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