded at negotiated rates as labor hours and other direct costs are
incurred. Cost to complete estimates are reviewed periodically and revised as
required and a provision for estimated losses on contracts is recorded when
identified.
All contract costs, including direct and indirect costs are subject to audit by
the Defense Contract Audit Agency ("DCAA") and ultimate reimbursement of costs
is contingent upon the outcome of such audits. As of May 31, 1996, the DCAA
has completed audits for the years 1982 to 1993 and all adjustments resulting
from these audits are reflected in the consolidated financial statements
presented.
In the opinion of management, adequate provision has been made in the
accompanying consolidated financial statements for adjustments, if any, which
may result from audits for fiscal years 1994 through 1996.
<PAGE>
<PAGE>
SOFTWARE REVENUE
- ----------------
ARS resells software products developed by other companies as well as state of
the art proprietary software products developed by the Company for use in the
scientific and engineering communities. Revenue is recorded when the software
program is shipped to the customer.
SUBSCRIPTION REVENUE
- --------------------
ARInternet provides online computer access to the internet (information super
highway). ARInternet offers monthly, quarterly, semi-annual and annual
subscriptions to its customers. These subscriptions are billable in advance.
ARInternet recognizes revenue on an as-earned basis. Deferred revenue is
recorded for amounts received from customers in advance. Subscriptions may be
canceled by the customer at any time, upon written notice.
CASH EQUIVALENTS
- ----------------
Cash equivalents are defined as highly liquid short-term investments whose
maturity dates do not extend past three months from the original date of
purchase. At May 31, 1996, the Company held no such investments. At May 31,
1996, ARM held $65,503 of cash that is restricted, as follows.
Description Amount
----------- ------
Held for ARM withholding taxes $43,173
Held for 401(k) Plan (see Note 7
to the Consolidated Financial
Statements) 22,330
-------
Total $65,503
=======
INVENTORY
- ---------
Inventory consists principally of computer software and is stated at the lower
of purchased cost or market. Cost is determined by using the first-in, first-
out (FIFO) method.
DEPRECIATION AND AMORTIZATION
- -----------------------------
Depreciation of furniture, office equipment, lab equipment and computer
equipment is computed on the straight-line method over the estimated useful
economic lives of the assets, generally 3 to 5 years. Leasehold improvements
are amortized over the estimated economic life of the improvement or the
remaining term of the lease, whichever is shorter.
INTANGIBLE ASSETS
- -----------------
Intangible assets consist of capitalized computer software costs and patent
development costs.
<PAGE>
<PAGE>
Capitalized computer software costs consist of expenses associated with
producing "product masters" for two products developed by ARS. These costs
have been capitalized in accordance with Statement of Financial Accounting
Standard #86 (SFAS No. 86). SFAS No. 86 prescribes that costs of producing
"product masters" incurred subsequent to establishing the technical feasibility
of a product shall be capitalized. In accordance with SFAS No. 86, the annual
amortization of these capitalized costs shall be the greater of the amount
computed using (a) the ratio that current gross revenues for a particular
product bear to the total of current and anticipated future gross revenues for
the product or (b) the straight line method over the remaining estimated
economic life of the product. At May 31, 1996 and 1995, net capitalized
software costs were $9,325 and $33,809, net of accumulated amortization of
$282,796 and $258,313, respectively. ARS began amortizing these costs on a
product-by-product basis as the associated products became available for
general release to customers. During the years ended May 31, 1996 and 1995,
$24,483 and $204,848, respectively, in amortization expense had been recorded
for products associated with the capitalized software development costs.
As of May 31, 1995, the Company wrote off the unamortized balance of one of its
software products, because it believed that the unamortized balance exceeded
the net realizable value of the product. The write-off amounted to $118,917,
and is included in the accumulated amortization above.
During the year ended May 31, 1995, the Company was granted two patents. The
costs associated with obtaining these patents were capitalized and are being
amortized over the life of the patents, which is 20 years from application, or
approximately 18.5 years after notification of receipt.
DEFERRED OFFERING EXPENSES
- --------------------------
During the year ended May 31, 1995, the Company paid approximately $30,500 of
costs that were associated with arranging for the raising of additional capital
in fiscal 1996, which effort was abandoned. These costs are included in other
assets (non current) in the consolidated balance sheet as of May 31, 1995.
During the year ended May 31, 1996, these costs were charged to expense.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
- --------------------------------------------
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 May 31, 1996, no minority
interest has been reflected in the consolidated financial statements.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
- -------------------------------------------------------
The preparation of financial statements in conformity with generally-accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
<PAGE>
<PAGE>
INCOME TAXES
- ------------
Deferred income taxes result from temporary differences resulting in the
recognition of revenue and expense for financial accounting and tax purposes.
The principal source of temporary differences relates to differences in the
amount of financial statement and tax treatment of net operating loss
carryfowards, compensated absences, capitalized software development costs, and
certain accrued contract amounts.
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.
RECLASSIFICATIONS
- -----------------
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
Effective for the year ended May 31, 1996, the Company changed its method of
presenting the statement of cash flows for operating activities from the
indirect method (which adjusts net income to remove the effects of noncash
operating transactions) to the direct method (which shows the principal
components of operating cash receipts and payments). This change has been
applied retroactively to the 1995 statement.
3. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11/SALE OF ARM
----------------------------------------------------------
On April 2, 1996, ARM (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. Neither ARC, ARS nor ARInternet filed
for relief. 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 supplemental consolidating
schedules for May 31, 1996 as "liabilities subject to compromise" (see
page 44). 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
<PAGE>
<PAGE>
as 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 will 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 (the final vouchers on 14
old contracts, which totaled approximately $136,700). 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 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. The Debtor has curtailed accruing interest on all
pre-petition obligations except the amounts owed CFC (see Note 5) because of
the Bankruptcy filing. In addition, the Debtor has curtailed accruing interest
on the unpaid amounts due to the 401(k) Plan, because of the Bankruptcy filing.
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, which was 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 biding, an offer was accepted for $2.1 Million. The following
is a list of the purchased and excluded assets:
PURCHASED ASSETS EXCLUDED ASSETS
- - All contracts rights - ARM's charter and status as a
including project contracts), corporation, its minute book, stock
- - All inventory, transfer records, and similar records
- - All books and records, relating to ARM's organization,
- - All furniture, fixtures and existence or capitalization, and the
equipment, capital stock or ARM,
- - All proprietary rights - Billed accounts receivable as of
(patents, etc.) closing,
- - All unbilled accounts - Intercompany receivables,
receivable as of the closing - ARM's rights to occupy real property
date. pursuant to leases of real property and
any leasehold improvements made thereto.
- Any other property identified by the
Purchaser prior to the closing.
<PAGE>
<PAGE>
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 is expected to be submitted to the
Bankruptcy Court for approval during the week ended September 13, 1996. The
sale is subject to the successful novation of ARM's government contracts. This
is expected to take approximately 60 to 90 days from contract execution. The
sale must also be approved by a majority of the Company's shareholders. The
Company plans to submit the matter to a vote at the Company's Annual Meeting of
Shareholders currently scheduled for October 30, 1996. Upon notification of
the government's novation approval, and approval of the Company's shareholders,
the sale will be completed.
PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES.
- -----------------------------------------------------------
Once 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 contracts rights plus the
collection of the outstanding accounts receivables (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 amounts owed to the employees for
accrued vacation (up to $325,000), the amount owed to the 401(k) Plan as of
April 2, 1996, of approximately $676,000, as well as their pre-petition claims
for unreimbursed travel expenses of approximately $50,000, and, 3) the
principal portion of the tax amounts owed to both the IRS and the various state
authorities. In addition, it appears that the various taxing authorities will
receive a portion of the pre-petition penalties and interest, but not the full
amount. Although these are the current expectations, there can be no
assurances that these amounts will be paid until the Plan of Reorganization is
submitted and confirmed by the 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 ARS's and
ARInternet's operating expenses during their start-up phases and providing
continued funding 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 May 31, 1996, ARS has still not
achieved break even operations. As of September 6, 1996, ARS has only one
full-time employee and its sales are minimal. Therefore payment of any of the
amount its owes ARM is extremely doubtful. On the other hand, ARInternet has
essentially achieved break even 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.<PAGE>
<PAGE>
IMPACT ON ARC AFTER THE SALE OF ARM IS COMPLETED.
- ------------------------------------------------
During the current fiscal year ARM 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 current fiscal year (through April 2,
1996), ARM funded approximately $204,600 of ARS and ARInternet expenses. From
the period from April 2, 1996 on, because of the 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 break even, 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 May 31, 1996, had approximately 1,000
subscribers and had essentially reached break even 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 assurances 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 of its obligation under the lease. In addition, ARC will continue
to incur expenses to maintain its status as a public company. Although these
expenses will be less because of having less revenues and expenses, they will
have to be borne by the remaining companies. (See Note 10.)
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 $3.7 million at May 31, 1996, will be either liquidated
or discharged. This will decrease the Company's interest and penalties costs
that it had 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. While there can be no
assurance, management believes that ARC will not be adversely affected by the
bankruptcy proceeding and the sale of ARM.
AICPA Accounting Principles Board opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal if a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB
30") provides that the operations of a segment of a business be accounted for
as discontinued operations in the period that management, having the authority
to approve the action, commits itself to a formal plan to dispose of the
segment, whether by sale or abandonment. Although management had expressed its
<PAGE>
<PAGE>
intent to sell ARM, a formal plan had not been approved prior to May 31, 1996.
In addition, the proposed sale of ARM is contingent on several factors, as
described above, including successful novation of ARM's government contracts
and final approval from the Bankruptcy Court. It is the opinion of management
that the proposed sale does not meet the requirements of APB 30 as of May 31,
1996. Accordingly, ARM's results of operations and the financial impact of the
proposed sale have not been accounted for as discontinued operations.
4. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable are comprised of the following at May 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Billed accounts receivable, 1995
includes $53,945 of May 1995
expenses billed in June 1995) $1,100,861 $1,068,425
Unbilled costs, fees and retentions
under cost-type contracts 433,824 724,428
------------ ------------
1,534,685 1,792,853
Less: allowance for doubtful accounts 10,000 -
------------ ------------
Accounts receivable - net of allowance $1,524,685 $1,792,853
============ ============
</TABLE>
Principally all of the Company's revenues are generated from contracts with
departments or agencies of the U.S. Government ("Government") and are subject
to audit by Government auditors (see Note 2 - Contract Revenue). In 1996 and
1995, net sales to the Government or to prime contractors under Government
contracts amounted to approximately $8,393,900 and $9,153,500, respectively.
The Company extends unsecured credit to essentially all of its customers. As
of May 31, 1996 and 1995, billed accounts receivable included approximately
$1,066,953 and $1,011,192, respectively, due from either the Government or from
prime contractors under Government contracts.
In accordance with industry practice, accounts receivable relating to long-term
contracts are classified as current assets. In 1996 and 1995, accounts
receivable of approximately $166,000 and $193,000 respectively are not expected
to be realized within one (1) year. These amounts are comprised primarily of
retainages on long-term contracts.
<PAGE>
<PAGE>
5. NOTES PAYABLE
-------------
Notes payable are comprised of the following at May 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable to an investor, converted
into 66,667 shares of common stock
during October 1995 $ - $ 25,000
Note payable to asset-based lending
organization with interest payable
monthly at 14%, due in installments
over three years, secured by equipment - 41,538
Notes payable to asset-based lending
organization 689,563 870,143
------------ ------------
Total notes payable 689,563 936,681
------------ ------------
Less current maturities 689,563 911,681
------------ ------------
Notes payable - long term $ - $ 25,000
============ ============
</TABLE>
On January 7, 1994, the Company's wholly owned subsidiary ARS, entered into an
agreement with an investor, whereby the investor provided a $25,000 loan to ARS
in exchange for a convertible promissory note. The note was to mature on
January 7, 1999. The note bore interest at the rate of 8% per annum and was
converted into 66,667 shares of the Company's common stock pursuant to its
terms. These shares have been registered with the Securities and Exchange
Commission under a Form S-3, which was declared effective on July 1, 1994 (see
Note 11).
Effective April 29, 1994, the Company's wholly owned subsidiary, ARM,
consummated an agreement with an asset-based lender ("PrinCap") as its primary
source of financing under a $1.5 million line of credit facility, which allowed
ARM to borrow against billed and unbilled government receivables on certain
assigned contracts. The cost to ARM associated with the foregoing financing
agreements was prime plus 5% on all borrowings secured by billed receivables
and 18.25% per annum on borrowings secured by unbilled receivables. In
addition, ARM was charged an annual administration fee of $25,000 and a 0.5%
service fee per month on the highest outstanding loan balance (including the
amount outstanding on the equipment note) during each preceding month.<PAGE>
<PAGE>
On August 31, 1994, ARM negotiated an agreement with PrinCap to provide $50,515
of equipment financing to ARM. This note was payable over three years, in
monthly installments of $1,726, starting October 15, 1994. The note bore
interest at the rate of 14% per annum, and was secured by the underlying
equipment purchased.
ARM defaulted on its loan agreement with PrinCap pursuant to a provision
requiring it to remit all federal payroll withholding taxes as they became due.
On November 7, 1995, the IRS filed liens against the ARM. As a result, PrinCap
issued a letter of default on November 14, 1995, under which no additional
funding was granted and all residuals received by PrinCap were applied to
reduce the loan balances outstanding.
On November 17, 1995, ARM entered into an agreement with a new lender ("CFC"),
and on December 4, 1995, CFC paid off the remaining outstanding PrinCap loan
balance of $651,491, plus $18,288 of accrued interest and other charges. The
agreement with CFC allows ARM to borrow 90% against billed receivables on all
assigned contracts. Since the new financing agreement did not allow ARM to
borrow against unbilled receivables, ARM was required to pay off the $250,000
unbilled loan advance and the approximate $35,000 equipment loan due to PrinCap
at the time of closing the new loan. To accommodate this, CFC allowed ARM a
one-time advance of approximately 97% against eligible billed receivables. The
new financing agreement provides an interest rate of prime plus 4%, calculated
on the mid-month and end-of-month balances. There is also a 0.65% service
charge for each 15 day period on outstanding invoices.
The IRS agreed to give CFC a priority security interest with regards to its
loans against billed receivables. The IRS and CFC initially operated under an
interim subordination agreement while the Company applied for a formal
subordination from the IRS. On January 30, 1996, the IRS issued a Certificate
of Subordination. Additionally, as part of the installment agreement entered
into with the IRS on December 1, 1995, CFC agreed to deduct the monthly payment
due to the IRS from the amounts ARM borrows against its current billings, and
remit this directly to the IRS (see Notes 3 and 8 for additional information).
Subsequent to the filing of the Chapter 11 petition in the Bankruptcy Court,
CFC was granted a "First Lien" position in all post-petition financing. CFC
has continued lending to ARM against its post-petition receivables. As of
May 31, 1996, CFC was owed $28,400 on unpaid pre-petition receivables. The
underlying receivables were subsequently paid by the customers and this amount
was repaid.
6. ACCRUED SALARIES AND BENEFITS
-----------------------------
Accrued salaries and benefits are comprised of the following at May 31:
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Liabilities not subject to compromise:
Accrued salaries $ 122,681 $ 349,698
Accrued vacation 35,403 324,068
Retirement plan contributions (employer)
(see Note 7) 3,698 153,558
Retirement plan contributions (employee)
(see Note 7) 14,792 358,317
Retirement plan loan payments (employee) - 29,643
------------ ------------
Total accrued salaries and benefits -
not subject to compromise $ 176,574 $1,215,284
============ ============
Liabilities subject to compromise:
Accrued vacation $ 294,217 $ -
Retirement plan contributions (employer)
(see Note 7) 203,449 -
Retirement plan contributions (employee)
(see Note 7) 326,383 -
Retirement plan loan payments (employee) 37,102 -
------------ ------------
Total accrued salaries and benefits -
subject to compromise $ 861,151 $ -
============ ===========
</TABLE>
7. RETIREMENT PLAN
---------------
The Company has a retirement plan (401(k) Plan) which is available to all
qualified employees. Employee contributions up to 10 percent of annual
compensation, up to $9,240 for calendar year 1995, may be made to the plan.
The Company provides matching funds up to 25 percent of the employee's
contributions to the plan. The plan provides that forfeitures may be used to
reduce the Company's contribution. The Company has accrued matching funds, net
of forfeitures, of $49,401 and $78,314 in 1996 and 1995, respectively.
At May 31, 1996, ARM had not remitted employee contributions of $326,383.
During calendar 1995, ARM had an agreement with its previous Lender
("PrinCap"), pursuant to which PrinCap had been authorized to, and had remitted
the 1995 employee contributions as they became due. This arrangement continued
until mid-November 1995, when PrinCap issued a default letter due to ARM's
failure to remit payroll withholding taxes as they became due. Because of the
shortfall of cash caused by the refinancing with CFC (see Note 5), ARM was
unable to remit the remaining 1995 employee contributions totaling $61,331
(included in the above total number). ARM began remitting the 1996 employee
<PAGE>
<PAGE>
contributions as they became due until April 2, 1996, when ARM filed for
protection form its creditors under Chapter 11 of the United States Bankruptcy
Code. ARM has informed its employees that it intends to pay interest at the
rate of 15% per annum on the unpaid employee withholdings. At April 2, 1996,
ARM had accrued interest payable of approximately $92,900.
At May 31, 1996, ARM had not remitted employer contributions of $237,449. ARM
has informed its employees that it intends to pay interest on these amounts at
the prevailing statutory rates (approximately 5%). At April 2, 1996, ARM had
accrued interest payable of approximately $9,900.
During July, 1995, ARM agreed to and signed contract modifications on its two
largest contracts with NASA. The contract modifications require ARM to remit
an increasing portion of its fee earned on these two contracts directly to the
401(k) plan in order to reduce the past due amounts owed. The portion of the
fees applied to the plan was 25% for the fees earned beginning January 1, 1995
and increased to 75% during calendar year 1995. Effective January 1, 1996, the
percentage increased to 100%. The contract modifications will remain in effect
until all past due amounts owed the 401(k) plan have been repaid. Through
April 2, 1996, $80,274 of fees earned under these contracts had been remitted
to the 401(k) plan in accordance with the contract modifications. From the
period from April 3, 1996 through May 31, 1996, an additional $22,300 in fees
were deposited into a separate bank account as required by these contract
modifications, although these monies cannot be remitted to the Plan without
Bankruptcy Court approval because they are pre-petition claims. As of May 31,
1996, ARM was in compliance with the terms of these contracts, as modified.
The Company's failure to remit 401(k) contributions in a timely fashion and/or
bring its past due obligations current may subject the Company to legal
proceedings seeking to collect said unpaid contributions, together with
interest thereon, liquidated damages and attorney's fees.
During the current fiscal year, the Department of Labor ("DOL") conducted an
investigation into the Company's 401(k) Plan and the status of the past due
contributions. There has been no indication that the DOL will impose any fines
and/or penalties as a result of the past due contributions therefore no
estimates can be made regarding any potential additional liabilities. At May
31, 1996, other than the interest that has already been accrued as discussed
above, no additional amounts have been recorded.
8. WITHHOLDING TAXES
-----------------
As of April 2, 1996, ARM had not remitted federal payroll tax withholdings
totaling approximately $764,755 relating to the fourth calendar quarter of
1994, the second and fourth calendar quarters of 1995, as well as the first
calendar quarter of 1996. ARM has accrued penalties and interest on those
delinquent amounts totaling approximately $328,700 through April 2, 1996.
During September, 1995, ARM remitted a $50,000 payment to the IRS. However,
ARM was unable to meet the October, 1995, payment requested by the IRS, and as
a result, the IRS filed a lien against ARM on November 7, 1995.
<PAGE>
<PAGE>
On December 1, 1995, ARM entered into a new installment agreement with the IRS
which specified a $75,000 monthly payment to be made by the 15th of each month
starting with December, 1995, and continuing until the total liability was
paid. As part of this agreement, the IRS agreed to give ARM's new lender
("CFC") a priority security interest with regards to its loans against billed
receivables. The interim subordination agreement continued while ARM applied
for a formal subordination from the IRS. On January 30, 1996, the IRS issued
the Certificate of Subordination. As a condition of the new installment
agreement, CFC was required to deduct the monthly payment from ARM's borrowings
against billed receivables and remit this directly to the IRS. CFC remitted
the first four installment payments through March 1996, totaling $300,000.
However, because of the refinancing ARM underwent in December 1996, ARM fell
behind on its current federal payroll taxes due. Between November 14, 1995 and
March 25, 1996, ARM did not remit approximately $472,500 of federal payroll
withholding taxes. As a result, ARM was in default of the new installment
agreement. On April 1, 1996, the IRS issued Levy Notices to ARM's bank,
financing company and the majority of its customers. On April 2, 1996, the IRS
attempted to close ARM. As a result, ARM was forced to file for protection
under Chapter 11 of the United States Bankruptcy Code on April 2, 1996. (See
further discussion in Note 3.)
As of April 2, 1996, ARM was also delinquent in remitting $153,062 of 1995 and
1996 state withholding taxes, as well as $12,977 in state unemployment taxes.
These claims are all pre-petition claims covered by the Bankruptcy proceeding.
Collection of these taxes are stayed by the Bankruptcy proceeding.
9. INCOME TAXES
------------
Statement of Financial Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income.
SFAS 109 provides that deferred tax assets be reduced by a valuation allowance
if it is more likely than not that some portion of the deferred asset will not
be realized.
The tax effects of temporary differences computed at statutory rates in effect
as of May 31, 1996 and 1995 are as follows:
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Net
Deferred tax assets: 1996 1995 Change
------ ------ --------
<S> <C> <C> <C>
Section 481 retainages $ - $ 6,000 $ (6,000)
Accrued vacation 78,000 87,000 (9,000)
Bad debt allowances 4,000 - 4,000
Reserves for contract losses 24,000 16,000 8,000
Unfunded pension (employer) 81,000 61,000 20,000
Unfunded pension (employee) 131,000 143,000 (12,000)
Depreciation 2,000 7,000 (5,000)
Accrued interest 72,000 20,000 52,000
Deferred revenue 11,000 6,000 5,000
N.O.L. carryforward 544,000 432,000 112,000
------------ ------------ ------------
947,000 778,000 169,000
Valuation allowance (877,000) (642,000) (235,000)
------------- ------------ ------------
$ 70,000 $ 136,000 $ (66,000)
============= ============ ============
Deferred tax liabilities:
Retainages $ (66,000) $ (75,000) $ 9,000
Capitalized software (4,000) (61,000) 57,000
------------ ------------ ------------
$ (70,000) $(136,000) $ 66,000
============= ============ ============
</TABLE>
The net increase in the deferred tax asset valuation allowance during the 1996
was $235,000. In recognizing its deferred tax assets, the Company has used
assumptions about levels of future pretax income that are consistent with
historical results.
The Company had a net loss for federal income tax purposes for fiscal years
1996 and 1995. A provision for current state income tax for fiscal year 1995
of $25,334 has been included in the determination of net income. This
provision arises from the reporting of taxable income by the Company's ARM
subsidiary on its separately filed state returns.
The Company has unused net operating loss (NOL) carryforwards of approximately
$1,359,000 for consolidated federal and state income tax purposes. These
carryforwards expire between fiscal years 2004 and 2010.
<PAGE>
<PAGE>
10. LEASE COMMITMENTS
-----------------
The Company has noncancelable operating leases primarily for office facilities
and certain equipment which expire at various dates through September 1998.
The office facility leases are subject to standard real estate escalation
factors and building operating expense pass-throughs.
ARM has two short term operating leases for office space that are provided for
three employees who work on certain of its government contracts. The costs of
these leases are charged to the specific contracts that these employees work
on. One of these leases expires on September 30, 1996, while the other, which
is on a cancelable basis, expires September 30, 1998. This latter lease
specifies an 3% escalation in rent each year.
Rental expense for operating leases was approximately $212,200 and $221,100 for
the years ended May 31, 1996, and 1995, respectively.
Future minimum operating lease payments on the noncancelable leases are as
follows:
Fiscal Year
-----------
1997 204,000
1998 204,000
1999 68,000
----------
$476,000
========
11. COMMON STOCK ISSUED/WARRANTS EXERCISABLE
----------------------------------------
During fiscal 1995, the Company prepared a Registration Statement on Form S-3
which registered the resale of all 220,000 shares of restricted common stock
sold and issued during fiscal 1994, and the issuance of the related common
stock underlying the Class A common stock purchase warrants. The Registration
Statement was declared effective by the Securities and Exchange Commission on
July 1, 1994. However, due to the decline in the market value of the Company's
common stock, the Company did not demand the exercise of the Class A common
stock warrants, which became discretionary with the warrantholder through the
expiration of the warrants which was extended by the Company to May 29, 1995.
No warrants were exercised prior to May 29, 1995, and $5,625 was repaid to the
individuals who had prepaid their warrants.
The Registration Statement also covered 920,000 shares of restricted common
stock and 184,000 shares of common stock purchase warrants convertible at $0.75
per share issued to the president of the Company upon conversion of $230,000 of
debt, and 66,667 shares convertible at $0.375 per share issuable upon the
conversion of an outstanding $25,000 convertible note. The holder of the<PAGE>
<PAGE>
convertible note converted the note into 66,667 shares of common stock of the
Company. (See Note 5).
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 were to 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) was issued in escrow
pending release as specified in the agreements. Upon the release of the stock,
the Company records compensation expense equal to the average of the bid and
asked prices (approximately $0.30 a share) on the date the agreements were
signed. During fiscal 1996, a total of 150,000 shares had been released to
each of these Companies, resulting in the recognition of $89,063 in consulting
expense. During December 1995, the Company and the consulting companies agreed
to terminate these agreements. Therefore, the remaining 500,000 shares will
not be released.
During January 1995, the Company entered into consulting agreements with two
individuals. These consultants have agreed to provide various consulting
services to the Company including identifying potential analysts, broker-
dealers, underwriters, market-makers, money managers, financial planners,
investors, and/or other new sources of capital, as well as, providing investor
and stockholder relations and identifying any potential acquisitions and/or
joint ventures. As compensation for these services, the Company has agreed to
pay these individuals up to 3.5% of any capital raised and has granted each of
these individuals Class A common stock warrants exercisable to purchase 100,000
shares of the common stock of the Company at an exercise price of $0.375 per
share. The Company has agreed to register with the Securities and Exchange
Commission the stock underlying these warrants. The warrants are exercisable
for a period of two years, expiring in March 1997.
At May 31, 1996, the Company had the following outstanding warrants:
Exercise Expiration
Amount Price Date
------ --------- ------------------
184,000 $0.75 November 1996
200,000 $0.375 March 1997
12. STOCK OPTION PLAN
-----------------
Under the terms of its 1986 stock option plan, options to purchase shares of
the Company's common stock were granted at $.50 per share, which was the market
price at the time of the reorganization of the Company. All shares were
exercisable over a 5 year period at 20 percent per year and if unexercised,
expire 10 years from the date of grant. As of May 31, 1996, there were options
outstanding to purchase 51,000 shares of the Company's common stock, which
expire during fiscal year 1998.
<PAGE>
<PAGE>
During fiscal 1995, the Company adopted a new incentive stock option plan.
This plan was approved by the shareholders on November 15, 1995. Under this
plan, the Company may issue options to purchase up to 300,000 shares of the
Company's common stock, at a price not less than the then current market price
of the Company's common stock. All shares are exercisable over a 5 year period
at 20 percent per year and if unexercised, expire no later than 10 years from
the date of grant.
The following is a summary of transactions for common shares under options:
Stock Under Options: 1996 1995
---- ----
Outstanding, beginning of year 220,000 96,000
Granted during the year 40,000 160,000
Canceled or expired during year (9,000) (36,000)
Exercised during year - -
--------- ---------
Outstanding, end of year 251,000 220,000
--------- ---------
Shares eligible for exercise
at end of year 91,000 60,000
========= =========
13. SIGNIFICANT CUSTOMERS
---------------------
For fiscal 1996, one customer accounted for approximately 35 percent (35%) of
total revenue. This customer, NASA, had 10 contracts with the Company of which
one contract provided 18 percent (18%) and a second provided 12 percent (12%)
of total revenue. Another customer accounted for 47 percent (47%) of the
Company's revenue during the year. This customer, Hughes Corporation
("Hughes"), had two contracts with the Company of which one provided 35 percent
(35%) of total revenue. The Company maintained one contract with General
Sciences Corporation ("GSC"), which contributed approximately 4 percent (4%) of
total revenue. The Company has two contracts with the Naval Research
Laboratory ("NRL") which accounted for 3 percent (3%) of the Company's revenue.
For fiscal 1995, one customer accounted for approximately 38 percent (38%) of
total revenue. This customer, NASA, had 21 contracts with the Company of which
one contract provided 17 percent (17%) and a second provided 13 percent (13%)
of total revenue. Another customer accounted for 37 percent (37%) of the
Company's revenue during the year. This customer, Hughes, had two contracts
with the Company of which one provided 29 percent (29%) of total revenue. The
Company has four contracts with NRL, which accounted for 7 percent (7%) of the
Company's revenue. The Company maintained one contract with GSC, which
contributed approximately 6 percent (6%) of total revenue.
<PAGE>
<PAGE>
14. INDUSTRY SEGMENT INFORMATION
----------------------------
The Company's operations have been classified into three business segments:
<TABLE>
<CAPTION>
ARM ARS ARInternet Consolidated
---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers:
YEARS ENDED:
-----------
May 31, 1996 $8,393,868 $261,921 $ 301,675 $8,957,464
May 31, 1995 $9,135,523 $429,335 $ 25,255 $9,590,113
Operating income (loss) from continuing
operations before income taxes and
extraordinary item:
YEARS ENDED:
-----------
May 31, 1996 $349,618 $(118,026) $(202,350) $ 29,242
May 31, 1995 $286,202 $(404,719) $(207,958) $(326,475)
Capital expenditures:
YEARS ENDED:
-----------
May 31, 1996 $22,633 $ - $38,542 $ 61,175
May 31, 1995 $47,485 $470 $61,537 $109,492
Depreciation and amortization:
YEARS ENDED:
-----------
May 31, 1996 $48,149 $29,372 $25,977 $103,498
May 31, 1995 $54,964 $93,892 $ 9,279 $158,135
Research and development costs:
YEARS ENDED:
-----------
May 31, 1996 $ 87,205 $ - - $ 87,205
May 31, 1995 $217,444 $26,661 - $244,105
Identifiable assets at:
May 31, 1996 $1,678,958 $ 33,687 $84,975 $1,797,620
May 31, 1995 $1,947,571 $100,962 $71,625 $2,120,158
</TABLE>
Operating income (loss) equals total net revenues less operating expenses. In
computing operating income, items comprising other income (expense) have not
been added or deducted.
Research and development costs include software development costs capitalized
by ARS.
Identifiable assets by segment are those assets that are used in the Company's
operations in each industry segment, net of intercompany eliminations.
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATING SCHEDULES - BALANCE SHEET
YEAR ENDED MAY 31, 1996
<CAPTION>
ARM Consolidated
(Debtor in Balance
ARC Possession) ARS ARInternet Eliminations Sheet
----------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash $ - $ 62,878 $ 15,836 $ (25) $ - $ 78,689
Accounts receivable, net
Pre-petition - 611,477 - - - 611,477
Post-petition - 889,300 - - - 889,300
Other - not affected by
bankruptcy - - 3,915 19,993 - 23,908
Due from ARSoftware 25,000 1,181,042 - 13,258 (1,219,300) -
Due from ARInternet - 401,800 21,847 - (423,647) -
Investment in ARM 1,029,621 - - - (1,029,621) -
Inventory - - 1,492 - - 1,492
Other current assets - 20,501 410 182 - 21,093
----------- ------------ ------------ ---------- ------------ ------------
TOTAL CURRENT ASSETS 1,054,621 3,166,998 43,500 33,408 2,672,568) 1,625,959
PROPERTY AND EQUIPMENT, AT COST
Furniture and equipment - 147,013 7,109 13,283 - 167,405
Computer equipment - 355,100 20,308 86,798 - 462,206
Laboratory equipment - 121,426 - - - 121,426
Leasehold improvements - 22,122 200 - - 22,322
----------- ------------ ------------ ---------- ------------ ------------
- 645,661 27,617 100,081 773,359
Less accumulated depreciation
and amortization - 580,425 24,908 35,256 - 640,589
----------- ------------ ------------ ---------- ------------ ------------
NET PROPERTY AND EQUIPMENT - 65,236 2,709 64,825 132,770
INTANGIBLE ASSETS, NET OF
AMORTIZATION - 22,951 9,325 - - 32,276
OTHER ASSETS - 6,615 - - - 6,615
----------- ------------ ------------ ---------- ------------ ------------
TOTAL ASSETS $1,054,621 $ 3,261,800 $ 55,534 $ 98,233 $(2,672,568) $ 1,797,620
========== =========== =========== ========= ============ ===========
CONTINUED
</TABLE>
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATING SCHEDULES - BALANCE SHEET - Continued
YEAR ENDED MAY 31, 1996
<CAPTION>
ARM Consolidated
(Debtor in Balance
ARC Possession) ARS ARInternet Eliminations Sheet
----------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES
- -----------
CURRENT LIABILITIES
Liabilities not subject to
compromise:
Notes payable, current
maturities $ - $ 689,563 $ - $ - $ - $ 689,563
Note payable to officers
and directors, current
maturities - - 4,000 - - 4,000
Accounts payable - 14,018 116,153 32,143 - 162,314
Due to ARC - - 25,000 - (25,000) -
Due to ARM - - 1,181,042 401,800 (1,582,842) -
Due to ARS - - - 21,847 (21,847) -
Due to ARInternet - - 13,258 - (13,258) -
Accrued salaries and
benefits - 137,505 24,583 14,486 - 176,574
Accrued payroll taxes
and withholdings - 43,174 1,511 12,458 - 57,143
Other accrued liabilities - 74,388 3,277 - - 77,665
Billings in excess of
costs and anticipated
profits - 9,999 - - - 9,999
Deferred revenue - - - 27,635 - 27,635
Income taxes payable - 1,411 - - - 1,411
Provision for contract
losses - 60,000 - - - 60,000
----------- ------------ ------------ ---------- ------------ ------------
Total liabilities not
subject to compromise - 1,030,058 1,368,824 510,369 (1,642,947) 1,266,304
----------- ------------ ------------ ---------- ------------ ------------
Liabilities subject to
compromise:
Accounts payable - 403,812 - - - 403,812
Accrued salaries and
benefits, includes
$109,013 of accrued
interest - 970,164 - - - 970,164
Accrued payroll taxes and
withholdings, includes
$328,695 of accrued
interest and penalties - 1,259,489 - - - 1,259,489
----------- ------------ ------------ ---------- ------------ ------------
Total liabilities subject
to compromise - 2,633,465 - - - 2,633,465
----------- ------------ ------------ ---------- ------------ ------------
TOTAL CURRENT LIABILITIES - 3,663,523 1,368,824 510,369 (1,642,947) 3,899,769
NOTES PAYABLE,
NET OF CURRENT MATURITIES - - - - - -
----------- ------------ ------------ ---------- ------------ ------------
TOTAL LIABILITIES - 3,663,523 1,368,824 510,369 (1,642,947) 3,899,769
----------- ------------ ------------ ---------- ------------ ------------
CONTINUED
/TABLE
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATING SCHEDULES - BALANCE SHEET - Concluded
YEAR ENDED MAY 31, 1996
<CAPTION>
ARM Consolidated
(Debtor in Balance
ARC Possession) ARS ARInternet Eliminations Sheet
----------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STOCKHOLDERS' DEFICIT
- ---------------------
Investment from ARC $ - $ 1,029,621 $ - $ - $(1,029,621) $ -
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 (89,063) (1,431,344) (1,313,290) (412,136) - (3,245,833)
----------- ------------ ------------ ---------- ------------ ------------
TOTAL STOCKHOLDERS' DEFICIT 1,054,621 (401,723) (1,313,290) (412,136) (1,029,621) (2,102,149)
----------- ------------ ------------ ---------- ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $1,054,621 $ 3,261,800 $ 55,534 $ 98,233 $(2,672,568) $ 1,797,620
========== =========== =========== ========= ============ ===========
/TABLE
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATING SCHEDULES - BALANCE SHEET
YEAR ENDED MAY 31, 1995
<CAPTION>
Consolidated
Balance
ARC ARM ARS ARInternet Eliminations Sheet
----------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ - $ 5,270 $ 3,708 $ 6,050 $ - $ 15,028
Accounts receivable, net - 1,735,620 48,616 8,617 - 1,792,853
Due from ARSoftware - 1,119,860 - 2,608 (1,122,468) -
Due from ARInternet - 260,600 7,147 - (267,747) -
Investment in ARM 1,029,621 - - - (1,029,621) -
Inventory - - 3,709 - - 3,709
Other current assets - 57,298 3,521 - - 60,819
----------- ------------ ------------ ---------- ------------ ------------
TOTAL CURRENT ASSETS 1,029,621 3,178,648 66,701 17,275 (2,419,836) 1,872,409
PROPERTY AND EQUIPMENT,
AT COST
Furniture and equipment - 179,775 7,109 5,996 - 192,880
Computer equipment - 388,706 20,310 55,541 - 464,557
Laboratory equipment - 246,365 - - - 246,365
Leasehold improvements - 22,122 200 - - 22,322
----------- ------------ ------------ ---------- ------------ ------------
- 836,968 27,619 61,537 926,124
Less accumulated depreciation
and amortization - 747,508 20,020 9,279 - 776,807
----------- ------------ ------------ ---------- ------------ ------------
NET PROPERTY AND EQUIPMENT - 89,460 7,599 52,258 - 149,317
INTANGIBLE ASSETS, NET OF
AMORTIZATION - 23,548 33,809 - - 57,357
OTHER ASSETS - 36,375 - 4,700 - 41,075
----------- ------------ ------------ ---------- ------------ ------------
TOTAL ASSETS $1,029,621 $ 3,328,031 $ 108,109 $ 74,233 $(2,419,836) $ 2,120,158
========== =========== =========== ========= ============ ===========
CONTINUED
</TABLE>
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATING SCHEDULES - BALANCE SHEET - Concluded
YEAR ENDED MAY 31, 1995
<CAPTION>
Consolidated
Balance
ARC ARM ARS ARInternet Eliminations Sheet
----------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES
- -----------
CURRENT LIABILITIES
Notes payable, current
maturities $ - $ 911,681 $ - $ - $ - $ 911,681
Accounts payable - 425,941 123,354 - - 549,295
Due to ARM - - 1,119,860 260,600 (1,380,460) -
Due to ARS - - - 7,147 (7,147) -
Due to ARInternet - - 2,608 - (2,608) -
Accrued salaries and
benefits - 1,193,907 21,377 - - 1,215,284
Accrued payroll taxes and
withholdings - 481,045 531 - - 481,576
Other accrued liabilities - 356,074 6,506 - - 362,580
Billings in excess of costs
and anticipated profits - 59,594 - - - 59,594
Deferred revenue - - - 14,444 - 14,444
Income taxes payable - 19,860 - - - 19,860
Provision for contract
losses - 40,000 - - - 40,000
----------- ------------ ------------ ---------- ------------ ------------
TOTAL CURRENT LIABILITIES - 3,488,102 1,274,236 282,191 (1,390,215) 3,654,314
NOTES PAYABLE, NET OF
CURRENT MATURITIES - - 25,000 - - 25,000
----------- ------------ ------------ ---------- ------------ ------------
TOTAL LIABILITIES - 3,488,102 1,299,236 282,191 (1,390,215) 3,679,314
----------- ------------ ------------ ---------- ------------ ------------
STOCKHOLDERS' DEFICIT
Investment from ARC - 1,029,621 - - (1,029,621) -
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 - (1,189,692) (1,191,127) (207,958) - (2,588,777)
----------- ------------ ------------ ---------- ------------ ------------
TOTAL STOCKHOLDERS' DEFICIT 1,029,621 (160,071) (1,191,127) (207,958) (1,029,621) (1,559,156)
----------- ------------ ------------ ---------- ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $1,029,621 $ 3,328,031 $ 108,109 $ 74,233 $(2,419,836) $ 2,120,158
========== =========== =========== ========= ============ ===========
/TABLE
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATING SCHEDULES - STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1996
<CAPTION>
ARM Consolidated
(Debtor in Balance
ARC Posession) ARS ARInternet Eliminations Sheet
----------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ - $ 8,393,868 $ 261,921 $ 301,675 $ - $ 8,957,464
Operating costs and expenses:
Direct cost of services - 5,207,341 160,496 99,276 - 5,467,113
Indirect operating costs - 1,902,456 31,743 - - 1,934,199
General & administrative
expenses - 934,453 187,708 404,749 - 1,526,910
----------- ------------ ------------ ---------- ------------ ------------
Total operating costs
and expenses - 8,044,250 379,947 504,025 - 8,928,222
----------- ------------ ------------ ---------- ------------ ------------
Operating income (loss) - 349,618 (118,026) (202,350) - 29,242
Other expense:
Interest expense, net - 379,085 575 (487) - 379,173
Consulting expense
associated with stock
awards 89,063 - - - - 89,063
Penalties - 159,067 3,171 540 - 162,778
Other, net - 24,355 391 1,775 - 26,521
----------- ------------ ------------ ---------- ------------ ------------
Total other expense 89,063 562,507 4,137 1,828 - 657,535
----------- ------------ ------------ ---------- ------------ ------------
Loss before reorganization
items and income taxes (89,063) (212,889) (122,163) (204,178) - (628,293)
Reorganization items:
Professional fees - (28,763) - - - (28,763)
----------- ------------ ------------ ---------- ------------ ------------
Loss before income taxes: (89,063) (241,652) (122,163) (204,178) - (657,056)
Income taxes - - - - - -
----------- ------------ ------------ ---------- ------------ ------------
Net loss $ (89,063) $ (241,652) $ (122,163) $(204,178) $ - $ (657,056)
=========== ============ ============ ========== =========== ============<PAGE>
<PAGE>
</TABLE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATING SCHEDULES - STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1995
<CAPTION>
Consolidated
Balance
ARC ARM ARS ARInternet Eliminations Sheet
----------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ - $ 9,135,523 $ 429,335 $ 25,255 $ - $ 9,590,113
Operating costs and expenses:
Direct cost of services - 5,576,805 446,333 43,292 - 6,066,430
Indirect operating costs - 2,277,950 71,134 - - 2,349,084
General & administrative
expenses - 994,566 316,587 189,921 - 1,501,074
----------- ------------ ------------ ---------- ------------ ------------
Total operating costs
and expenses - 8,849,321 834,055 233,212 - 9,916,588
----------- ------------ ------------ ---------- ------------ ------------
Operating income (loss) - 286,202 (404,719) (207,958) - (326,475)
Other expense:
Interest expense, net - 345,747 1,866 - - 347,613
Penalties - 171,555 9,424 - - 180,979
Other, net - 16,280 (1,368) - - 14,912
----------- ------------ ------------ ---------- ------------ ------------
Total other expense - 533,582 9,922 - - 543,504
----------- ------------ ------------ ---------- ------------ ------------
Loss before income taxes - (247,380) (414,641) (207,958) - (869,979)
Income taxes - 25,334 - - - 25,334
----------- ------------ ------------ ---------- ------------ ------------
Net loss $ - $ (272,714) $ (414,641) $(207,958) $ - $ (895,313)
========== ============ ============ ========== =========== ============
/TABLE
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION
FORM 10-KSB FOR THE YEAR ENDED MAY 31, 1996
INDEX TO EXHIBITS
NUMBER DESCRIPTION
- ------ -----------
1.1 Escrow Agreement (Note 1)
1.2 Underwriting Agreement (Note 1)
2.0 Reorganization Agreement between Dollar Ventures, Inc. and Applied
Research Corporation (Note 1)
3.1 Articles of Incorporation of Dollar Ventures, Inc. (Note 1)
3.2 Amended Articles of Incorporation of Dollar Ventures, Inc. (Note 1)
3.3 Articles of Incorporation of Applied Research Corporation (Note 1)
3.4 Amended Articles of Incorporation of Applied Research Corporation
(Note 1)
3.5 By-Laws of Dollar Ventures, Inc. (Note 1)
3.6 By-Laws of Applied Research Corporation (Note 1)
3.7 401(k) Plan of Applied Research Corporation (Note 1)
4.1 Warrant Agreement (Note 1)
4.2 Specimen Certificate of Common Stock (Note 3)
4.3 Specimen Class A Common Stock Purchase Warrant (Note 3)
4.4 Specimen Subscription Agreement (Note 3)
4.5 Convertible Note (Note 3)
4.6 Convertible Note Purchase Agreement (Note 3)
10.1 Employment Agreements (Note 1)
10.2 Sovran Bank Loan (Note 1)
10.4(b) Lease Agreement on Maryland Property, dated October 22, 1993
(Note 4)
10.4(c) First Amendment to Lease Agreement on Maryland Property, dated
October 22, 1993 (Note 4)
10.4(d) Second Amendment to Lease Agreement on Maryland Property, dated
May 12, 1994 (Note 4)
10.14(b) Patent (Note 5)
10.14(c) Patent (Note 5)
10.21 Contract with Hughes Applied Information Systems, dated 6-03-93
(Note 4)
10.22 Contract with NASA, dated 9-27-93 (Note 4)
10.23 Contract with NASA, dated 1-10-94 (Note 4)
10.24(a) Financing Agreement with PrinCap Finance Company, L.L.C., dated
March 21, 1994 (Note 4)
10.24(b) Amended Financing Agreement with Princeton Capital Finance Company,
L.L.C., dated May 10, 1995 (Note 5)
10.24(c) Default letter from Princeton Capital Finance Company, L.L.C.,
dated November 14, 1995 (Note 6)
10.25 1994 Incentive Stock Option Plan (Note 5)
10.26 Consulting Agreement with William Hayde (Note 5)
10.27 Consulting Agreement with Market Visibility, Inc. (Note 5)
10.28 Fee Agreement with Commerce Funding Corporation, dated November 17,
1995 (Note 6)
10.29 Consolidated Asset Purchase Agreement (Note 6)
11 Computation of Net Income (Loss) per Common Share (Note 6)
16.2 Letter of KPMG Peat Marwick, dated June 20, 1994 (Note 2)
21 Subsidiaries of the Registrant (Note 6)<PAGE>
<PAGE>
NOTES TO EXHIBITS:
- -----------------
(1) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Registration Statement on
Form S-18, as amended, filed with Securities and Exchange
Commission on June 2, 1989, S.E.C. File No. 33-11943-LA.
(2) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Current Report on Form 8-K, dated
June 14, 1994, filed with Securities and Exchange Commission on
June 21, 1994, S.E.C. File No. 01-10076.
(3) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Registration Statement on
Form S-3, filed with Securities and Exchange Commission on June 28,
1994, S.E.C. File No. 01-10076.
(4) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1994, filed with Securities and Exchange
Commission on September 6, 1994, S.E.C. File No. 01-10076.
(5) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1995, filed with Securities and Exchange
Commission on August 29, 1995, S.E.C. File No. 01-10076.
(6) Filed herewith. <PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Applied Research Corporation has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized:
APPLIED RESEARCH CORPORATION
/s/ S.P.S. Anand September 12, 1996
- ---------------------------------------- ------------------
Dr. S.P.S. Anand, Director, Date
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ S.P.S. Anand September 12, 1996
- ---------------------------------------- ------------------
Dr. S.P.S. Anand, Director Date
/s/ Manjit K. Anand September 12, 1996
- ---------------------------------------- ------------------
Manjit K. Anand, Director & Treasurer Date
/s/ Dennis H. O'Brien September 12, 1996
- ---------------------------------------- ------------------
Dennis H. O'Brien, Director, Secretary, Date
Vice President & Chief Financial Officer
/s/ Andrew S. Endal September 12, 1996
- ---------------------------------------- ------------------
Dr. Andrew S. Endal, Senior Vice President Date
<PAGE>
PRINCETON CAPITAL
FINANCE COMPANY
November 14, 1995
via fax (301) 731-0765
- ----------------------
Dr. S.P.S. Anand, President
Dennis H. O'Brien, CFO
Applied Research Corporation ("ARC")
8201 Corporate Drive, Suite 1120
Landover, MD 20785
Dear Dr. Anand:
This letter is to inform Applied Research Corporation and you as it's
President and Personal Guarantor, that ARC is in default under the terms of its
Contracts Financing Agreement with Princeton Capital Finance Company LLC
("PCFC"), and specifically the First Amendment thereto, as follows:
1. Since the First Amendment was executed in May of 1995, ARC has failed
to execute and/or implement a separate agreement with Financial Support
Services, Inc. of Princeton, New Jersey, for the control of and funds to cover
the calculation, disbursement, and total tax payments on ARC's "gross plus"
payroll.
2. ARC has failed to maintain a savings account in its name into which
it is required to deposit, on a weekly basis, sums sufficient to aggregate at
least the $135,5561.68 due to the State of Maryland.
3. ARC has failed to make any payments into the 401(k) pension plan for
its employees to cover the back due amounts, in excess of $400,000, borrowed
from such plan by ARC and utilized by ARC to finance the research and
development efforts of one of it's affiliates or other operations, as you have
previously informed us. This failure is a default not only under ARC's
Contracts Financing Agreement with PCFC but also under ARC's contract with
NASA, and PCFC has been led to believe.
4. On November 9, 1995, ARC's Form 2848 attorney of record with the IRS,
Gunk L. Thomas, Esq., was notified by the Internal Revenue Service ("IRS")
that, on November 7, 1995, the IRS has filed a lien against ARC for sums due
under its 941 employee withholding obligation, for the fourth quarter of 1994,
and the first and second quarters of 1995, for a sum in excess of $750,000.
This failure to comply with federal employee withholding requirements is
precisely the result which the First Amendment to the Financing Agreement was
designed to prevent.
Until such time as these defaults are cured, all residuals received by PCFC
will be applied to outstanding mobilization loans.
PCFC is not obligated to inform ARC of these defaults in writing, pursuant
to the terms of the Financing Agreement and the Guaranties, but does so merely
as a courtesy to ARC. PCFC is also not obligated, during periods of default
such as this, to fund ARC on a continuing basis and may suspend financing as is
its right. ARC has fifteen (15) days within which to cure its arrearages to
both the IRS and the 401(k) plan. Otherwise, PCFC will have no choice but to
accelerate ARC's indebtedness in order to avoid the loses which will inevitably
occur when the rights and remedies of those employees owed funds as a result of
these failures to make deposits on their behalf are enforced.
Respectfully,
/s/ Michael F. Dolan
-----------------------
Michael F. Dolan
Vice President
"Dedicated to Providing Small Business with Access to Capital"
---------------------------------------------------------------
38 Washington Road, Princeton, NJ 08550
* Phone: 609-275-7100 * Fax: 609-275-9191
<PAGE>
COMMERCE FUNDING CORPORATION
-----------------------------------------------------------
1945 Old Gallows Road, Suite 205, Vienna, VA 22182-3931
FEE AGREEMENT
To whom it may concern:
For and in consideration of the covenants contained herein the undersigned
agree to the terms stated below.
APPLIED RESEARCH OF MARYLAND, INC., ("Assignor") and COMMERCE FUNDING
CORPORATION ("Assignee") agree that for a period of one year commencing
NOVEMBER 17, 1995 to NOVEMBER 17, 1996, Assignor shall deal exclusively and
solely with Assignee in the factoring of its accounts receivable. This Fee
Agreement will renew for successive twelve month terms unless canceled thirty
days prior to the last day of each term. During such period Assignee shall make
available to Assignor the following terms subject to increased in the prime
rate and subject to the terms and conditions of the "Assignment and Transfer of
Receivables Agreement, as of date of this agreement. Assignor agrees to pay
Assignee a fee of $1,500.00 for each unused month during said period of one (1)
year.
o 90% assignment price; 10% holdback;
o Prime plus 4% to be charged against the principal balance.
o .65% charge per 15 day period for processing total invoice amounts on a
monthly basis.
o The terms of the Assignment and Transfer of Receivables Agreement(s)
executed by the Assignor and the Guarantees(s) of Performance and Payment
executed by the Guarantor(s) are incorporated herein and made a part
hereof by reference.
o Neither this Agreement nor any other Agreement related to this contract
shall be deemed accepted or constitute an offer or be binding upon CFC
until accepted and executed by CFC's authorized officer at its principal
office in Vienna, Virginia.
ASSIGNOR:
APPLIED RESEARCH OF MARYLAND, INC. Sworn to and subscribed before me
this 17th day of November, 1995.
BY: /s/ S.P.S. Anand /s/
--------------------------- ----------------------------------
NAME: S. P. S. Anand Notary Public (Anita Wilks)
---------------------------
TITLE: President My commission expires:
--------------------------- September 30, 1998
DATE: 11/17/95
---------------------------
ASSIGNEE:
COMMERCE FUNDING CORPORATION Sworn to and subscribed before me
this 17th day of November, 1995.
BY: /s/ Larry Ortiz /s/
--------------------------- ----------------------------------
NAME: Larry Ortiz Notary Public (Charlan Thomas)
---------------------------
TITLE: Sr. Vice President My commission expires:
--------------------------- Dec. 31, 1998
DATE: 11/17/95
---------------------------
<PAGE>
COMMERCE FUNDING CORPORATION
-------------------------------------------------------------
1945 Old Gallows Road, Suite 205, Vienna, VA 22182-3931
ASSIGNMENT AND TRANSFER OF RECEIVABLES AGREEMENT
Effective Date:
THE PARTIES
ASSIGNOR ASSIGNEE
Applied Research of Maryland, Inc. Commerce Funding Corporation
D/B/A Applied Research Corp. 1945 Old Gallows Road, #205
8201 Corporate Drive, #1120 Vienna, VA 22182
Landover, MD 20785
The parties hereby agree as follows:
In consideration of the Assignment Price, Assignor hereby sells,
absolutely, unconditionally and irrevocably assigns and transfers to Assignee,
its successors and assigns, all of Assignor's rights, title, and interest in
the accounts receivable(s) under all Contracts, Subcontracts, Purchase Orders,
Letter Agreements, etc. (hereinafter referred to as "Contract") from
Assignor's Account Debtor (hereinafter referred to as "Obligor") referenced
below:
Total Receivables Assigned: All accounts receivable
Assignment Price due Assignor: 90% of accounts receivable
Percentage of Debt: 90%
Contract No. / Obligor: To be determined
Invoice Number(s): To be determined
** IMPORTANT NOTICE **
----------------
THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH CONSTITUTES A
WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR AND ALLOWS THE CREDITOR TO
OBTAIN A JUDGMENT AGAINST YOU WITHOUT ANY FURTHER NOTICE.
Assignee is entitled to any and all such payments from Obligor including
but not limited to insurance proceeds, proceeds resulting from claims and
settlements under the Contract. To the extent Assignee receives payment for
items excluded from this Assignment (hereinafter referred to as "Exchange
Items"), those payments will be remitted to Assignor.
Assignor will advise Obligor to pay all amounts arising under the Contract
to Assignee to Assignee's designee, and Assignor agrees that any payments that
it may receive under the Contract shall be remitted immediately to Assignee.
Assignor shall implement an assignment of proceeds to the Assignee pursuant to
the assignment rights under the Uniform Commercial Code Regulation or
applicable Federal Acquisition Regulation.
Upon receipt of payment from the Obligor, Assignee agrees to make payment
by check to Assignor for the difference (hereinafter referred to as "Holdback")
between the payment received and the total of the Assignment Price and the
processing fees accrued in accordance with this Assignment. In the event
Assignor elects to receive holdbacks by wire transfer, there will be a $16.00
wire transfer charge. Furthermore, there will be a $16.00 wire transfer charge
for net fundings under $5,000.00
In consideration for the valuable service and the Assignment Price paid
hereunder, the Assignor agrees to pay the Assignee a processing fee specified
in the Fee Agreement. Furthermore, Assignor agrees to pay Assignee an
administrative close out fee not to exceed $1,500.00 for each unused month in
the event the Assignor elects to terminate prior to the last day of each term
as stated in the Fee Agreement. In the event there is no funding activity for
ninety (90) consecutive days, then CFC may terminate this agreement without
notice and may setoff the $1,500.00 termination fee against any funds or
property of the Assignor which it is holding or subsequently acquires.
In the event that the Assignor converts monies due and owing to the
Assignee under any of the assignments created herein, without the express
written consent of the Assignee, such action shall constitute an event of
default, and in the event of default, the Assignor hereby authorizes and
empowers (I) Jon J. Prager or, (ii) Janet L. Eveland, Esq. or John R. Severino,
both members of the Virginia Bar and both with the law firm of Eveland, Brown &
Sherman, P.C., or, (iii) any other member of the Virginia Bar, to confess
judgment against the Assignor for the principal amount(s) assigned which were
converted by the Assignor, interest, attorneys fees, and costs and expenses
incurred in collecting any amounts owing to the Assignee under this Agreement
and hereby waives protest, presentation and demand.
The parties understand and agree that any conversion by the Assignor of
monies that are properly due and owing to the Assignee under the assignments
created herein, without the express written consent of the Assignee, shall
constitute fraudulent conduct by the Assignor and shall entitle the Assignee to
recover, among other things, compensatory and punitive damages from the
Assignor in a court of law and may constitute criminal conduct punishable under
applicable State Law.
In the event that an invoice remains unpaid for more than ninety (90) days
from the date funds were advanced by Assignee, the Assignor agrees to replace
that invoice with another invoice of equal or greater value, or buy the invoice
back. Assignee may elect to perform all of the obligations and duties required
to be performed by Assignor under the Assignment, however, Assignor shall
immediately indemnify Assignee and hold the Assignee harmless for any claim
which may result from the action, fault or negligence of Assignor, including,
without limitation, any legal fees, costs and expenses incurred by Assignee in
defending any such claims.
Assignor hereby irrevocably appoints and constitutes Assignee, or any of
Assignee's Agents designated by Assignee so to act, its true and lawful
attorney-in-fact to act on behalf of Assignor in the collection of the accounts
receivable due hereunder. Assignor shall provide such further written
documents and perform such other acts as Assignee may consider necessary to
further evidence or secure to Assignee and interests of Assignor assigned
hereunder. Assignor agrees that nothing herein requires Assignee to purchase
Receivables and Invoices from Assignor unless Assignee determines in its sole
and absolute discretion that it will receive full payment on any invoices
purchased.
In the event that the Obligor elects not to make the payment herein
assigned for whatever reason under the Contract within ninety (90) days of this
Assignment, Assignee shall have full recourse against the Assignor and its
guarantors, if any, and the Assignor shall immediately pay to Assignee all sums
due under the Assignment, the Fee Agreement and the Guarantee, including
without limitation, any and all accrued processing fees applicable plus
reasonable attorney's fees and costs of collection.
Assignor represents and warrants that 1) it has good and marketable title
to the Accounts Receivable free and clear of all security interests, liens,
claims and encumbrances and that it will warrant and defend the same against
all claims and demands of all persons, 2) the purpose of the assignment is to
assist the Assignor financially in performing its obligation to the Obligor
under the contract being assigned pursuant to this agreement, 3) Assignor
understands that federal tax lien searches will be ordered by Assignee on a
periodic basis and that the charge for these searches will be taken out of
Holdbacks or Exchange Items received by Assignee. (The average charge for an
PTL search is approximately $45.00 with the actual fee being determined by the
location of the Assignor's filing jurisdiction), 4) in the event Assignor
becomes a debtor or a creditor in a bankruptcy proceeding or in an assignment
for the benefit of creditors or receivership proceeding, Assignor agrees to
reimburse Assignee for any legal fees and costs incurred by Assignee in
connection with such proceedings and to grant Assignee immediate relief from
the automatic stay to permit the Assignee to pursue its legal rights against
the Assignor and the property of the Assignor's bankruptcy estate.
The Assignment Agreement and all representations, warranties, covenants,
powers, and rights herein contained shall be interpreted and construed in
accordance with the laws of the Commonwealth of Virginia. The terms and
conditions of this Assignment Agreement are severable so that in the event any
portions of this Assignment Agreement shall be finally determined by any court
of competent jurisdiction to be invalid or unenforceable, such provision shall
be deemed void and the remainder of this Assignment Agreement shall continue in
full force and effect. The foregoing represents the entire agreement of the
parties, including all obligations and warranties of Assignor, and supersedes
all prior communications, both oral and written.
Assignor agrees to reference Assignee's "Payment Instructions" on all
invoices submitted for payment under the Contract. Assignor will be
responsible for immediate reimbursement to Assignee of any invoices paid
directly to Assignor under this Agreement. Failure by Assignor to remit such
reimbursement to Assignee shall constitute a Default under this Agreement
causing all amounts advanced by Assignee to Assignor under this Agreement or
any other Agreement to be immediately due and payable. In the event of a
Default and/or a shortfall has been determined on an invoice, it is understood
that fundings, Holdbacks and Exchange Items may be applied to cover such
defaults or shortfalls.
Assignee may setoff any obligations owing to it by the Assignor against
any funds or property held by the Assignee without notice to the Assignor.
This agreement shall continue in full force and effect until terminated in
writing by either party as follows: A written termination notice by CFC shall
take effect upon receipt of the notice by Assignor or its agents or
representatives. A written termination notice by Assignor shall take effect
sixty (60) days after receipt by CFC, its agents or representatives.
Neither this Agreement nor any other Agreement pursuant to this contract
shall be deemed accepted or constitute an offer or be binding upon Assignee
until accepted and executed by Assignee's authorized officer at its principal
office in Vienna, Virginia.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment
Agreement to be duly executed as of the day and year first above written.
ASSIGNOR:
APPLIED RESEARCH OF MARYLAND, INC. Sworn to and subscribed before me
this 17th day of November, 1995.
BY: /s/ /s/
------------------------------ ---------------------------------
NAME: S. P. S. Anand Notary Public (Anita Wilks)
------------------------------
TITLE: President My commission expires:
------------------------------ September 30, 1998
DATE: 11/17/95
------------------------------
ASSIGNEE:
COMMERCE FUNDING CORPORATION Sworn to and subscribed before me
this 17th day of November, 1995.
BY: /s/ /s/
------------------------------ ---------------------------------
NAME: Larry Ortiz Notary Public (Charlan Thomas)
------------------------------
TITLE: Sr. Vice President My commission expires:
------------------------------ Dec. 31, 1998
DATE: 11/17/95
------------------------------
CONSOLIDATED ASSET PURCHASE AGREEMENT
THIS CONSOLIDATED ASSET PURCHASE AGREEMENT (this "Agreement") is made as
of the 30th day of July, 1996, by and between FIDELITY TECHNOLOGIES
CORPORATION, a Pennsylvania corporation ("Purchaser" or "Buyer") and APPLIED
RESEARCH OF MARYLAND, INC., a Maryland corporation also doing business as
Applied Research Corporation ("Seller").
RECITALS
R.1 Seller is a high technology company specializing in research and
development, design and fabrication of sensors and instrumentation, technical
support services and software development. Seller operates its business at
8201 Corporate Drive, Suite 1120, Landover, Maryland 20785.
R.2 Seller is a wholly owned subsidiary of Applied Research Corporation,
Colorado corporation ("Parent"). Dr. S.P.S. Anand ("Dr. Anand") is the
President and Chairman of the Boards of Directors of both Seller and Parent.
R.3 On April 2, 1996 (the "Petition Date"), Seller filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Maryland,
Greenbelt Division (the "Bankruptcy Court"), as case number 96-1-2425DK (the
"Bankruptcy Case").
R.4 Purchaser desires to purchase, and Seller desires to sell, the assets
of Seller identified herein.
NOW, THEREFORE, for and in consideration of the mutual promises and other
good and valuable consideration contained herein, the adequacy and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINED TERMS. As used herein, the terms below shall have the
following meanings:
"Accounts Receivable" shall mean all accounts, claims, chooses in
action or other right to receive money or other property or consideration from
any person or entity, whether such fight, claim, account, right or chose in
action is disputed or undisputed, fixed or contingent, matured or unmatured,
liquidated or unliquidated, evidenced by an instrument or other writing or
unwritten, including, without limitation: all of Seller's present and future
accounts, contract rights (other than Contract Rights), receivables, promissory
notes and other instruments, chattel paper, all present and future tax refunds
of Seller and all present and future rights of Seller to refunds or returns of
prepaid expenses, including, unearned insurance premiums; all present and
future judgments, orders, awards and decrees in favor of Seller and causes of
action in favor of Seller; all present and future claims, rights of
indemnification and other rights of Seller under or in connection with any
contracts or agreements to which Seller is or becomes a party or third party
beneficiary, including letters of credit (and the proceeds thereof issued or
assigned for the benefit of Seller; all goods previously or hereafter returned,
repossessed or stopped in transit, the sale, lease or other disposition of
which contributed to the creation of any account, instrument or chattel paper
of Seller; all present and future rights of Seller as an unpaid seller of
goods, including rights of stoppage in transit and reclamation; all rights
which Seller may now or at any time hereafter have, by law or agreement,
against any account debtor or other obligor of Seller, and all rights, liens
and security interests which Seller may now or at any time hereafter have, by
law or agreement, against any property of any account debtor or other obligor
of Seller, all present and future interests and rights of Seller, including
rights to the payment of money, under or in connection with all present and
future leases and subleases of real or personal property to which Seller is a
party, as lessor, sublessor, lessee or sublessee; all other present and future
contingent and noncontingent rights of Seller to the payment of money for any
reason whatsoever whether arising, in contract, tort or otherwise; all deposit
accounts now or hereafter maintained or established by, for or on behalf of
Seller with any bank or other person and all balances of funds now or hereafter
on deposit in all such accounts, including, without limitations all checking
accounts, collection accounts, lockbox accounts, disbursement accounts and
concentration accounts.
"Affiliate" shall mean any person that is an affiliate (as such term
is used in Section 101 of the Bankruptcy Code) of Seller, including, without
limitation, Parent, ARS and ARInternet.
"ARInternet" shall mean ARInternet Corporation, a Maryland
corporation.
"ARS" shall mean ARSoftware Corporation, a Maryland corporation.
"Balance Sheet" shall mean the statement of assets and liabilities of
the Seller previously provided to Purchaser and dated as of April 2, 1996.
"Balance Sheet Date" shall mean the date as of which the Balance
Sheet is effective, that is, April 2, 1996.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as
amended from time to time.
"Books and Records" shall mean all records pertaining to the
Purchased Assets, including without limitation records pertaining, to
customers, suppliers, lessors and employees of the Seller.
"Business Day" shall mean any day that is not a weekend or legal
holiday as defined in Rule 9006 of the Bankruptcy Rules.
"Closing" shall mean the closing of the transactions contemplated
hereby, as set forth in Section 3.1, below.
"Closing Date" shall mean the tenth (10th) Business Day following the
date on which all of the conditions to Purchaser's obligations to close, as set
forth in Article VIII, below, have been, and remain, satisfied or have been
waived in writing by Purchaser, or such other date following entry of the Order
on which the Seller and the Purchaser may agree.
"Consulting Agreement and Non-Compete Agreement" shall mean certain
agreements between Purchaser and Dr. Anand providing engagement of Dr. Anand by
Purchaser as a consultant and for prohibitions against competition by Dr. Anand
for three years, in the forms and in substance reasonably acceptable to
Purchaser. The terms and conditions of the Consulting Agreement and the Non-
Compete Agreement shall be disclosed in accordance with the Bankruptcy Code and
the Bankruptcy Rules.
"Contract" shall mean any of the agreements, contracts, leases or
commitments described in the Disclosure Schedule.
"Contract Rights" shall mean all of Seller's rights and obligations
under the Contracts.
"Court" shall mean the United States Bankruptcy Court for the
District of Maryland.
"Direct Employees" shall mean all employees of Seller whose salary
and benefits are chargeable in majority part to one or more Project Contract as
a direct, reimbursable expense.
"Disclosure Schedule" shall mean a schedule executed and delivered by
Seller to Purchaser of even date herewith, which sets forth the exceptions to
the representations and warranties contained in Article IV hereof and certain
other information called for by Article IV hereof and other provisions of this
Agreement. The final Disclosure Schedule delivered by Seller to Purchaser
(which shall be designated by Seller as the Final Disclosure Schedule) shall be
incorporated into and made a part of this Agreement.
"Employee" shall mean any employee or consultant engaged or employed
by Seller as of the date hereof or following the date hereof until Closing,
whether such engagement or employment is pursuant to a written or unwritten
contract or is at will. Notwithstanding the foregoing, "Employee" shall not
include Dr. Anand.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
easement, security interest, right-of-way, encumbrance or other right of third
parties.
"Excluded Assets" shall mean the following items, which are not to be
acquired by Purchaser under this Agreement.
A. The Seller's franchise, charter and status as a corporation, its
minute books, stock transfer records and similar records relating to the
Seller's organization, existence or capitalization, and the capital stock of
the Seller;
B. Claims and causes of action arising under Sections 547, 548, 549
and 550 of the Bankruptcy Code including without limitation claims and causes
of action for preferences, fraudulent transfers, fraudulent conveyances,
illegal or improper dividends (collectively, "Avoidance Claims");
C. Accounts Receivable of the Seller that are billed, fixed,
matured and liquidated as of the Closing Date (other than Accounts Receivable
arising on account of the Last Payroll and Accounts Receivable that were
unbilled on July 30, 1996, and that relate to expired Contracts that are
awaiting closeout);
D. Intercompany Receivables;
E. The Seller's rights to occupy real property pursuant to leases
of real property other than leases specifically identified in writing by the
Buyer after delivery of the final Disclosure Schedule and any leasehold
improvements made pursuant thereto to the extent that the Seller has no right
to remove such leasehold improvements or that such removal would be
impracticable;
F. Any proceeds from the refund of unearned insurance premiums, if
any, relating to Seller's workers' compensation insurance policies; and
G. Any other property or asset that the Buyer identified in writing
as an Excluded Asset at or prior to the Closing.
"Final Order" shall mean an order of the Bankruptcy Court or any
appellate court that has not been reversed, modified, amended or stayed with
respect to which the time to appeal or seek certiorari has expired, and with
respect to which no appeal or request for certiorari is pending.
"Fixtures and Equipment" shall mean all of the furniture, fixtures,
furnishings, machinery and equipment owned by Seller as of the date hereof,
plus all additions, replacements or deletions following the date hereof until
Closing, including, without limitation all equipment of Seller of every type
and description, now owned and hereafter acquired and wherever located,
including, without limitation, all machinery, vehicles and other rolling stock,
furniture, tools, dies, leasehold improvements, fixtures, computers, computer
peripherals, computer systems and related furniture, and materials and supplies
relating to any of the foregoing; all present and future documents of title
relating to any of the foregoing; all present and future rights, claims and
causes of action of Seller in connection with purchases of (or contracts for
the purchase of), or warranties relating to, or letters of credit (and the
proceeds thereof issued or assigned for the benefit of Seller relating to, or
damages to, goods held or to be held by Seller as equipment; all present and
future warranties, manuals and other written materials (and packaging thereof
or relating thereto) relating to any of the foregoing; and all present and
future general intangibles of Seller in any way relating to any of the
foregoing, including, without limitation, all Intellectual Property associated
with, used or useable in connection with, or necessary for the manufacture,
operation, sale or lease of, any of the foregoing.
"Hired Employee" shall mean any Employee (including Project Managers)
to whom Purchaser offers employment or engagement commencing upon the
consummation of the transactions contemplated by this Agreement, and who
accepts such employment or engagement and, if requested by Purchaser, enters
into an employment, consulting or other engagement agreement. Employment shall
be offered to all Direct Employees upon substantially the same terms and
conditions as currently exists with Seller; provided, however, that Purchaser
shall have no obligation to provide credit to any Hired employee on account of
services rendered, benefits accrued, or seniority achieved prior to Closing;
and further provided that Purchaser shall have no obligation to offer benefits
to any Hired Employee that are greater or different that the benefits that
Purchaser generally provides with respect to its employees of similar,
education, experience, salary and job responsibilities.
"Indemnification Agreement" shall mean this Agreement, in which
Dr. Anand hereby agrees to indemnify, defend and hold harmless Purchaser and
Purchaser's agents, affiliates, predecessors, successors and assigns, against
and in respect of any and all Damages that any of them shall incur or suffer,
which arise, result from or relate to any breach of, or failure by Seller to
perform, any of their respective representations, warranties, covenants or
agreements in this Agreement, or in any schedule, certificate, exhibit or other
instrument furnished or to be furnished by Seller under or pursuant to this
Agreement. The liability of Dr. Anand under this Indemnification Agreement
shall expire unless action hereunder is commenced against him on or before the
first business day following the first anniversary of the first to occur of the
Closing or the termination of this Agreement.
"Intellectual Property" shall mean all of Seller's right, title and
interest, whether now or existing or hereafter arising or acquired, in and to
(a) all domestic and foreign copyrights, copyright registrations and copyright
applications, whether or not registered or filed with any governmental or other
authority, (b) all United States and foreign patents, and all pending and
abandoned United States and foreign patent applications, including, without
limitation, the inventions and improvements described or claimed therein,
together with any reissues, divisions, continuations, certificates of
re-examination, extensions and continuations-in-part thereof, and (c) all
domestic and foreign trademarks, trademark registrations, trademark
applications, service marks and trade names, whether or not registered or filed
with any governmental or other authority; all present and future licenses and
license agreements of Seller, and all rights of Seller under or in connection
therewith, whether Seller is licensee or licensor thereunder, including,
without limitation, any present or future franchise agreements under which
Seller is franchisee or franchisor, all goodwill of Seller; all present and
future trade secrets of Seller; all other present and future intellectual
property of Seller; all income, royalties, damages and payments now or
hereafter due and/or payable to Seller under or with respect to any of the
foregoing, including, without limitation, rights to sue, damages and payments
for past, present or future infringements thereof, and all rights corresponding
to any of the foregoing throughout the world.
"Intercompany Receivables" shall mean any Account Receivable that is
matured, fixed and liquidated as of the date hereof owed to Seller by any
Affiliate.
"Inventory" shall mean all of all inventory of Seller of every type
and description, now owned and hereafter acquired and wherever located,
including, without limitation, raw materials, work in process, finished goods,
goods returned or repossessed, and goods held for demonstration, marketing or
similar purposes; all present and future materials and supplies of Seller used,
useable or consumed in the course of Seller's business, whether relating to the
manufacture, assembly, installation repair, packaging, packing or shipment of
goods by Seller, or relating to advertising or any other aspect of Seller's
business; all present and future property of Seller in, on or with which any of
the foregoing is stored or maintained; all present and future warranties,
manuals and other written materials (and packaging thereof or relating thereto)
relating to any of the foregoing; all present and future documents of title
relating to any of the foregoing; and all present and future rights of Seller
in connection with goods consigned to or by Seller; all present and future
rights of Seller as an unpaid seller of goods, including rights of stoppage in
transit and reclamation, all present and future rights, claims and causes of
action of Seller in connection with purchases of (or contracts for the purchase
of), or warranties relating to, or letters of credit (and the proceeds thereof)
issued or assigned for the benefit of Seller relating to, or damages to, goods
held or to be held by Seller as inventory; and all present and future general
intangibles of Seller in any way relating to any of the foregoing, including,
without limitation, all Intellectual Property associated with, used or useable
in connection with, or necessary for the manufacture, operation, sale or lease
of, any of the foregoing.
"Last Payroll" shall mean Seller's last payroll not to exceed
fourteen (14) days prior to Closing; but only to the extent that such Payroll
is for services rendered during the period covered by such payroll for existing
employees.
"Non-Direct Personnel" shall mean all Personnel whose salary and
benefits are not chargeable in whole to one or more Project Contract as a
direct, reimbursable expense.
"Parent Consent and Indemnification Agreement" shall mean an
instrument in form and substance acceptable to Purchaser and its counsel:
(1) certifying that Parent consents to the transactions contemplated by this
Agreement; (2) certifying that the representations and warranties set forth in
this Agreement are true and correct; (3) and providing that Parent agrees to
indemnify, defend and hold harmless Purchaser and Purchaser's agents,
affiliates, predecessors, successors and assigns, against and in respect of any
and all Damages that any of them shall incur or suffer, which arise, result
from or relate to any claim by, through or on behalf of any existing, future or
former shareholder or creditor of Parent relating to the subject matter of the
foregoing certifications or Seller's entering into or performing under this
Agreement; and (4) agreeing and covenanting not to compete with Purchaser on
the same terms and conditions set forth herein with respect to Seller. The
Parent Consent and Indemnification Agreement must be authorized by a majority
of the disinterested directors of Parent, and approved by the shareholders of
Parent at a shareholders' meeting conducted in accordance with applicable Law.
Seller and Parent shall be solely responsible for complying with all Laws
(including without limitation all corporate and securities laws, rules and
regulations) as may be applicable in obtaining Parent Consent and
Indemnification Agreement.
"Parent Opinion" shall mean one or more legal opinions of Parent's
general corporate counsel, in a form and in substance satisfactory to Purchaser
and its counsel, which shall contain the opinion of Parent's counsel that:
(a) Parent is duly organized; (b) Parent is authorized to enter into and
perform the Parent Consent and Indemnification Agreement; (c) the Parent
Consent and Indemnification Agreement does not conflict with or violate any
law, rule, regulation, order, contract, covenant or agreement governing Parent;
(d) the Parent Consent and Indemnification Agreement is enforceable; and
(e) all necessary consents and approvals for the Parent Consent and
Indemnification Agreement have been obtained.
"Permits" shall mean all of Seller's licenses, permits and other
governmental authorizations required to operate the Seller's business in the
manner presently conducted and in the manner as any Contract may require
Seller's business to be conducted.
"Personnel" shall mean all officers, employees and agents of the
Seller.
"Plan" shall mean the 401(k) plan of Seller dated December 11, 1991.
"Plan Trustees" shall mean the trustees under the Plan.
"Professionals" shall mean all attorneys, accountants, appraisers,
auctioneers or other professional persons engaged by or on behalf of the
Seller.
"Project Contracts" shall mean those Contracts specified in
Exhibit "A" hereto.
"Project Managers" shall mean those Employees who have management
responsibility with respect to one or more projects of Seller.
"Proprietary Rights" shall mean all of Seller's Intellectual
Property, trade secrets, designs, plans, specifications, customer fists and
other proprietary rights.
"Purchase Price" shall mean payments and assumption of specified
liabilities in an amount totaling up to Two Million One Hundred Thousand and
No/100 dollars ($2,100,000.00). The Purchase Price shall consist of the
following items:
A. A deposit (the "Deposit") in the amount of Fifty Thousand and
No/100 dollars ($50,000.00) paid to the Escrow Agent upon
execution of this Agreement and held in an interest-bearing
deposit account. The Deposit shall be released and paid to the
Internal Revenue Service ("IRS") at Closing with any accrued
interest being applied to the Designated Payment due at Closing;
B. A payment at Closing by Purchaser to the Seller for the IRS in
the amount of Five Hundred Forty-Nine Thousand and No/100
dollars ($549,000.00) (the "Designated Payment"), provided,
however, that Purchaser shall receive $15,000 credit toward such
payment based upon the August 1, 1996, payment by Seller to the
IRS and shall receive additional credit for all other $15,000
monthly payments by Seller to the IRS, which payments shall
continue to be paid by Seller to the IRS until Closing;
C. A payment at Closing in the amount of Six Hundred Seventy-Six
Thousand and No/100 dollars ($676,000.00) by Purchaser to the
Plan (the "Initial Plan Payment");
D. -INTENTIONALLY LEFT BLANK-
E. An assumption of liabilities of Seller to its employees for
liabilities of Seller to its employees for accrued and unpaid
vacation liabilities ("Vacation Liability") in an amount not to
exceed Three Hundred Twenty Five Thousand and No/100 dollars
($325,000.00), to be paid or provided for by Purchaser to such
employees in such manner as may be agreed by Purchaser and each
affected employee; provided that Purchaser shall not be required
to pay or provide for Vacation Liability within less than one
year following the Closing Date; and further provided that
Purchaser shall not require that Vacation Liability be paid or
provided for across a period greater that two years following
the Closing Date (the "Assumed Vacation Liability");
F. Payment to the Seller in the amount of Three Hundred
Seventy-Eight Thousand and no/100 dollars ($378,000.00), to be
paid, without interest, as follows: $76,000.00 shall be paid no
later than the first anniversary of the Closing Date; $76,000.00
shall be paid to the Seller for the IRS no later than the second
anniversary of the Closing Date; $52,000 shall be paid to the
Seller and $24,000 shall be paid to the Seller for the IRS no
later than the third anniversary of the Closing Date; $100,000
shall be paid no later than the fourth anniversary of the
Closing Date; and $50,000 shall be paid no later than the fifth
anniversary of the Closing Date (the "Deferred Payments");
G. Payment to the Seller of the aggregate amount of Seventy-Two
Thousand and no/100 dollars ($72,000.00) for the IRS, $36,000 of
which is pursuant and subject to the Non-Compete Agreement with
Dr. Anand and $36,000 of which is pursuant to the Non-Compete
covenants of Seller in Section 10.1 of this Agreement (the
"Assigned Non-Compete Payments") to be paid, without interest,
as follows: $24,000 shall be paid no later than the first
anniversary of the Closing Date; $24,000 shall be paid no later
than the second anniversary of the Closing Date; and $24,000
shall be paid no later than the third anniversary of the Closing
Date.
H. Purchaser shall reimburse Seller's employees for their
prepetition travel expenses in an aggregate amount not to exceed
Fifty Thousand and No/100 dollars ($50,000.00) for all such
employees; and
"Purchased Assets" shall mean all of Seller's right, title and
interest in and to properties, assets and rights of any kind, whether tangible
or intangible, real or personal, owned by Seller or in which Seller has any
interest (other than Excluded Assets), including without limitation, the
following:
A. all Contract Rights (including, without limitation all Project
Contracts);
B. all Inventory;
C. all Books and Records;
D. all Fixtures and Equipment;
E. all Proprietary Rights;
F. to the extent transferable, all Permits;
G. all Accounts Receivable that are unbilled as of the Closing
Date;
H. all Accounts Receivable (billed and unbilled) relating to the
Last Payroll;
I. all Accounts Receivable billed after July 30, 1996, relating to
expired Contracts that are awaiting closeout;
J. Life Insurance Policy of United of Omaha in the amount of
$1,000,000 as Key-Man Life Insurance on Dr. S.P.S. Anand, in
which Seller is the 100% beneficiary; and
K. all items of real or personal property specified in Exhibit "B"
hereto.
"Seller" shall mean Applied Research of Maryland, Inc., a Maryland
corporation.
"Seller Opinion" shall mean one or more legal opinions of Seller's
bankruptcy counsel and general corporate counsel, in a form and in substance
satisfactory to Purchaser and its counsel, which shall contain the opinion of
Seller's counsel that: (a) Seller is duly organized as represented and
warranted in Section 4.1; (b) Seller is authorized to enter into and perform
this Agreement as represented and warranted in Section 4.2; (c) this Agreement
does not conflict with or violate any law, rule, regulation, order, contract,
covenant or agreement governing Seller as represented and warranted in
Section 4.6; (d) this Agreement is enforceable as represented and warranted in
Section 4.2; (e) all necessary consents and approvals have been obtained as
represented and warranted in Sections 4.7, 6.8 and 8.18 of this Agreement;
(f) notice as is required under this Agreement and under the Bankruptcy Code,
the Bankruptcy Rules, the Local Rules, and other applicable Law has been given
to all creditors and parties in interest; and (g) the Order is a Final Order.
1.2 Other Defined Terms. The following terms shall have the
meanings defined for such terms in the Sections of this Agreement set forth
below:
TERM SECTION
---- -------
Actions Section 4.9
Bankruptcy Case Recital 3
Bankruptcy Court Recital 3
Bankruptcy Rules Section 6.8
Benefit Arrangement Section 4.15
Employee Benefit Plan Section 4.15
ERISA Affiliate Section 4.15
ERISA Section 4.15
Law or laws Section 4.11
Local Rules Section 6.8
Losses Section 10.2
Motion Section 6.5
Order Section 7.4
Parent Recital 2
Transfer Taxes Section 2.3
ARTICLE II
PURCHASE AND SALE OF ASSETS
2.1 TRANSFER OF ASSETS.
On the Closing Date:
A. Effective as of the Closing, Seller will sell, convey, transfer,
assign and deliver to Purchaser, the Purchased Assets, free and clear of all
Encumbrances, and Purchaser will acquire from Seller the Purchased Assets.
B. Purchaser shall not assume or acquire any obligation or
liability of Seller except, effective as of the Closing, the following:
(i) all obligations and liabilities accruing, arising out of,
or relating to events or occurrences happening after the Closing under
Contracts identified on the Disclosure Schedule as being assumed by Purchaser
(but in any case, not including any obligation or liability for any breach
occurring prior to the Closing); and
(ii) the Assumed Vacation Liability (not to exceed $325,000.00
in the aggregate);
(iii) Seller's Last Payroll; and
(iv) all obligations specifically undertaken by Purchaser
pursuant to the other provisions of this Agreement.
2.2 PURCHASE PRICE.
On the Closing Date, Purchaser shall make the following payments and
deliveries of documents, and shall assume the designated liabilities in
consideration for the sale, transfer, assignment, conveyance and delivery of
the Purchased Assets:
(a) the Deposit and the Designated Payment shall be paid to the
Seller for the IRS, at Purchaser's option, by wire transfer of immediately
available funds or by cashier's or certified check;
(b) the Initial Plan Payment shall be paid to the Plan, at
Purchaser's option, by wire transfer of immediately available funds or by
cashier's or certified check;
(c) the Employee Expense Liability (not to exceed $50,000.00 in the
aggregate) shall be paid pro rata to employees of the Seller holding allowed
claims for employee expenses;
(d) (1) Purchaser shall make the Deferred Payments and the Assigned
Non-Compete Payments on or before the designated anniversaries of the Closing
Date;
(2) To secure payment of the Deferred Payments and the Assigned
Non-Compete Payments, Purchaser shall execute and deliver to Seller at Closing,
documents reasonably sufficient to provide Seller with a junior lien on all of
Purchaser's existing fixed assets, including Purchaser's property, plant,
fixtures, and equipment, but not including additional assets acquired by
Purchaser after Closing, except to the extent they constitute replacements,
improvements, and accessions to Purchaser's existing fixed assets; such liens
shall be evidenced by a promissory note to Seller, security agreement, deeds of
trust, mortgages, financing statements, and other usual and customary financing
instruments, and shall be junior to the liens securing the existing loans and
loan commitments to Purchaser from its bank or its governmental agency,
existing or future loans from any purchase money security interest lender,
extensions or renewals of existing loans or loan commitments, and any future
loans from any lender or lenders, used to refinance or replace any of the
foregoing;
(3) The documents evidencing Seller's liens shall set forth
and, if recorded, shall be recorded in a manner that reflects the junior lien
status described in subsection (d)(2), above; Seller shall, at any time after
the date hereof upon the request of Purchaser, promptly execute such additional
documents and replacement financing statements as are reasonably necessary to
reflect the lien priority described in subsection (d)(2), above; and
(e) the Assumed Vacation Liability shall be assumed by Purchaser,
and shall be paid or provided for in the manner set forth in agreements as may
be reached by and between Purchaser and each Employee. Purchaser shall not be
required to pay or provide for Assumed Vacation Liability within less than one
year following the Closing Date, and Purchaser shall not require that Assumed
Vacation Liability be paid or provided for across a period greater that two
years following the Closing Date.
To the extent that Seller is liable as of the Closing Date to any governmental
agency or taxing authority whose consent or action is required for the transfer
of any Permit, Purchaser, at its election, may pay or provide for payment of
amounts due to such agency or authority and may deduct amounts paid or required
to be paid to such agency or authority from the Designated Payment. For the
purpose of the foregoing sentence, the Seller shall be considered liable if the
taxing authority or governmental agency has a right to payment that constitutes
a "claim" against Seller within the meaning of Section 101(5) of the Bankruptcy
Code. Notwithstanding subsection (b) of this Section 2.2, in the event that a
claim is allowed against Seller in favor of any current or former employee of
Seller as a priority claim under Sections 507(a)(3) or 507(a)(4) of the
Bankruptcy Code, then the portion of the Initial Plan Payment that is equal to
the amount of such allowed priority claims shall be paid to Seller, and not to
the Plan, and the remaining portion of the Initial Plan Payment shall be paid
to the Plan. All payments to the Plan shall be made directly to T. Rowe Price
as the administrator of the Plan, or to the successor administrator of the
Plan.
2.3 CLOSING COSTS; TRANSFER TAXES.
The parties shall endeavor to obtain exemptions under Section 1146 of
the Bankruptcy Code and otherwise from documentary transfer taxes and any other
sales, use or other taxes imposed by reason of the transfers of the Purchased
Assets provided hereunder ("Transfer Taxes"). To the extent that payment of a
Transfer Tax is not subject to an exemption, Purchaser shall be responsible for
the payment of any such Transfer Tax (provided, however, that Seller shall be
responsible for the payment of any Transfer Tax or other tax accruing or
arising prior to the Closing).
2.4 PURCHASE PRICE ALLOCATIONS.
At Closing, Seller and Purchaser shall agree in writing to an
allocation of the Purchase Price and shall execute, and thereafter file on a
timely basis with their respective federal income tax returns, the initial
asset acquisition statement and any supplemental statements on Internal Revenue
Service Form 8594 required by Temporary Treasury Regulation Section 1.1060-1T.
2.5 WAIVERS AND RELEASES OF CERTAIN CLAIMS.
At Purchaser's request, at Closing, and thereafter from time to time,
Seller shall waive and release any and all claims, known and unknown, they, or
any of them, have or may have, as of the Closing Date, including without
limitation Avoidance Claims, against all Hired Employees. Such release shall
be a general release and shall be in a form that is reasonably satisfactory to
Purchaser and its counsel.
ARTICLE III
CLOSING
3.1 CLOSING.
The Closing of the transactions contemplated herein (the "Closing")
shall take place at or about the hour of 11:00 a.m. on the Closing Date at the
offices of Greenan, Walker, Trainor & Billman, 6411 Ivy Lane, Seventh Floor,
Greenbelt, Maryland 20770, unless the parties hereto agree otherwise.
3.2 CONVEYANCES AT CLOSING.
A. INSTRUMENTS AND POSSESSION. To effect the transfer referred to
in Section 2.1 of this Agreement, Seller will, on the Closing Date, execute and
deliver to Purchaser:
(i) one or more bills of sale substantially in the form
attached hereto as Exhibit "C," conveying in the aggregate all of Seller's
owned personal property included in the Purchased Assets;
(ii) assignments or novations of all Contract Rights included
in the Purchased Assets (including, without limitation Project Contracts);
(iii) assignment of all Proprietary Rights in recordable form
to the extent necessary to assign such rights or to perfect the assignment of
such rights;
(iv) such other instruments as shall be reasonably requested by
Purchaser to vest in Purchaser title in and to the Purchased Assets in
accordance with the provisions of this Agreement;
(v) all Books and Records included in the Purchased Assets; and
(vi) physical possession of all tangible personal property
included in the Purchased Assets.
B. FORM OF INSTRUMENTS. All of the foregoing instruments shall be
in form and substance, and shall be executed and delivered in a manner,
reasonably satisfactory to Purchaser.
3.3 OTHER DELIVERIES AT CLOSING.
In addition to the foregoing matters, at the Closing:
A. Purchaser and Seller shall deliver officers' certificates
confirming the accuracy of the representations and warranties set forth in
Articles IV and V;
B. Purchaser and the Seller shall deliver the certificates and
other matters described in Articles VII and VIII;
C. Purchaser and Dr. Anand shall execute and deliver the Consulting
and Non-Compete Agreement and the Indemnification Agreement;
D. Seller shall deliver a copy of the Order, certified by the
Bankruptcy Court and evidence that the Order has become a Final Order (unless
Purchaser in writing waives the finality requirement);
E. Seller shall deliver the Seller Opinion and the Parent Opinion;
F. Seller shall deliver a schedule of accrued vacation time and
allowances with respect to each of its employees; and
G. Seller shall deliver the Parent Consent and Indemnification
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Except as set forth on the Disclosure Schedule, Seller hereby represents
and warrants to Purchaser as follows:
4.1 ORGANIZATION OF SELLER.
Seller is duly organized, validly existing and in good standing under
the laws of the State of Maryland, has full corporate power and authority to
conduct its business as it is presently being conducted and to own and lease
its properties and assets. Seller is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which such
qualification is necessary under the applicable law as a result of the conduct
of its business or the ownership of its properties and where the failure to be
so qualified would have a material adverse effect on the business or financial
condition of Seller. Each jurisdiction in which Seller is qualified to do
business as a foreign corporation is listed on the Disclosure Schedule.
4.2 AUTHORIZATION.
Seller has all necessary corporate power and authority and has taken
all corporate action necessary to enter into this Agreement, to consummate the
transactions contemplated hereby and to perform its obligations hereunder.
This Agreement has been duly executed and delivered by Seller and, subject to
approval by the Court, is a legal, valid and binding obligation of Seller
enforceable against Seller in accordance with its terms.
4.3 ABSENCE OF CERTAIN CHANGES OR EVENTS.
Since the Balance Sheet Date, there has not been any:
(a) (i) except for normal periodic increases in the ordinary course
of business consistent with past practice, increase in the compensation payable
or to become payable by Seller to any of its Personnel, (ii) bonus, incentive
compensation, service award or other like benefit granted, made or accrued,
contingently or otherwise, for or to the credit of any of any Non-Direct
Personnel, (iii) employee welfare, pension, retirement, profit-sharing or
similar payment or arrangement made or agreed to by Seller for any Personnel
except pursuant to the existing plans and arrangements described in the
Disclosure Schedule or (iv) new employment agreement to which Seller is a party
with any new Non-Direct Employee;
(b) sale, assignment or transfer of any of the assets of Seller,
other than in the ordinary course of business;
(c) cancellation of any indebtedness or waiver of any rights of
substantial value to Seller, whether or not in the ordinary course of business;
(d) amendment, cancellation or termination of, or notice of default
by Seller under any Contract, Permit, license or other instrument material to
Seller;
(e) capital expenditure, other than in the ordinary course of
business and consistent with past practice;
(f) failure to operate the business of Seller in the ordinary course
consistent with past practice;
(g) damage, destruction or loss (whether or not covered by
insurance) with respect to any of the Purchased Assets;
(h) any declaration, setting aside or payment of dividends or
distributions in respect of any capital stock of Seller or any redemption,
purchase or other acquisition of any of Seller's equity securities;
(i) any payment, discharge or satisfaction of any liabilities other
than the payment, discharge or satisfaction in the ordinary course of business
and consistent with past practice of liabilities reflected or reserved against
in the Balance Sheet or incurred in the ordinary course of business and
consistent with past practice since the Balance Sheet Date, or as otherwise
approved by the Bankruptcy Court;
(j) agreement by Seller to do any of the foregoing; or
(k) any other material adverse change in the business, financial
condition or operations of Seller (items (a) through (k), above, being referred
to collectively herein as "Material Adverse Changes").
4.4 TITLE TO ASSETS, ETC.
Seller has good and marketable title to the Purchased Assets.
Without limiting the generality of the foregoing, neither Parent nor any other
Affiliate has any legal or equitable interest in any of the Project Contracts.
None of the Purchased Assets is subject to any Encumbrances, except liens which
are specified in the Disclosure Schedule and which are to be discharged
pursuant to the Order at or prior to the Closing. Seller enjoys peaceful, and
undisturbed possession of all its facilities, and its facilities are not
subject to any Encumbrances, encroachments, building or use restrictions,
exceptions, reservations or limitations which in any material respect interfere
with or impair the present and continued use thereof in the usual and normal
conduct of the business of Seller. None of the real property improvements
(including leasehold improvements), equipment and other assets owned or used by
Seller at its facilities is subject to any commitment or other arrangement for
their sale or use by any affiliate of Seller or third parties.
4.5 CONTRACTS AND COMMITMENTS.
A. Seller is not a party to any written or oral:
(a) commitment, contract, note, loan, evidence of indebtedness,
purchase order or letter of credit involving any obligation or liability on the
part of Seller;
(b) lease of real property (the Disclosure Schedule indicates
with respect to each Lease listed on the Disclosure Schedule the term, annual
rent, renewal options and number of square feet leased);
(c) lease of personal property (the Disclosure Schedule
indicates with respect to each lease listed on the Disclosure Schedule a
general description of the leased items, term, annual rent and renewal
options);
(d) contract or commitment not otherwise described above or
listed in the Disclosure Schedule (including purchase orders, franchise
agreements and undertakings or commitments to any governmental or regulatory
authority) relating to the business of Seller and otherwise materially
affecting Seller's business under contracts not in the ordinary course of
business;
(e) Permit;
(f) contracts or agreements containing covenants limiting the
freedom of Seller to engage in any line of business or compete with any person;
or
(g) employment contracts, including, without limitation,
contracts to employ executive officers and other contracts with officers or
directors of Seller.
B. Seller is not (and, to the best knowledge of Seller, no other
party is) in material breach or violation of, or default under any of the
Contracts or other instruments, obligations, evidences of indebtedness or
commitments described in (a) through (g) above, the breach or violation of
which would have a material adverse effect on the business, financial condition
or operations of Seller, other than and to the extent alleged for the filing of
a petition in bankruptcy.
C. Except as otherwise set forth on the Disclosure Schedule:
(i) none of the Project Contracts has been assigned or is the subject of any
security agreement; (ii) each of the Project Contracts is a valid and binding
obligation of the Seller and (to the best knowledge of the Seller) the other
party or parties thereto, enforceable in accordance with its terms;
(iii) neither the Seller nor (to the best knowledge of the Seller) any other
party thereto, has terminated, canceled, modified or waived any term or
condition of any Project Contract, (iv) neither the Seller nor (to the best
knowledge of the Seller) any other party to any Project Contract is in default
or alleged to be in default under any Project Contract and there exists no
event, condition or occurrence that, after notice or lapse of time, or both,
would constitute such a default by the Seller or (to the best knowledge of the
Seller) any other party to any such Project Contract; and (v) none of the
Project Contracts contains any covenant or other restriction preventing or
limiting the consummation of the transactions contemplated hereby, including
any provision prohibiting the assignment of the Seller's rights thereunder or
granting any party a right of termination or modification of any provision as a
result thereof.
4.6 NO CONFLICT OR VIOLATION.
Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will result in (a) a
violation of or a conflict with any provision of the Articles of Incorporation
or Bylaws of Seller, (b) a breach of, or a default under, any term or provision
of any contract, agreement, indebtedness, lease, Encumbrance, commitment,
license, franchise, Permit, authorization or concession to which Seller is a
party or by which the Purchased Assets are bound, which breach or default would
have a material adverse effect on the business, financial condition or
operations of Seller or its ability to consummate the transactions contemplated
hereby, (c) a violation by Seller of any statute, rule, regulation, ordinance,
code, order, judgment, writ, injunction, decree or award, which violation would
have a material adverse effect on the business, financial condition or
operations of Seller or its ability to consummate the transactions contemplated
hereby, or (d) an imposition of any material Encumbrance, restriction or charge
on any of the Purchased Assets.
4.7 CONSENTS AND APPROVALS.
Except for the approval of the Court contemplated by Sections 6.5,
7.4 and 8.6, no consent, approval or authorization of, or declaration,
registration with, any governmental or regulatory authority, or any other
person or entity, required to be made or obtained by, Seller in connection with
the execution, delivery and performance of this Agreement, and the consummation
of the transactions contemplated hereby.
4.8 FINANCIAL STATEMENTS.
Seller has heretofore delivered to Purchaser the Financial
Statements. Except as otherwise set forth therein, the Financial Statements
are complete, are in accordance with the books and records of Seller accurately
reflect the assets, liabilities and financial condition and results of
operations indicated thereby in accordance with generally accepted accounting
principles consistently applied, and contain and reflect all necessary
adjustments for a fair representation of the Financial Statements as of the
date and for the period covered thereby.
4.9 LITIGATION.
There are no suits, actions, proceedings or investigations pending
or, to the best knowledge of Seller, threatened (whether or not any such suit,
action, proceeding or investigation involves, or seeks recourse against, Seller
or any of the Purchased Assets) ("Actions") which materially affect or would,
if adversely determined, materially adversely affect any of the Purchased
Assets or Seller's ability to execute and deliver this Agreement or consummate
the transactions contemplated hereby.
4.10 LABOR MATTERS.
Seller is not a party to any labor agreement with respect to its
employees with any labor organization, group or association. Seller has not
experienced any attempt by organized labor or its representatives to make
Seller conform to demands of organized labor relating to its employees or to
enter into a binding agreement with organized labor that would cover the
employees of Seller. Seller is in material compliance with all applicable laws
respecting employment practices, terms and conditions of employment and wages
and hours and is not engaged in any unfair labor practice. There is no unfair
labor practice charge or complaint against Seller pending before the National
Labor Relations Board or any other governmental agency arising out of Seller's
activities, and Seller has no knowledge of any facts or information which would
give rise thereto; there is no labor strike or labor disturbance pending or
threatened against Seller nor is any grievance currently being asserted; and
Seller has not experienced a work stoppage or other labor difficulty.
4.11 COMPLIANCE WITH LAW.
Seller and the conduct of its business are in compliance with all
applicable laws, statutes, ordinances, rules, regulations and orders, whether
federal, state or local (collectively, "Law" or "Laws"), except where the
failure to comply would not have a material adverse effect on the business,
financial condition or operations of Seller. Seller has not received any
written notice to the effect that, or otherwise been advised that, it is not in
compliance with Law where the failure to comply would have a material adverse
effect on the business, financial condition or operations of Seller, and Seller
has no reason to anticipate that any presently existing circumstances are
likely to result in violations of any such Law which would, in any one case or
in the aggregate, have a material adverse effect on the business, financial
condition or operations of Seller. All Permits that are required by Law, or
which are otherwise necessary or appropriate for the operation and conduct of
the business of Seller, are held by Seller in its name, are in full force and
effect Seller is in good standing under, and in compliance with, all Permits.
4.12 NO BROKERS.
Neither Seller nor any Affiliate has entered into or will enter into
any Contract, agreement, arrangement or understanding with any person or firm
which will result in the obligation of Purchaser to pay any finder's fee,
brokerage commission or similar payment in connection with the transactions
contemplated hereby.
4.13 NO OTHER AGREEMENTS TO SELL THE ASSETS OR SELLER.
Neither Seller nor any shareholder of Seller has any legal
obligation, absolute or contingent, to any other person or firm to sell the
Purchased Assets, to sell a majority of the capital stock of Seller or to
effect any merger, consolidation or other reorganization of Seller or to enter
into any agreement with respect thereto.
4.14 PROPRIETARY RIGHTS.
All of Seller's Proprietary Rights are listed in the Disclosure
Schedule. The Proprietary Rights listed in the Disclosure Schedule are in all
material respects all those used in the business of Seller. No person has a
right to receive a royalty or similar payment in respect of any Proprietary
Rights pursuant to any contractual arrangement entered into by Seller, and no
person otherwise has a right to receive a royalty or similar payment in respect
of any such Proprietary Rights. Seller has no licenses granted by or to it or
no other agreements to which it is a party, relating in whole or in part to any
of the Proprietary Rights. Seller's use of the Proprietary Rights is not
infringing upon or otherwise violating the rights of any third party in or to
such Proprietary Rights, and no proceedings have been instituted against or
notices received by Seller that are presently outstanding alleging that
Seller's use of its Proprietary Rights infringes upon or otherwise violates any
rights of a third party in or to such Proprietary Rights.
4.15 EMPLOYEE BENEFIT PLANS.
(a) DEFINITIONS. The following terms, when used in this
Section 4.15, shall have the following meanings. Any of these terms may,
unless the context otherwise requires, be used in the singular or the plural
depending on the reference.
(1) ERISA. "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
(2) ERISA AFFILIATE. "ERISA Affiliate" shall mean any entity
which is (or at any relevant time was) a member of a "controlled group of
corporations" with or under "common control" with the Company as defined in
Section 4.14(b) or (c) of the IRC.
(3) BENEFIT ARRANGEMENT. "Benefit Arrangement" shall mean any
employment, consulting, severance or other similar contract, arrangement or
policy and each plan, arrangement (written or oral), program agreement or
commitment providing for insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits, supplemental
unemployment benefits, vacation benefits, retirement benefits, life, health,
disability or accident benefits (including, without limitation, any "voluntary
employees' beneficiary association" as defined in Section 501(c)(9) of the IRC
providing for the same or other benefits) or for deferred compensation, profit
sharing bonuses, stock options, stock appreciation rights, stock purchases or
other forms of incentive compensation or postretirement insurance, compensation
or benefits which is
(i) entered into, maintained, contributed to or required
to be contributed to, as the case may be, by the Company or an ERISA Affiliate
or under which the Company or any ERISA Affiliate may incur any liability, and
(ii) covers any employee or former employee of the Company
or any ERISA Affiliate (with respect to their relationship with such entities).
(b) REPRESENTATIONS. Except for the Plan, neither the Seller nor
any ERISA Affiliate maintains, administers, contributes to or is required to
contribute to any "employee benefit plan" as defined in Section 3(3) of ERISA,
any "multiemployer plan," as defined in Section 4001(a)(3) of ERISA or any
Benefit Arrangement, which covers any employee or former employee of the
Company or any ERISA Affiliate (with respect to their relationship with such
entities) (collectively, "Employee Benefit Plans"), or within the five years
prior to the Closing Date, maintained, administered, contributed to or is
required to contribute to any such Employee Benefit Plan or under which
Employee Benefit Plan the Company or any ERISA Affiliate may incur any
liability.
(c) EMPLOYEE PLAN LIABILITIES. Except as otherwise expressly
provided by this Agreement, Purchaser shall have no liability or obligation
with respect to any Employee Benefit Plan, including without limitation any
responsibility for contributions required to fund any benefits payable
thereunder with respect to the employees of the Seller for any period prior to,
at or following the Closing. Seller shall indemnify, defend and hold Purchaser
harmless from and against any such claims and liabilities.
(d) NO CONTINUING OBLIGATION. Purchaser shall have no obligation to
assume or continue any benefits under any Employee Benefit Plan. Purchaser
shall have no obligation to provide the same or similar benefits on account of
any period prior to Closing. Purchaser's sole obligations with respect to
benefits are to make the Initial Plan Payment.
4.16 SEVERANCE ARRANGEMENTS.
Seller has not entered into any severance or similar arrangement in
respect of any present or former Personnel that will result in any obligation
(absolute or contingent) of Purchaser or Seller to make any payment to any
present or former Personnel following termination of employment, other than
such agreements requiring Seller (but not Purchaser) to make such payments,
which agreements must be approved by the Bankruptcy Court and which shall not
affect Hired Employees. Purchaser shall have no obligation to assume any
severance arrangement between Seller and any other person (including without
limitation, Hired Employees). No payment made by Seller on any severance
arrangement shall affect the net profit from operations under Section 6.9,
below.
4.17 COMPLIANCE WITH LEGISLATION REGULATING ENVIRONMENTAL QUALITY.
There are no toxic wastes or other toxic or hazardous substances or
materials being stored or otherwise held on, under or about any of the
Facilities. The Facilities have been maintained in compliance with all
federal, state and local environmental protection, occupational, health and
safety or similar laws, ordinances, restrictions, licenses, and local
environmental protection, occupational, health and safety or similar laws,
ordinances, restrictions, licenses and regulations, including, but not limited
to the Federal Water Pollution Control Act (42 U.S.C. Section 1251 et seq.),
Resource Conservation & Recovery Act (42 U.S.C. Section 6901 et seq.), Safe
Drinking Water Act (21 U.S.C. Section 349, 42 U.S.C. Sections 201; 300f), Toxic
Substances Control Act (15 U.S.C. Section 2601 et seq.), Clean Air Act (42
U.S.C. Section 7401 et seq.), Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.).
4.18 TAX MATTERS.
Seller has filed or caused to be filed all federal income tax returns
and all other federal, state, county, local or city tax returns which are
required to be filed, and it has paid or caused to be paid all taxes shown on
said returns or on any tax assessment received by it to the extent that such
taxes have become due and before such taxes became delinquent.
4.19 INSURANCE.
The Disclosure Schedule contains a complete and accurate list of all
policies or binders of fire, liability, title, worker's compensation and other
forms of insurance maintained by Seller on its business, property or Personnel.
Such policies and binders provide sufficient coverage for the risks insured
against, are in full force and effect on the date hereof and shall be kept in
full force and effect by Seller through the Closing.
4.20 FULL DISCLOSURE.
None of the representations and warranties made by Seller, nor in any
certificate or memorandum furnished or to be furnished by Seller, or on its
behalf, including the Disclosure Statement, contains or will contain any untrue
statement of material fact, or omit any material fact, the omission of which
would be misleading.
4.21 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; APPLICABILITY.
All of the representations and warranties of Seller contained in this
Article IV shall survive the Closing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller as follows:
5.1 ORGANIZATION OF PURCHASER.
Purchaser is duly organized, validly existing and in good standing
under the laws of the Commonwealth of Pennsylvania.
5.2 AUTHORIZATION.
Purchaser has all necessary corporate power and authority and has
taken all corporate action necessary to enter into this Agreement, to
consummate the transactions contemplated hereby and to perform its obligations
hereunder. This Agreement has been duly executed and delivered by Purchaser
and, subject to approval by the Court, is a legal, valid and binding
obligations of Purchaser, enforceable against Purchaser in accordance with its
terms.
5.3 NO CONFLICT OR VIOLATION.
Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will result in (a) a
violation of or a conflict with any provision of the Articles of Incorporation
or Bylaws of Purchaser, (b) a breach of, or a default under, any term or
provision of any contract, agreement, indebtedness, lease, commitment, license,
franchise, permit, authorization or concession to which Purchaser is a party
which breach or default would have a material adverse effect on the business,
financial condition or operations of Purchaser or its ability to consummate the
transactions contemplated hereby or (c) a violation by Purchaser of any
statute, rule, regulation, ordinance, code, order, judgment, writ, injunction,
decree or award, which violation would have a material adverse effect on the
business or financial condition of Purchaser or its ability to consummate the
transactions contemplated hereby.
5.4 CONSENTS AND APPROVALS.
Except for the approval of the Court contemplated by Sections 7.4 and
8.6, and such governmental agencies as may be identified by Seller in the
Disclosure Schedule, no consent, approval or authorization of, or declaration,
filing, or registration with, any governmental or regulatory authority, or any
other person or entity, is required to be made or obtained by Purchaser in
connection with the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby.
5.5 LIENS AND LOANS.
The secured liens of record, Line of Credit (revolving), Line of
Credit (revolving - M&E), term loans and additional term loan for the
acquisition of Seller's assets as set forth in Counsel's correspondence of
August 27, 1996 are true and correct. Purchaser will have loan availability to
fund the purchase of Seller's assets as provided in their Agreement.
ARTICLE VI
COVENANTS OF SELLER AND PURCHASER
Seller and Purchaser each covenants with the other as follows:
6.1 COOPERATION AND BEST EFFORTS.
Prior to the Closing, the Purchaser and the Seller shall cooperate
and diligently pursue and use their respective best efforts to obtain the
assignments and novations of the Contract Rights and Contracts, the Order, and
any required consent of the relevant third parties to the assignment of the
Contracts.
6.2 MAINTENANCE OF ASSETS AND RELATIONSHIPS.
Prior to the Closing, the Seller shall duly perform and discharge its
obligations and liabilities under the Project Contracts and the Contracts;
operate its business in the ordinary course; maintain the Fixtures and
Equipment and its other assets and properties in good repair and operating
condition; and will use its best efforts to preserve and maintain good
relationships with its clients, customers, vendors and Employees.
6.3 OTHER ACTION.
Neither the Seller nor the Purchaser shall take any action that would
result in any of their respective representations and warranties not being true
in all material respects as of the Closing Date. Each of the parties shall use
its best efforts to cause the fulfillment at the earliest practicable date of
all of the conditions to its obligations to consummate the sale and purchase
under this Agreement.
6.4 INVESTIGATION BY PURCHASER.
Seller shall allow Purchaser at its own expense during regular
business hours to make such inspection of the Purchased Assets and to inspect
and make copies of other Contracts, Books and Records or information requested
by Purchaser and necessary for or reasonably related to the business, financial
condition and operations of Seller. All such information shall be provided to
Purchaser in such form as information may presently exist or be readily
available. Seller hereby authorizes Purchaser and its agents, representatives,
employees, accountants and lawyers to contact, communicate with: Employees,
customers of Seller and Affiliates (including parties to Contracts),
governmental agencies and permitting authorities, licensors, shareholders of
Seller and Affiliates, creditors and other parties in interest in the
Bankruptcy Case, in order to facilitate Purchaser's investigation and/or the
consummation of the transactions contemplated by this Agreement. Seller shall
hold Purchaser and its agents harmless from any and all claims and liability,
and shall not assert any claim or liability against Purchaser or its agents,
arising from or in connection with the activities of Purchaser and its agents
pursuant to this Section, except for actions by Purchaser that are intended to
cause harm to Seller or that constitute gross misconduct.
6.5 COURT APPROVAL; BEST EFFORTS.
Within five (5) Business Days following the date hereof, Seller shall
file a motion or motions pursuant to Section 363 of the Bankruptcy Code (and
such other Sections of the Bankruptcy Code and Bankruptcy Rules as may be
appropriate) (the "Motion") seeking the Court's approval of this Agreement and
the transactions contemplated hereby. Seller shall use its best efforts to
obtain Court approval of this Agreement and the transactions contemplated
hereby.
6.6 CERTAIN PROHIBITED TRANSACTIONS.
Except as otherwise required by the Court or the Bankruptcy Code or
expressly provided herein, Seller shall not take any of the following actions
without the prior written consent of Purchaser:
INK pay or incur any obligation to pay any dividend on its capital
stock or make or incur any obligation to make any distribution or redemption
with respect to its capital stock;
(b) make any change to its Articles of Incorporation or bylaws;
(c) mortgage, pledge or otherwise encumber any of its properties or
assets or sell, transfer or otherwise dispose of any of its properties or
assets or cancel, release or assign any indebtedness owed to it or any claims
held by it, except in the ordinary course of business and consistent with past
practice;
(d) make any investment of a capital nature either by purchase of
stock or securities, contributions to capital, property transfer or otherwise,
or by the purchase of any property or assets of any other individual,
partnership, firm or corporation, except in the ordinary course of business and
consistent with past practice;
(e) enter into, terminate or reject any material contract or
agreement, or make any material change in the Leases or any of its Contracts,
other than in the ordinary course of business and consistent with past
practice, or as may be approved by the Bankruptcy Court; provided, however,
that Seller shall not terminate, reject or make any material adverse change in
any Project Contract;
(f) do any other act which would cause any representation or
warranty of Seller in this Agreement to be or become untrue in any material
respect; or
(g) directly or indirectly file or make any motion or request, or
consent or agree to, any motion or request, for the dismissal or conversion of
the Bankruptcy Case, or any plan of reorganization or liquidation that is
inconsistent with the terms of this Agreement.
6.7 NOTIFICATION OF CERTAIN MATTERS.
Seller shall give prompt notice to Purchaser, and Purchaser shall
give prompt notice to Seller, of (i) the occurrence, or failure to occur, of
any event which occurrence or failure would cause any representation or
warranty contained in this Agreement to be untrue or inaccurate in any material
respect any time from the date hereof to the Closing Date and (ii) any material
failure of Seller or Purchaser, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder. Additionally, Seller shall give prompt notice to Purchaser of any
objection, allegation or threat of legal action that Seller may receive in
connection with this Agreement or the transactions contemplated hereby. Each
party shall use all reasonable efforts to remedy any material failure on its
part to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder.
6.8 NOTICES TO CREDITORS AND PARTIES IN INTEREST.
Seller shall provide notice to all creditors and parties in interest
of all matters that are required by the Bankruptcy Code or the Federal Rules of
Bankruptcy Procedure ("Bankruptcy Rules"). Without limiting the generality of
the foregoing, Seller shall provide notice to all persons and entities who are
shareholders in Parent as of the time such notice is given or required to be
given. Such notices shall be given in a manner, and within the time, required
by the Bankruptcy Code, Bankruptcy Rules, local rules of the Court ("Local
Rules") or order of the Court, as applicable. At Closing, Seller shall certify
Seller's compliance with all notice requirements by sworn affidavit of an
officer of Seller executed under penalty of perjury. In addition to providing
notices as required above, Seller shall cause Parent to conduct meeting of
Parent's board of directors and, as soon as practicable after the date of the
Order, a meeting of Parent's shareholders to obtain approval and authorization
of the Parent Consent and Indemnification Agreement. Seller and Parent shall
comply with all applicable Laws (including without limitation, applicable
corporate and securities laws, rules and regulations) in obtaining such
approval and authorization.
6.9 NET PROFIT FROM OPERATIONS.
Within thirty (30) days following the Closing, Seller shall make
payment to Purchaser in immediately available funds in an amount equal to
Seller's net profits from operations computed pursuant to generally accepted
accounting principles, consistently applied, accrued during the period
commencing on July 30, 1996, and ending on the Closing Date.
6.10 DISCLOSURE SCHEDULE.
Within ten (10) Business Days following the date hereof, Seller shall
deliver to Purchaser the Final Disclosure Schedule.
ARTICLE VII
CONDITIONS TO SELLER'S OBLIGATIONS
The obligations of Seller to consummate the transactions required to take
place at Closing are subject, in the discretion of Seller, to the satisfaction,
on or prior to the Closing Date, of each of the following conditions:
7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS.
All representations and warranties of Purchaser contained in this
Agreement shall be true and correct in all material respects at and as of the
Closing Date, except as, and to the extent that, the facts and conditions upon
which such representations and warranties are based are expressly required or
permitted to be changed by the terms hereof, and Purchaser shall have performed
all agreements and covenants required hereby to be performed by it prior to or
at the Closing Date.
7.2 CERTIFICATES.
Purchaser shall have furnished Seller with such certificates of its
officers and others to evidence compliance with the conditions set forth in
this Article VII and the representations and warranties in Article V.
7.3 CORPORATE DOCUMENTS.
Seller shall have received from Purchaser resolutions adopted by the
board of directors of Purchaser approving this Agreement and the transactions
contemplated hereby, certified by Purchaser's corporate secretary.
7.4 COURT APPROVAL.
The Court shall have entered an order or orders, including any
findings of fact and conclusions of law (collectively, the "Order") in a form
acceptable to Purchaser that (1) approves the form and content of this
Agreement; (2) authorizes Seller to enter into each and every transaction
contemplated by this Agreement; and (3) authorizes Seller to convey to
Purchaser the Purchased Assets effective on the Closing Date.
ARTICLE VIII
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligations of Purchaser to consummate the transactions required to
take place at Closing are subject, in the discretion of Purchaser, to the
satisfaction, on or prior to the Closing Date, of each of the following
conditions:
8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS.
All representations and warranties of Seller contained in this
Agreement shall be true and correct in all material respects at and as of the
Closing Date, except as, and to the extent that, the facts and conditions upon
which such representations and warranties are based are expressly required or
permitted to be changed by the terms hereof, and Seller shall have performed
all agreements and covenants required hereby to be performed by them prior to
or at the Closing Date.
8.2 CONSENTS.
All consents, approvals and waivers from third parties and
governmental authorities and other Parties necessary to permit Seller to
transfer the Purchased Assets to Purchaser as contemplated hereby shall have
been obtained.
8.3 NO GOVERNMENTAL PROCEEDINGS OR LITIGATION.
No Action by any governmental authority shall have been instituted or
threatened which questions the validity or legality of the transaction
contemplated hereby and which could reasonably be expected to affect materially
the right or ability of Purchaser to own, operate or possess the Purchased
Assets after the Closing or to damage Purchaser materially if the transactions
contemplated hereunder are consummated.
8.4 CERTIFICATES.
Seller shall have furnished Purchaser with such certificates of its
officers and others to evidence compliance with the conditions set forth in
this Article VIII and the representations and warranties set forth in
Article IV.
8.5 CORPORATE DOCUMENTS.
Purchaser shall have received from Seller resolutions adopted by the
boards of directors and shareholders of Seller approving this Agreement and the
transactions contemplated hereby, certified by Seller's corporate secretary.
8.6 COURT APPROVAL.
On or before August 30, 1996, or such later date as Purchaser may
agree in writing in Purchaser's sole and absolute discretion, the Court shall
have entered the Order in a form and in substance acceptable to Purchaser that
(1) approves the form and content of this Agreement effective July 30, 1996;
(2) authorizes Seller to enter into each and every transaction contemplated by
this Agreement; (3) authorizes Seller to convey to Purchaser the Purchased
Assets free and clear of all Encumbrances of all parties and entities;
(4) approves the assumption and assignment to Purchaser of any Contract that is
an executory contract and is a Purchased Asset; (5) determines that the
consideration given by Purchaser under this Agreement represents the fair
market value of the Purchased Assets; (6) determines that this Agreement is in
the best interest of Seller and its Affiliates, including without limitation,
Parent and Parent's shareholders.
8.7 FINALITY.
The Order shall have become a Final Order.
8.8 THIRD PARTY ESTOPPELS AND CONSENTS.
Within ninety (90) days following the entry of the Order, all parties
to any Project Contract have executed and delivered to Purchaser legally
binding instruments consenting to the assumption and assignment to Purchaser of
each such Project Contract, without conditions, restrictions or modifications
to which Purchaser has not agreed in writing, and verifying the absence of any
default, defense or cure requirement in connection with such Project Contract,
or alternatively entering into a novation of the Project Contract with
Purchaser, all in a form and in substance acceptable to Purchaser and its
counsel.
8.9 MATERIAL ADVERSE CHANGE.
There shall not have been a Material Adverse Change.
8.10 CONSULTING AGREEMENT AND NON-COMPETE AGREEMENT.
Purchaser and Dr. Anand shall have agreed to and executed and
delivered the Consulting Agreement and the Non-Compete Agreement in form and in
substance acceptable to Purchaser.
8.11 PERMITS.
All licenses, Permits and other governmental authorizations required
for Purchaser to conduct the business of Seller shall have been obtained.
8.12 EMPLOYEES AND PROJECT MANAGERS.
At least 90% of the Employees to whom Purchaser has offered
employment have agreed to become Hired Employees on terms and conditions that
are mutually acceptable to Purchaser and each such Employee; and all of the
Project Managers to whom Purchaser has offered engagement or employment have
agreed to such employment or engagement on terms and conditions that are
mutually acceptable to Purchaser and each such Project Manager.
8.13 ARTICLES OF TRANSFER.
Seller shall have executed and furnished to Purchaser Articles of
Transfer describing the sale of assets contemplated hereby, which Articles of
Transfer shall have been filed with the Maryland State Department of
Assessments and Taxation as of the Closing Date.
8.14 PURCHASE PRICE ALLOCATION.
Seller shall have executed and delivered the Purchase Price
allocation referenced in Section 2.4, above.
8.15 PLAN TRUSTEES.
The Plan Trustees have executed and delivered to Purchaser an
instrument consenting to the terms and conditions of this Agreement and the
performance and consummation thereof, in form and substance acceptable to
Purchaser and its counsel.
8.16 INDEMNIFICATION AGREEMENT.
Dr. Anand shall execute this Agreement as the Indemnification
Agreement.
8.17 PARENT CONSENT.
Seller shall have delivered the Parent Consent and Indemnification
Agreement, duly executed by Parent, and all documentation reasonably requested
by Purchaser to evidence corporate authority and approvals and authorizations
required under this Agreement.
8.18 OPINIONS.
Seller shall have delivered the Parent Opinion and the Seller
Opinion.
8.19 CLOSING DATE.
The Closing shall have occurred on or before November 30, 1996.
8.20 CONSENT AND RELEASE.
Dr. Anand and the Plan Trustees shall acknowledge and agree that
Purchaser shall pay up to $10,000 to the IRS in lieu of paying this amount to
the Plan and Dr. Anand hereby releases and forgives Purchaser from liability
for such payment.
ARTICLE IX
MISCELLANEOUS
9.1 BREACH; REMEDIES; TERMINATION.
A. If any condition precedent to Seller's obligations hereunder is
not satisfied and such condition is not waived by Seller at or prior to the
Closing Date, or if any condition precedent to Purchaser's obligations
hereunder is not satisfied and such condition is not waived by Purchaser at or
prior to the Closing Date, Seller or Purchaser, as the case may be, may
terminate this Agreement at its option by notice to the other party.
B. Either party may terminate this Agreement upon the occurrence of
a material breach of this Agreement by the other party that is not cured within
a reasonable time after notice of the breach; provided, however, that a party
may not terminate this Agreement solely on the grounds of a material breach by
the other party if the terminating party is itself in material breach of this
Agreement at the time.
C. Purchaser and Seller agree that the novations and/or assignments
of Project Contracts shall be obtained pursuant to applicable laws, rules and
regulations governing the novation and/or assignment of such contracts.
D. In the event of the termination of this Agreement by either
party pursuant to Sections 9.1(A) or 9.1(B), above, neither party shall have
any liability hereunder of any nature whatsoever to the other party, including
any liability for damages, unless such party has materially breached its
obligations hereunder, in which event the party in default shall be liable to
the other party in damages. In the event of the termination of this Agreement
by Purchaser pursuant to Section 9.1(C), above, neither party shall have any
liability hereunder of any nature whatsoever, regardless of the occurrence and
continuation of a breach or default. In the event of a breach or default by
Seller, in addition to other remedies available at law or in equity, Purchaser
shall be entitled to specific performance of this Agreement without posting
bond or other security.
E. In the event that a condition precedent to its obligations is
not satisfied, nothing contained herein shall be deemed to require any party to
terminate this Agreement, rather than to waive such condition precedent and
proceed with the Closing.
9.2 ASSIGNMENT.
Neither this Agreement nor any of the rights or obligations hereunder
may be assigned by either party without the prior written consent of the other
party. Subject to the foregoing, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
9.3 NOTICES.
Unless otherwise provided herein, any notice, request, instruction or
other document to be given hereunder by either party to the other shall be in
writing and delivered personally or mailed by certified mail, postage prepaid,
return receipt requested (such mailed notice to be effective on the date such
receipt is acknowledged or refused) as follows:
If to Seller, addressed to: Dr. S.P.S. Anand
Applied Research Corporation
8201 Corporate Drive
Suite 1120
Landover, MD 20875
With a copy to: James M. Greenan, Esquire
Greenan, Walker, Trainor &
Billman
6411 Ivy Lane, 7th Floor
Greenbelt, MD 20770
If to Purchaser, addressed to: Mr. Jack Gulati, CEO
Fidelity Technologies
Corporation
2501 Kutztown Road
Reading, PA 19605
With a copy to: Joseph E. Lewis, Esquire
Stevens & Lee
111 North Sixth Street
P.O. Box 679
Reading, PA 19603
or to such other place and with such other copies as either party may designate
as to itself by written notice to the others.
9.4 CHOICE OF LAW.
This Agreement shall be construed, interpreted and the rights of the
parties determined in accordance with the laws of the State of Maryland
(without reference to the choice of law provisions of Maryland law).
9.5 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS.
This Agreement, together with all exhibits and schedules hereto and
all agreements contemplated hereby, constitutes the entire agreement among the
parties pertaining to the subject matter hereof and supersedes all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties and their employees, agents, representatives and
attorneys. No supplement, modification or waiver of this Agreement shall be
binding unless executed in writing by the party to be bound thereby. No waiver
of any of the provisions of this Agreement shall be deemed or shall constitute
a waiver of any other provision hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver unless otherwise expressly provided.
9.6 MULTIPLE COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
9.7 EXPENSES.
Except as set forth below or as otherwise specified herein, each
party hereto shall pay its own legal, accounting, out-of-pocket and other
expenses incident to this Agreement and to any action taken by such party in
preparation for carrying this Agreement into effect. The obligations of the
parties under this Section shall survive termination of this Agreement.
9.8 TITLES.
The titles, captions or headings of the Articles and Sections herein
are inserted for convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Agreement.
9.9 FURTHER ASSURANCES.
Each party shall at any time and from time to time hereafter, both
before and after Closing, execute, acknowledge and deliver to the other party
any and all instruments or assurances that the other party may reasonably
require for the purpose of giving full force and effect to the provisions of
this Agreement, and shall otherwise cooperate with the other's reasonable
requests made in aid of consummating the transactions herein contemplated.
9.10 SIGNED UNDER SEAL.
This Agreement is signed under seal by the parties.
9.11 TIME IS OF THE ESSENCE.
Time is of the essence under this Agreement.
9.12 NO THIRD PARTY BENEFICIARIES.
This Agreement is for the benefit of the undersigned parties and is
not intended to create rights in, or be enforceable by, any third party.
9.13 JURY TRIAL.
EACH PARTY HERETO WAIVES THE RIGHT TO TRIAL BY JURY WITH RESPECT TO
ANY CLAIM OR CAUSE OF ACTION ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED HEREBY.
9.14 PUBLICITY.
All notices to third parties and all publicity concerning the
transactions contemplated by this Agreement shall be jointly planned and
coordinated by and between Purchaser and Seller. None of the parties shall act
unilaterally in this regard without the prior written approval of the others;
however, this approval shall not be unreasonably withheld.
9.15 REQUIRED FILINGS.
Seller shall file all documents and reports required by Law in
connection with the transactions contemplated by this Agreement, including
without limitation filings as may be required under securities laws.
ARTICLE X
POST-CLOSING OBLIGATIONS
10.1 COVENANT NOT TO COMPETE.
Seller acknowledges and agrees that the Seller's business is
conducted in Montgomery County and Prince Georges County, Maryland, and that
Seller's reputation and goodwill are an integral part of its business. If
Seller deprives Purchaser of any of Seller's goodwill or in any manner utilizes
its reputation and goodwill in competition with Purchaser, Purchaser will be
deprived of the benefits it has bargained for pursuant to this Agreement. This
covenant is necessary to transfer the business and goodwill of Seller to
Purchaser effectively. Accordingly, as an inducement for Purchaser to enter
into this Agreement, Seller agrees that for a period of three years after the
Closing, Seller shall not, without Purchaser's prior written consent, directly
or indirectly, own, manage, operate, join, control or participate in the
ownership, management, operation or control of, or be connected with, any,
profit or nonprofit business or organization either in Montgomery County or
Prince Georges County, Maryland, which involves high technology research or
development, design or fabrication of sensors or instrumentation, technical
support services, or software development. Seller further agrees that it shall
not solicit or enter into any business or transaction with any person or entity
that is a party to any Project Contract for a period of three years after the
Closing. Seller shall maintain in confidence, and not to disclose to any third
party, any ideas, methods, developments, inventions, improvements, trade
secrets and business plans and information which are confidential information
of Seller. In the event the agreement in this Section 10.1 shall be determined
by any court of competent jurisdiction to be unenforceable by reason of its
extending for too great a period of time or over too great a geographical area
or by reason of its being too extensive in any other respect, it shall be
interpreted to extend only over the maximum period of time for which it may be
enforceable and/or over the maximum geographical area as to which it may be
enforceable and/or to the maximum extent in all other respects as to which it
may be enforceable, all as determined by such court in such action.
Seller acknowledges that a breach of the covenants contained in this
Section 10.1 will cause irreparable damage to Purchaser, the exact amount of
which will be difficult to ascertain, and that the remedies at law for any such
breach will be inadequate. Accordingly, Seller agrees that if Seller breaches
the covenant contained in this Section 10.1, in addition to any other remedy
which may be available at law or in equity, Purchaser shall be entitled to
specific performance and injunctive relief, without posting bond or other
security.
10.2 INDEMNIFICATION BY THE SELLER.
Subject to Section 9.1 and the further provisions of this Article X,
the Seller shall protect, defend, hold harmless and indemnify the Purchaser,
its officers, directors, stockholders, employees and agents, and their
respective successors and assigns from, against and in respect of any and all
losses, liabilities, deficiencies, penalties, fines, costs, damages and
expenses whatsoever (including reasonable professional fees and costs of
investigation, litigation, settlement, and judgment and interest) ("Losses")
that may be suffered or incurred by any of them arising from or by reason of
any of the following.
(a) Any breach of any representation, warranty, covenant or
agreement made by the Seller, in this Agreement or contained in any certificate
executed by the Seller and delivered to the Purchaser in connection with this
Agreement;
(b) Any liability or obligation of the Seller which has not
been assumed by the Purchaser pursuant to the express provisions of this
Agreement; and
(c) Any and all costs and expenses (including reasonable legal
fees) incident to the enforcement of the provisions of this Section.
10.3 INDEMNIFICATION BY THE PURCHASER.
Subject to Section 9.1 and the further provisions of this Article X,
the Purchaser shall protect, defend, hold harmless and indemnify the Seller,
its officers, directors, employees and agents, and stockholders and their
respective successors and assigns from, against and in respect of any all
Losses that may be suffered or incurred by any of them arising from or by
reason of any of the following.
(a) Any breach of any representation, warranty, covenant or
agreement made by the Purchaser in this Agreement or contained in any
certificate executed by the Purchaser and delivered to the Seller in connection
with this Agreement; and
(b) Any and all costs and expenses (including reasonable legal
fees) incident to the enforcement of the provisions of this Section.
10.4 INDEMNIFICATION PROCEDURES.
Whenever a party hereto (such party and each of its affiliates which
is entitled to indemnification pursuant to any provisions of this Agreement, an
"Indemnified Party") shall learn after the Closing of a claim that, if allowed
(whether voluntarily or by judicial or quasi-judicial tribunal or agency),
would give rise to an obligation of another party (the "Indemnifying Party") to
indemnify the Indemnified Party under any provision of this Agreement, before
paying the same or agreeing thereto, the Indemnified Party shall promptly
notify the Indemnifying Party in writing of all such facts within the
Indemnified Party's knowledge with respect to such claim and the amount thereof
(a "Notice of Claim"). If, prior to the expiration of fifteen (15) days from
the mailing of a Notice of Claim, the Indemnifying Party shall request, in
writing, that such claim not be paid, the Indemnified Party shall not pay the
same, provided the Indemnifying Party proceeds promptly, at its or their own
expense (including employment of counsel reasonably satisfactory to the
Indemnified Party), to settle, compromise or litigate, in good faith, such
claim. After notice from the Indemnifying Party requesting the Indemnified
Party not to pay such claim and the Indemnifying Party's assumption of the
defense of such claim at its or their expense, the Indemnifying Party shall not
be liable to the Indemnified Party for any legal or other expense subsequently
incurred by the Indemnified Party in connection with the defense thereof.
However, the Indemnified Party shall have the right to participate at its
expense and with counsel of its choice in such settlement, compromise or
litigation. The Indemnified Party shall not be required to refrain from paying
any claim which has matured by a court judgment or decree, unless an appeal is
duly taken therefrom and execution thereof has been stayed, nor shall the
Indemnified Party be required to refrain from paying any claim where the delay
in paying such claim would result in the foreclosure of a lien upon any of the
property or assets then held by the Indemnified Party. The failure to provide
a timely Notice of Claim as provided in this Section shall not excuse the
Indemnifying Party from its or their continuing obligations hereunder; however,
the Indemnified Party's claim shall be reduced by any damages to the
Indemnifying Party resulting from the Indemnified Party's delay or failure to
provide a Notice of Claim as provided in this Section.
10.5 ALLEGATIONS BY THIRD PARTIES.
For purposes of this Article X, any assertion of fact and/or law by a
third party that, if true, would constitute a breach of a representation or
warranty made by a party to this Agreement or make operational an
indemnification obligation hereunder, shall, on the date that such assertion is
made, immediately invoke the Indemnifying Party's obligation to protect,
defend, hold harmless and indemnify the Indemnified Party pursuant to this
Article X.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on their respective behalf, by their respective officers
thereunto duly authorized, all as of the day and year first above written.
SELLER:
APPLIED RESEARCH OF MARYLAND, INC.
By ________________________________
Title:_____________________________
PURCHASER:
FIDELITY TECHNOLOGIES CORPORATION
By_________________________________
Title:_____________________________
Agreed and consented to: ___________________________________
DR. S.P.S. ANAND
<PAGE>
EXHIBIT 11
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
FOR EACH OF THE TWO YEARS ENDED MAY 31
<CAPTION>
1996 1995
Average shares ----------------- -----------------
outstanding Fully Fully
(000's Omitted) Primary Diluted Primary Diluted
- ------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
1. Average Number of
Common Shares
Outstanding 6,215 6,215 5,944 5,944
2. Stock Options - - - -
------- ------- ------- -------
3. Average Number of
Common & Common
Equivalent Shares
Outstanding 6,215 6,215 5,944 5,944
===== ===== ===== =====
Net Income (Loss)
($000's Omitted)
- -------------------------
Income (Loss) before
Extraordinary Item $(657) $(657) $(895) $(895)
Extraordinary Item - - - -
------- ------- ------- -------
Net Income
(Loss) $(657) $(657) $(895) $(895)
====== ====== ====== ======
Net Income (Loss) Per
Common Share
- -------------------------
Income (Loss) Before
Extraordinary Item $(0.11) $(0.11) $(0.15) $(0.15)
Extraordinary
Item - - - -
------- ------- ------- -------
Net Income
(Loss) $(0.11) $(0.11) $(0.15) $(0.15)
======= ======= ======= =======
<FN>
Note 1: For all periods presented, the conversion of common stock warrants
and common stock options into common equivalent shares would have the
effect of increasing the income or decreasing the loss per common
share (i.e., antidilutive) and are therefore excluded from the
computation of the average number of common and common equivalent
shares outstanding for purposes of deriving primary and fully diluted
earnings per share.
</FN>
</TABLE>
<PAGE>
EXHIBIT 21
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
<CAPTION>
Percentage of
Incorporated voting securities
under the owned by
Name laws of Parent immediate parent
- ------------------- ------------ ----------------- ----------------
<S> <C> <C> <C>
Applied Research
Corporation Colorado Registrant
Applied Research Applied Research
of Maryland, Inc. Maryland Corporation 100%
ARSoftware Applied Research
Corporation Maryland Corporation 100%
ARInternet Applied Research
Corporation Maryland Corporation 95%
Note: The subsidiaries of the Registrant as of May 31, 1996, are
included in the consolidated financial statements of the
Registrant.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Consolidated Statement of Operations found on
pages 22 through 25 of the Company's Form 10-KSB for the year ended May 31, 1996,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 78,689
<SECURITIES> 0
<RECEIVABLES> 1,534,685
<ALLOWANCES> 10,000
<INVENTORY> 1,492
<CURRENT-ASSETS> 1,625,959
<PP&E> 773,359
<DEPRECIATION> 640,589
<TOTAL-ASSETS> 1,797,620
<CURRENT-LIABILITIES> 3,899,769
<BONDS> 0
0
0
<COMMON> 3,155
<OTHER-SE> (2,105,304)
<TOTAL-LIABILITY-AND-EQUITY> 1,797,620
<SALES> 8,957,464
<TOTAL-REVENUES> 8,957,464
<CGS> 0
<TOTAL-COSTS> 8,928,222
<OTHER-EXPENSES> 657,535
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 379,173
<INCOME-PRETAX> (657,056)
<INCOME-TAX> 0
<INCOME-CONTINUING> (657,056)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (657,056)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
