<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 November 30, 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 January 14, 1997, the Company had 6,311,083 shares of its $.01 par value
common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
<PAGE>
<PAGE>
FORM 10-QSB
APPLIED RESEARCH CORPORATION
INDEX
Part I: FINANCIAL INFORMATION PAGE NO.
______ _____________________ ________
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
November 30, 1996 (unaudited) and May 31, 1996 3-4
Condensed Consolidated Statements of Operations -
Three months ended November 30, 1996 and 1995
(unaudited) 5
Condensed Consolidated Statements of Operations -
Six months ended November 30, 1996 and 1995
(unaudited) 6
Condensed Consolidated Statements of Cash Flows -
Six months ended November 30, 1996 and 1995
(unaudited) 7-8
Notes to Condensed Consolidated Financial Statements 9-14
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-23
Part II: OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 2 Changes in Securities 24
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
Signatures 25
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, May 31,
1996 1996
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash $ 228,851 $ 78,689
Accounts receivable, net 1,326,488 1,524,685
Inventory, at cost 222 1,492
Other current assets 18,951 21,093
------------ ------------
TOTAL CURRENT ASSETS 1,574,512 1,625,959
PROPERTY AND EQUIPMENT, AT COST
Furniture and equipment 167,405 167,405
Computer equipment 478,952 462,206
Laboratory equipment 121,426 121,426
Leasehold improvements 22,322 22,322
------------ ------------
790,105 773,359
Less accumulated depreciation and amortization 677,962 640,589
------------ ------------
NET PROPERTY AND EQUIPMENT 112,143 132,770
INTANGIBLE ASSETS, NET OF
AMORTIZATION 28,965 32,276
OTHER ASSETS 7,359 6,615
------------ ------------
TOTAL ASSETS $1,722,979 $1,797,620
=========== ===========
</TABLE>
See accompanying notes to the
condensed consolidated financial statements
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
November 30, May 31,
1996 1996
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
LIABILITIES
- -----------
CURRENT LIABILITIES
Liabilities not subject to compromise:
Notes payable, current maturities $ 565,403 $ 689,563
Notes payable to officers and directors,
current maturities 26,100 4,000
Accounts payable 300,587 162,314
Accrued salaries and benefits 224,617 176,574
Accrued payroll taxes and withholdings 134,629 57,143
Other accrued liabilities 99,635 77,665
Billings in excess of costs and anticipated
profits 9,179 9,999
Deferred revenue 30,035 27,635
Income taxes payable 411 1,411
Provision for contract losses 60,000 60,000
------------ ------------
Total liabilities not subject to compromise 1,450,596 1,266,304
------------ ------------
Liabilities subject to compromise:
Accounts payable 335,857 403,812
Accrued salaries and benefits 835,233 861,151
Accrued payroll taxes and withholdings 815,406 930,794
Accrued interest and penalties 438,152 437,708
------------ ------------
Total liabilities subject to compromise 2,424,648 2,633,465
------------ ------------
TOTAL CURRENT LIABILITIES 3,875,244 3,899,769
------------ ------------
STOCKHOLDERS' DEFICIT
- ---------------------
Preferred stock, $.10 par value, 40,000,000
shares authorized, none issued - -
Common stock, $.0005 par value, 60,000,000
shares authorized, 6,811,083 shares
issued and 6,311,083 shares outstanding 3,155 3,155
Capital in excess of par value 1,140,529 1,140,529
Accumulated deficit (3,295,949) (3,245,833)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (2,152,265) (2,102,149)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,722,979 $1,797,620
=========== ===========
</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 NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenue $ 127,285 $ 130,818
Operating costs and expenses:
Direct cost of services 42,822 58,129
Indirect operating costs - 14,086
General & administrative expenses 97,030 164,744
---------- ----------
Total operating costs and expenses 139,852 236,959
---------- ----------
Operating loss from continuing operations (12,567) (106,141)
Other expense:
Interest expense, net 138 110
Consulting expense associated with stock awards - 59,375
Penalties 1,358 804
Other, net 152 -
---------- ----------
Total other expense 1,648 60,289
---------- ----------
Loss before discontinued operations,
reorganization items and income taxes (14,215) (166,430)
Profit (loss) from discontinued operations
before reorganization items 15,069 (61,723)
Reorganization items:
Professional fees (39,323) -
---------- ----------
Profit (loss) from discontinued operations (24,254) (61,723)
---------- ----------
Loss before income taxes (38,469) (228,153)
Income taxes - -
---------- ----------
Net loss $(38,469) $(228,153)
========== ==========
Net loss per common share:
Loss before discontinued operations $ - $(0.03)
Loss from discontinued operations - (0.01)
---------- ----------
Net loss per common share $ (0.01) $ (0.04)
========== ==========
Weighted average number of shares outstanding 6,311,083 6,294,599
========= =========
</TABLE>
See accompanying notes to the
condensed consolidated financial statements
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenue $ 271,041 $ 296,148
Operating costs and expenses:
Direct cost of services 100,534 157,909
Indirect operating costs - 30,018
General & administrative expenses 206,083 324,822
---------- ----------
Total operating costs and expenses 306,617 512,749
---------- ----------
Operating loss from continuing operations (35,576) (216,601)
Other expense:
Interest expense, net 116 623
Consulting expense associated with stock awards - 89,063
Penalties 1,626 804
Other, net 466 -
---------- ----------
Total other expense 2,208 90,490
---------- ----------
Loss before discontinued operations,
reorganization items and income taxes (37,784) (307,091)
Profit (loss) from discontinued operations
before reorganization items 78,237 (115,542)
Reorganization items:
Professional fees (90,569) -
---------- ----------
Loss from discontinued operations (12,332) (115,542)
---------- ----------
Loss before income taxes (50,116) (422,633)
Income taxes - -
---------- ----------
Net loss $(50,116) $(422,633)
========== ==========
Net loss per common share:
Loss before discontinued operations $(0.01) $(0.05)
Loss from discontinued operations -- (0.02)
---------- ----------
Net loss per common share $(0.01) $(0.07)
========== ==========
Weighted average number of shares outstanding 6,311,083 6,118,551
========= =========
</TABLE>
See accompanying notes to the
condensed consolidated financial statements
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $4,439,049 $4,801,953
Cash paid to suppliers and employees (4,001,658) (4,349,845)
Interest paid (76,854) (137,168)
Income taxes paid (1,000) (11,310)
------------ ------------
Net cash provided from operating activities
before reorganization items 359,537 303,630
------------ ------------
Operating cash flows from reorganization items:
Professional fees paid for services rendered
in connection with the Chapter 11 proceeding (90,569) -
------------ ------------
Net cash used by reorganization items (90,569) -
------------ ------------
Net cash provided from operating activities 268,968 303,630
------------ ------------
Cash flows from investing activities:
Capital expenditures (16,746) (46,655)
------------ ------------
Net cash used in investing activities (16,746) (46,655)
------------ ------------
Cash flows from financing activities:
Proceeds from loans from officers and directors 22,100 -
Proceeds of loans from receivables assignment
- pre-petition - 3,374,384
Proceeds of loans from receivables assignment
- post-petition 3,251,996 -
Repayment of loans from receivables assignment
- pre-petition - (3,627,022)
Repayment of loans from receivables assignment
- post-petition (3,376,156) -
Repayment of equipment loan - pre-petition - (7,552)
------------ ------------
Net cash used in financing activities (102,060) (260,190)
------------ ------------
Net increase in cash 150,162 (3,215)
Cash at the beginning of period 78,689 15,028
------------ -----------
Cash at the end of period $ 228,851 $ 11,813
=========== ===========
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
SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
---------- -----------
<S> <C> <C>
Reconciliation of net loss to net cash
provided from operating activities:
Net loss $ (50,116) $(422,633)
Adjustments to reconcile net loss to net cash
provided from operating activities:
Depreciation 37,373 39,001
Amortization 3,311 10,151
Consulting expense associated with
common stock awards - 89,063
Changes in assets and liabilities:
Decrease in accounts receivable 198,197 243,258
Decrease in inventory 1,270 1,609
Decrease in other current assets 2,142 2,610
Increase in intangible assets - (695)
Increase in other assets (744) (2,500)
Increase (decrease) in accounts payable
- pre-petition (67,955) 88,703
Increase in accounts payable - post-petition 138,273 -
Increase (decrease) in accrued salaries
and benefits - pre-petition (25,918) 11,477
Increase in accrued salaries and benefits
- post-petition 48,043 -
Increase (decrease) in accrued payroll taxes and
withholdings - pre-petition (115,388) 244,098
Decrease in accrued payroll taxes and withholdings
- post-petition 77,486 -
Increase in other accrued liabilities - pre-petition 444 45,800
Increase in other accrued liabilities
- post-petition 21,970 -
Decrease in billings in excess of costs
and anticipated profits (820) (40,982)
Increase in deferred revenue 2,400 5,980
Decrease in income taxes payable (1,000) (11,310)
---------- ----------
Net cash provided from operating activities $ 268,968 $ 303,630
========= =========
</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 November 30, 1996, the
condensed consolidated statements of operations for the three months and six
months ended November 30, 1996, and the condensed consolidated statements of
cash flows for the six months ended November 30, 1996, have been prepared by
the Company and are unaudited. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at November 30,
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 November 30, 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-KSB for the fiscal year ended May 31, 1996. The results of operations for
the period ended November 30, 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 loss
by the weighted average number of shares of common stock outstanding during
each of the periods presented. Common stock equivalent shares relating to
stock options and warrants are included in the weighted average only when the
effect is dilutive.
3. RECLASSIFICATIONS
-----------------
Certain amounts in the condensed consolidated balance sheet as of May 31,
1996, the condensed consolidated statements of operations for the three and six
months ended November 30, 1995, and the condensed consolidated statements of
cash flows for the six months then ended have been reclassified to conform to
the November 30, 1996, presentation.
4. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11/SALE OF ARM AND
--------------------------------------------------------------
MANAGEMENT'S PLANS TO CONTINUE AS A GOING CONCERN
-------------------------------------------------
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 condensed financial statements
for November 30, 1996 as "liabilities subject to compromise". Additional
claims (liabilities subject to compromise) may arise subsequent to the filing
date resulting from the rejection of executory contracts, including leases, and
from the determination by the court (or agreement of the parties in interest)
<PAGE>
of allowed claims for contingencies and other disputed amounts. Claims secured
against the Debtor's assets ("secured claims") also are stayed, although the
holders of such claims have the right to move the court for relief from the
stay. Secured claims are secured primarily by liens on the Debtor's property,
including the Debtor's accounts receivable.
On April 5, 1996, ARM received an emergency hearing with the Bankruptcy
Court to determine its request to pay its employees their pre-petition wages as
well as to continue to operate the business. Prior to the emergency hearing,
ARM reached an agreement with the IRS and CFC (its lender - see Note 5) to
allow the company to continue to operate and borrow money from CFC against its
billed receivables. Under this agreement, ARM agreed to pay $15,000 a month
starting April 1996, towards its arrearage with the IRS. The April payment
consisted of the $13,600 of cash seized by the IRS on April 1, 1996. Future
monthly payments 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 (which totaled
approximately $136,700 and consisted of final vouchers on 14 old contracts).
In addition, as part of the agreement with the IRS and as required by the
Bankruptcy Court, ARM was required to remit its post-petition taxes when due
and provide proof of such payments to the IRS and the Bankruptcy Court on a
timely basis. The Bankruptcy Court approved the agreements with the IRS and
CFC, and approved ARM's operating budget for 15 days through April 21, 1996.
These agreements have continued to be renewed by the Bankruptcy Court.
The Debtor has determined that there exists insufficient collateral to
cover the interest portion of scheduled payments on its pre-petition debt
obligations, most notably the installment obligation due to the IRS prior to
the filing of the petition. The Debtor has curtailed accruing interest on all
pre-petition obligations except the amounts owed CFC 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 bidding, 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 (including - ARM's charter and status as a
project contracts), corporation, its minute book,
- - All inventory, stock transfer records, and
- - All books and records, similar records relating to ARM's
- - All furniture, fixtures and organization, existence or
equipment, capitalization, and the capital
- - All proprietary rights (patents, stock of ARM,
etc.), - Billed accounts receivable as of
- - All unbilled accounts receivables as closing,
of the closing date. - Intercompany receivables,
- ARM's rights to occupy real
property pursuant to leases of
real property and any leasehold
improvements made thereto,
- Any other property identified by
the Purchaser prior to the
closing.
<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 was submitted to the Bankruptcy Court
on September 26, 1996, and was approved on October 4, 1996. The sale is
subject to the successful novation of ARM's government contracts, which request
was submitted to the Government in October 1996, with the information
supporting the request for novation submitted in early November 1996. Approval
of the novation is expected to take approximately 60 to 90 days from
submission. The sale was also required to be approved by a majority of the
Company's shareholders. On October 30, 1996, the Company conducted the Annual
Meeting of Shareholders, at which a majority of the Company's shareholders
approved the sale. Upon notification of the government's novation approval the
sale will be completed.
PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES
-----------------------------------------------------------
In the event that the sale referenced above is completed, ARM (the
"Debtor") will file a Plan of Reorganization, which will, among other things,
specify how much of the outstanding pre-petition liabilities will be paid and
over what period of time. It is expected that a Plan of Reorganization will be
filed with the Bankruptcy Court within 30 days of completing the sale. This
Plan is expected to take several months to receive Bankruptcy Court approval.
It is also expected that between the monies generated from the sale of ARM's
contract rights plus the collection of the outstanding accounts receivable
(which are not part of the sale), there will not be sufficient monies to
liquidate all of ARM's pre-petition liabilities. Furthermore, it appears that
the unsecured creditors (accounts payable) will receive little or nothing
towards their pre-petition claims. Specifically, it appears that the following
will be paid in full as a result of the Plan of Reorganization: 1) the secured
claim of CFC, ARM's pre-petition and post-petition lender, 2) the 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 certain
employees' pre-petition claims for unreimbursed travel expenses of
approximately $50,000, and, 3) the principal portions of the tax amounts owed
to both the IRS and the various state authorities. In addition, it appears
that 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 assurance that these amounts will be paid
until the Plan of Reorganization is submitted and confirmed by the Bankruptcy
Court.
COLLECTION OF THE INTER-COMPANY AMOUNTS OWED TO ARM
---------------------------------------------------
As of April 2, 1996, ARS owed ARM approximately $1.2 Million and
ARInternet owed ARM $0.4 Million. These amounts resulted from ARM paying
certain operating expenses of ARS and ARInternet during their start-up phases
and providing continued money thereafter to fund operations. Since these
amounts are owed to ARM, the ultimate collection of these advances will be
supervised and controlled by the Bankruptcy Court. As of November 30, 1996,
ARS has only one part-time employee and its sales are minimal. As a result,
ARS still has not achieved breakeven operations. Therefore payment of any of
the amount it owes ARM is extremely doubtful. On the other hand, ARInternet
has essentially achieved breakeven operations during the current fiscal year.
Therefore, it can reasonably be expected that ARInternet will be required to
repay some amount to liquidate its debt to ARM. The ultimate amount will be
determined by the Bankruptcy Court.
<PAGE>
IMPACT ON ARC AFTER THE SALE OF ARM IS COMPLETED
------------------------------------------------
During the fiscal year ended May 31, 1996, ARM's operations constituted
94% of ARC's total revenue. The sale currently contemplated will sell
essentially all of ARM's operations and eliminate all of ARM's revenues.
Therefore, ARS and ARInternet will be the only remaining operating entities.
Prior to the bankruptcy filing, ARM had been forced to continue to fund ARS's
and ARInternet's operations. During the fiscal year ended May 31, 1996,
(through April 2, 1996), ARM funded approximately $204,600 of ARS and
ARInternet expenses. From April 2, 1996 on, because of the ARM bankruptcy
proceedings, ARM ceased all such advances and ARS and ARInternet were forced to
fund their own operations. ARS is still not operating at cash flow breakeven,
so it is doubtful that it can survive without an infusion of cash or a
substantial increase in revenues. Management is considering several options
for ARS, including ceasing its operations. ARInternet on the other hand, has
steadily increased its revenues and as of November 30, 1996, had approximately
1,000 subscribers and had essentially reached breakeven operations. Management
believes that ARInternet's revenues and business will continue to grow and that
ARInternet will ultimately be a successful business on its own, however there
can be no assurance of this.
The space currently occupied by ARM is not covered by the Bankruptcy
proceeding, since the lease is held by ARC. Management of ARC has enlisted the
services of a real estate broker to find a tenant to take over this space when
ARM's operations are sold. The landlord has also been apprised of the ARM sale
and is attempting to find an alternate tenant, but is under no obligation to
release ARC from its obligation under the lease. On December 1, 1996, ARM
vacated 6,349 sq. ft. or 64% of the 10,072 sq. ft. previously occupied by ARM.
Effective January 1, 1997, the Company signed a lease amendment that reduced
its rental obligation by 1,338 sq. ft. to 8,734 sq. ft., which includes 5,011
of the 6,349 sq. ft. vacated on December 1, 1996. The landlord and the Company
have been negotiating to relieve the Company of the remaining space (5,011 as
of January 1, 1997, and the remainder when the ARM sale is completed). The
landlord's last offer in this regard was that it would do so for a total
payment of approximately $56,000, $13,600 of which would be due at the time of
signing the lease amendment and the balance in equal installments over the
remainder of the lease. The Company countered this proposal, which
counteroffer is currently being considered by the Landlord. In addition to the
continuing lease costs, ARC will continue to incur expenses to maintain its
status as a public company.
The sale of ARM, if completed, will dramatically change the Company's
balance sheet and statement of operations. Through the bankruptcy proceeding,
all of ARM's debts, which total $3.6 million at November 30, 1996, will be
either liquidated or discharged. This will decrease the interest and penalty
costs the Company has been incurring. If ARS' and ARInternet's revenues can be
increased to produce net profits and a positive cash flow, the Company may in
fact benefit from the sale of ARM. However, unless and until this occurs, the
Company may not have sufficient capital to achieve its current business plan,
which raises substantial doubt as to the Company's ability to continue as a
going concern after the sale of ARM is completed.
<PAGE>
5. DISCONTINUED OPERATIONS
-----------------------
Because the Bankruptcy Court has approved the sale of substantially all of
the assets of ARM, results from operations for ARM have been shown as
discontinued operations for the three and six months ended November 30, 1996
and 1995.
A summary of ARM's results from operations for the three and six months
ended November 30, 1996 and 1995 are shown below:
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1995:
Revenue $2,039,567 $2,145,034
Operating costs and expenses:
Direct cost of services 1,257,494 1,325,106
Indirect operating costs 454,880 498,742
General & administrative expenses 268,507 252,288
------------ ------------
Total operating costs and expenses 1,980,881 2,076,136
------------ ------------
Operating profit from discontinued operations 58,686 68,898
Other expense:
Interest expense, net 36,345 104,394
Other, net 7,272 26,227
------------ ------------
Total other expense 43,617 130,621
------------ ------------
Profit (loss) from discontinued operations
before reorganization items 15,069 (61,723)
Reorganization items - professional fees (39,323) -
------------ ------------
Profit (loss) from discontinued operations $ (24,254) $ (61,723)
=========== ============
<PAGE>
SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995:
Revenue $3,968,232 $4,297,550
Operating costs and expenses:
Direct cost of services 2,499,296 2,666,367
Indirect operating costs 844,670 1,016,322
General & administrative expenses 461,234 473,689
------------ ------------
Total operating costs and expenses 3,805,200 4,156,378
------------ ------------
Operating profit from discontinued operations 163,032 141,172
Other expense:
Interest expense, net 74,760 184,871
Other, net 10,035 71,843
------------ ------------
Total other expense 84,795 256,714
------------ ------------
Profit (loss) from discontinued operations
before reorganization items 78,237 (115,542)
Reorganization items - professional fees (90,569) -
------------ ------------
Loss from discontinued operations $ (12,332) $ (115,542)
=========== ============
</TABLE>
6. SUPPLEMENTAL SEGMENT INFORMATION
The Company's continuing operations have been classified into two business
segments:
Sales to unaffiliated customers:
<TABLE>
<CAPTION>
ARS ARInternet Consolidated
---------- ---------- ------------
QUARTER ENDED:
-------------
<S> <C> <C> <C>
November 30, 1996 $21,611 $105,674 $127,285
November 30, 1995 $64,684 $ 66,134 $130,818
SIX MONTHS ENDED:
----------------
November 30, 1996 $ 53,445 $217,596 $271,041
November 30, 1995 $187,070 $109,078 $296,148
</TABLE>
<PAGE>
Operating income (loss) from continuing operations
before other income (expense) and income taxes:
<TABLE>
<CAPTION>
QUARTER ENDED:
-------------
<S> <C> <C> <C>
November 30, 1996 $ (5,787) $ (6,780) $ (12,567)
November 30, 1995 $(39,966) $(66,175) $(106,141)
SIX MONTHS ENDED:
----------------
November 30, 1996 $(20,854) $ (14,722) $ (35,576)
November 30, 1995 $(66,486) $(150,115) $(216,601)
</TABLE>
Operating income (loss) equals total net revenues less operating
expenses.
ARM's results have been reported as discontinued operations in the
accompanying condensed consolidated financial statements, since the Company has
accepted and the Bankruptcy Court has approved of an offer to sell
substantially all of the operating assets of ARM (see Note 5).
<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
Company's Condensed Consolidated Financial Statements, including the footnotes
thereto.
RESULTS FROM OPERATIONS - THREE MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO 1995
- -------------------------------------------------------------------------------
FROM CONTINUING OPERATIONS
The Company's revenues for the quarter ended November 30, 1996, were
$127,285, or (3)% below revenues of $130,818 for the same period during 1995.
The decrease in revenues during the quarter ended November 30, 1996, of $3,533
is primarily attributable to the decrease in ARS's revenues of $43,073 or 67%
when compared with revenues of $64,684 generated during the same period in
1995. ARInternet's revenues were $105,674, an increase of $39,540 over the
previous year, and partially offset the declines experienced by ARS.
The Company's direct cost of services decreased $15,307 or 26%, from
$58,129 during the quarter ended November 30, 1995, to $42,822 during the same
period in 1996. Of this amount, ARS decreased $20,174 while ARInternet's cost
of services increased $4,867. The decrease in direct costs of ARS was
primarily related to the lower sales for the quarter and a decrease in the
amount of amortization of previously capitalized software development costs,
compared to the same period in 1995. The increase in ARInternet's direct costs
of sales was the direct result of increased sales during the current period.
Indirect operating costs decreased $14,086 or 100%, from $14,086 during
the quarter ended November 30, 1995, to $0 during the quarter ended November
30, 1996. The entire decrease was directly related to a decrease by ARS in
technical staff which occurred during the second half of the previous fiscal
year.
General and administrative ("G&A") expenses decreased $67,714 or 41%,
from $164,744 in 1995, to $97,030 during 1996. Most notably, the G&A expenses
associated with ARS decreased $42,991, while ARInternet's G&A expenses
decreased $24,723 during the quarter. The decrease in ARS's G&A expenses was
predominantly attributable to a reduction in personnel and marketing related
expenses during the period. The decrease in ARInternet's G&A expenses related
to a reduction in staffing during 1996 when compared to the same period in
1995.
As a result of the foregoing, the Company realized an operating loss from
continuing operations for the quarter ended November 30, 1996, of $(12,567)
compared to an operating loss of $(106,141) for the same period during 1995.
ARS posted an operating loss of $(5,787) for the quarter ended November 30,
1996, which loss represented an improvement of $34,179 or 86% from the
operating loss of $(39,966) 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 posted an operating loss of $(6,780) for the quarter ended
November 30, 1996, which loss represented an improvement of $59,395 or 90% from
the operating loss of $(66,175) 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 due to increases in the number of
subscribers to ARInternet.
Interest and other expenses decreased $58,641 or 97%, from $60,289 for
the quarter ended November 30, 1995, to $1,648 during the quarter ended
November 30, 1996. The decrease was primarily related to the fact that the
Company eliminated consulting expenses incurred during the same period in 1995
in conjunction with the issuance of common stock by the Company.
The Company sustained a loss from continuing operations of $(14,215) for
the quarter ended November 30, 1996, compared to a loss from continuing
operations of $(166,430) during the same period in 1995. This reduction in
losses from continuing operations was the result of improved operating margins
from both ARS and ARInternet, as well as the lack of any consulting expenses
related to the issuance of stock awards.
Loss per common share from continuing operations decreased from $(0.03)
in 1995 to $(0.00) in 1996, as a result of the reduced loss for the current
fiscal quarter when compared to the same period in 1995.
FROM DISCONTINUED OPERATIONS
ARM's revenues for the quarter ended November 30, 1996, were $2,039,567,
or (5)% below revenues of $2,145,034 for the same period during 1995. The
decrease in revenues during the quarter ended November 30, 1996, of $105,467 is
primarily attributable to a decrease in the number of contracts, and therefore,
the number of direct employees generating revenue during the current fiscal
quarter compared to the quarter ended November 30, 1995.
ARM's direct cost of services decreased $67,612 or 5%, from $1,325,106
during the quarter ended November 30, 1995, to $1,257,494 during the same
period in 1996. ARM's decrease in direct costs consisted of a decrease in
direct labor and a decrease in subcontract, material and equipment charges.
The decrease in direct labor related primarily to a decrease in the number of
contracts being performed at the Company's headquarters.
ARM's indirect operating costs decreased $43,862 or 9%, from $498,742
during the quarter ended November 30, 1995, to $454,880 during the quarter
ended November 30, 1996. This decrease is directly related to a decrease in
the amount of indirect labor being charged to overhead, as well as a decrease
in fringe benefit costs incurred as a result of fewer staff.
ARM's general and administrative ("G&A") expenses increased $16,219 or
6%, from $252,288 in 1995, to $268,507 during 1996. The increase in ARM's G&A
expenses was directly attributable to the increase in professional fees. This
was partially offset by a reduction in ARM's G&A staff for the current fiscal
period when compared to the previous year.
As a result of the foregoing, ARM realized operating income for the
quarter ended November 30, 1996, of $58,686 compared to operating income of
$68,898 for the same period during 1995. The $10,212 decrease in ARM's 1996
operating margin was primarily related to a decrease in fees realized on ARM's
contracts, due to the higher indirect rates realized by ARM during 1996, in
particular its general and administrative expenses.
ARM's interest and other expenses decreased $87,004 or 67%, from $130,621
for the quarter ended November 30, 1995, to $43,617 during the quarter ended
November 30, 1996. Net interest expense decreased $68,049 or 65% from 1995.
The decrease in interest costs was the result of ARM not accruing any interest
on either the delinquent employee 401(k) contributions nor the unpaid federal
withholding taxes during the quarter ended November 30, 1996, when compared to
the same period in 1995. Other expenses also decreased $18,955 during the
quarter ended November 30, 1996. This was primarily due to the fact that ARM
did not record any penalties during the current period because the accrual of
penalties is stayed as a result of the Company filing for protection under
Chapter 11 of the United States Bankruptcy Code.
ARM sustained a net loss before income taxes of $(24,454) for the quarter
ended November 30, 1996, compared to a net loss of $(61,723) during the same
period last year. The primary reasons for this improvement were the lower
interest and penalty costs realized during 1996, offset by the increase in
bankruptcy related professional fees.
RESULTS FROM OPERATIONS - SIX MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO 1995
- -----------------------------------------------------------------------------
FROM CONTINUING OPERATIONS
The Company's revenues for the six months ended November 30, 1996, were
$271,041, or (8)% below revenues of $296,148 for the same period during 1995.
The decrease in revenues during the six months ended November 30, 1996, of
$25,107 is primarily attributable to the decrease in ARS's revenues of $133,625
or 71% when compared with revenues of $187,070 generated during the same period
in 1995. ARInternet's revenues were $217,596, an increase of $108,518 or 99%,
over the previous year, and partially offset the declines experienced by ARS.
The Company's direct cost of services decreased $57,375 or 36%, from
$157,909 during the six months ended November 30, 1995, to $100,534 during the
same period in 1996. Of this amount, ARS decreased $75,975 while ARInternet's
cost of services increased $18,600. The decrease in direct costs of ARS was
primarily related to the lower sales for the quarter and a decrease in the
amount of amortization of previously capitalized software development costs,
compared to the same period in 1995. The increase in ARInternet's direct costs
of sales was the direct result of increased sales during the current period.
Indirect operating costs decreased $30,018 or 100%, from $30,018 during
the six months ended November 30, 1995, to $0 during the six months ended
November 30, 1996. The entire decrease was directly related to a decrease by
ARS in technical staff which occurred during the second half of the previous
fiscal year.
General and administrative ("G&A") expenses decreased $118,739 or 37%,
from $324,822 in 1995, to $206,083 during 1996. Most notably, the G&A expenses
associated with ARS decreased $73,263 or 67%, while ARInternet's G&A expenses
decreased $45,476 or 21%, during the six months ended November 30, 1996. The
decrease in ARS's G&A expenses was predominantly attributable to a reduction in
personnel and marketing related expenses during the period. The decrease in
ARInternet's G&A expenses related to a reduction in staffing during 1996 when
compared to the same period in 1995.
As a result of the foregoing, the Company realized an operating loss from
continuing operations for the six months ended November 30, 1996, of $(35,576)
compared to an operating loss of $(216,601) for the same period during 1995.
ARS posted an operating loss of $(20,854) for the six months ended November 30,
1996, which loss represented an improvement of $45,632 or 69% from the
operating loss of $(66,486) 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 $(14,722) for the six months ended
November 30, 1996, which loss represented an improvement of $135,393 or 90%
from the operating loss of $(150,115) 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 due to increases in the number of
subscribers to ARInternet.
Interest and other expenses decreased $88,282 or 98%, from $90,490 for
the six months ended November 30, 1995, to $2,208 during the six months ended
November 30, 1996. The decrease was primarily related to the fact that the
Company eliminated consulting expenses incurred during the same period in 1995
in conjunction with the issuance of common stock by the Company.
The Company sustained a loss from continuing operations of $(37,784) for
the six months ended November 30, 1996, compared to a loss from continuing
operations of $(307,091) during the same period in 1995. This reduction in
losses from continuing operations was the result of improved operating margins
from both ARS and ARInternet, as well as the lack of any consulting expenses
related to the issuance of stock awards.
Loss per common share from continuing operations decreased from $(0.05)
in 1995 to $(0.01) in 1996, as a result of the reduced loss for the current
fiscal quarter when compared to the same period in 1995.
FROM DISCONTINUED OPERATIONS
ARM's revenues for the six months ended November 30, 1996, were
$3,968,232, or (8)% below revenues of $4,297,550 for the same period during
1995. The decrease in revenues during the six months ended November 30, 1996,
of $329,318 is primarily attributable to a decrease in the number of contracts,
and therefore, the number of direct employees generating revenue during the
current fiscal quarter compared to the six months ended November 30, 1995.
ARM's direct cost of services decreased $167,071 or 6%, from $2,666,367
during the six months ended November 30, 1995, to $2,499,296 during the same
period in 1996. ARM's decrease in direct costs consisted of a decrease in
direct labor and a decrease in subcontract, material and equipment charges.
The decrease in direct labor related primarily to a decrease in the number of
contracts being performed at the Company's headquarters.
ARM's indirect operating costs decreased $171,652 or 17%, from $1,016,322
during the six months ended November 30, 1995, to $844,670 during the six
months ended November 30, 1996. This decrease is directly related to a
decrease in the amount of indirect labor being charged to overhead, as well as
a decrease in fringe benefit costs incurred as a result of fewer staff.
ARM's general and administrative ("G&A") expenses decreased $12,455 or
3%, from $473,689 in 1995, to $461,234 during 1996. The decrease in ARM's G&A
expenses was directly attributable to the reduction in ARM's G&A staff for the
current fiscal period when compared to the previous year.
As a result of the foregoing, ARM realized operating income for the six
months ended November 30, 1996, of $163,032 compared to operating income of
$141,172 for the same period during 1995. The $21,860 increase in ARM's 1996
operating margin was primarily related to a increase in fees realized on ARM's
contracts, due to the fewer contract overruns realized by ARM during 1996.
ARM's interest and other expenses decreased $171,919 or 67%, from
$256,714 for the six months ended November 30, 1995, to $84,795 during the six
months ended November 30, 1996. Net interest expense decreased $110,111 or 60%
from 1995. The decrease in interest costs was the result of ARM not accruing
any interest on either the delinquent employee 401(k) contributions nor the
unpaid federal withholding taxes during the six months ended November 30, 1996,
when compared to the same period in 1995. Other expenses also decreased
$61,808 during the six months ended November 30, 1996. This was primarily due
to the fact that ARM did not record any penalties during the current period
because the accrual of penalties is stayed as a result of the Company filing
for protection under Chapter 11 of the United States Bankruptcy Code.
ARM sustained a net loss before income taxes of $(12,332) for the six
months ended November 30, 1996, compared to a net loss of $(115,542) during the
same period last year. The primary reasons for this improvement were the
increase in operating margins together with lower interest and penalty costs
realized during 1996, offset by the increase in bankruptcy related professional
fees.
LIQUIDITY AND CAPITAL RESOURCES - 1996 COMPARED TO 1995
- -------------------------------------------------------
Total assets decreased $74,641 or 4%, from $1,797,620 at May 31, 1996, to
$1,722,979 at November 30, 1996. Total liabilities on the other hand decreased
from $3,899,769 to $3,875,244 over the same period, a decrease of $24,525.
The most significant reason for the decrease in total assets was the
decrease in accounts receivable, offset by the increase in cash and other
current assets. At November 30, 1996, the Company had $842,280 and $484,208 in
billed and unbilled receivables, respectively. Billed receivables decreased
$248,581 or 23% from May 31, 1996, while unbilled receivables increased $50,384
or 12% from May 31, 1996. The decrease in billed accounts receivable was
primarily the result of decreases in the average amount billed which, in turn,
was due to decreases in revenues and increases in unbilled receivables. The
increase in unbilled accounts receivable related to an increase in the amount
of work that was unbilled at November 30, 1996, plus an increase in the amount
of unbilled award fees on two contracts. Cash increased $150,162 during the
six months ended November, 30, 1996. At November 30, 1996, ARM had $198,309 of
cash that is restricted in use. Of this amount, $104,726 was held for payment
of ARM's payroll related taxes, and $93,583 was being segregated in accordance
with two (2) of ARM's government contracts.
The most significant reasons for the $184,292 increase in post-petition
liabilities collectively, were increases: in accounts payable of $138,273,
accrued salaries and benefits of $48,043 and payroll taxes and withholdings of
$77,486. The increase in accounts payable related primarily to unpaid
professional fees related to the bankruptcy proceeding, which must be court
approved before they can be paid. The primary reason for the increase in
accrued salaries and benefits was the increase in post-petition vacation earned
by employees. The increase in payroll taxes and withholdings related primarily
to the payroll taxes on the payroll paid on November 29, 1996, which taxes were
not due until December 4, 1996. At November 30, 1996 there was $104,726 of
cash in the payroll tax cash account which was used to pay these taxes.
The decrease in pre-petition liabilities of $(208,817) consisted of
decreases of: $(67,955) in accounts payable, $(25,918) in accrued salaries and
related benefits, and $(115,388) of accrued payroll taxes and withholdings.
The decrease in pre-petition accounts payable resulted from two customers
offsetting their pre-petition receivable claims against their pre-petition
payable claims. These two customers were both customers and vendors of ARM,
and according to bankruptcy rules, have the right to offset amounts owed to
them by the amounts owed by them. The decrease in pre-petition accrued
salaries and benefits related to the decrease in pre-petition accrued vacation,
the payment for which was authorized by a bankruptcy court order. The decrease
in pre-petition accrued taxes and withholdings represented $90,000 of monthly
payments being made by ARM to the IRS under court order, plus the collection of
a $29,442 pre-petition accounts receivables which was to be paid to the IRS as
part of the same court order.
The Company's working capital deficit remained relatively the same during
the six months ended November 30, 1996. At November 30, 1996, the working
capital deficit was $(2,300,732) compared to a deficit of $(2,273,810) at May
31, 1996.
Filing of Chapter 11 Petition by ARM
- ------------------------------------
Because ARM was in default under its December 1, 1995, installment
agreement with the IRS, the Company's assets were subject to immediate seizure
and possible sale by the IRS. To that end, on April 1, 1996, the IRS issued
Levy Notices to ARM's bank, financing company and the majority of its
customers. On April 2, 1996, the IRS attempted to close ARM. As a result, on
April 2, 1996, ARM was forced to file for protection under Chapter 11 of the
United States Bankruptcy Code.
On April 5, 1996, ARM received an emergency hearing with the Bankruptcy
Court to determine its request to pay its employees their pre-petition wages as
well as continue to operate the business. Prior to the emergency hearing, ARM
reached an agreement with the IRS and CFC (its lender) to allow the company to
continue to operate and borrow money from CFC against its billed receivables.
Under this agreement, ARM agreed to pay $15,000 a month starting April, 1996,
towards its arrearage with the IRS. The April payment consisted of $13,600 in
cash seized by the IRS on April 1, 1996. Future monthly payments 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 (which totaled approximately $139,700 and
consisted of final vouchers on 14 old contracts). In addition, as part of the
agreement with the IRS and as required by the Bankruptcy Court, ARM was
required to remit its post-petition taxes when due and provide proof of such
payments to the IRS and the Bankruptcy Court on a timely basis. The Bankruptcy
Court approved the agreements with the IRS and CFC, and approved ARM's
operating budget for 15 days through April 21, 1996. These agreements have
continued to be renewed by the Bankruptcy Court.
Sale of ARM's Government Contracts
- ----------------------------------
ARM informed the Bankruptcy Court and the IRS that it would continue to
pursue the sale of ARM's business. To that end, ARM placed ads in several
newspapers, including The Wall Street Journal. ARM received approximately 34
inquires to these ads. During May and June 1996, the Company sent information
about ARM to 18 Companies and held serious discussions with 7 Companies
concerning the sale of ARM's assets.
On June 24, 1996, the Company accepted a contract for the sale of certain
of ARM's assets for approximately $1.5 Million. The sale was subject to
Bankruptcy Court approval. A hearing before the Bankruptcy Court was
originally scheduled for July 26, 1996. This hearing was subsequently moved to
July 30, 1996. On July 30, 1996, the hearing was conducted. At the hearing, a
total of four qualified bidders attended, and after extensive bidding, an offer
was accepted for $2.1 Million. The following is a list of the purchased and
excluded assets:
PURCHASED ASSETS EXCLUDED ASSETS
---------------- ---------------
- - All contracts rights (including - ARM's charter and status as a
project contracts), corporation, its minute book,
- - All inventory, stock transfer records, and
- - All books and records, similar records relating to ARM's
- - All furniture, fixtures and organization, existence or
equipment, capitalization, and the capital
- - All proprietary rights (patents, stock of ARM,
etc.), - Billed accounts receivable as of
- - All unbilled accounts receivables as closing,
of the closing date. - Intercompany receivables,
- ARM's rights to occupy real
property 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 was submitted to the Bankruptcy Court
for approval on September 26, 1996, and was signed on October 4, 1996. The
sale is subject to the successful novation of ARM's government contracts, which
request was submitted to the Government in October 1996, with the information
supporting the request for novation submitted in early November 1996. Approval
of novation is expected to take approximately 60 to 90 days from submission.
The sale was also required to be approved by a majority of the Company's
shareholders. On October 30, 1996, the Company conducted the Annual Meeting of
Shareholders, at which a majority of the Company's shareholders approved the
sale. Upon notification of the government's novation approval the sale will be
completed.
PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES
In the event that the sale referenced above is completed, ARM (the
"Debtor") will file a Plan of Reorganization, which will, among other things,
specify how much of the outstanding pre-petition liabilities will be paid and
over what period of time. It is expected that a Plan of Reorganization will be
filed with the Bankruptcy Court within 30 days of completing the sale. This
Plan is expected to take several months to receive Bankruptcy Court approval.
It is also expected that between the monies generated from the sale of ARM's
contract rights plus the collection of the outstanding accounts receivable
(which are not part of the sale), there will not be sufficient monies to
liquidate all of ARM's pre-petition liabilities. Furthermore, it appears that
the unsecured creditors (accounts payable) will receive little or nothing
towards their pre-petition claims. Specifically, it appears that the following
will be paid in full as a result of the Plan of Reorganization: 1) the secured
claim of CFC, ARM's pre-petition and post-petition lender, 2) the 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 certain
employees' pre-petition claims for unreimbursed travel expenses of
approximately $50,000, and, 3) the principal portions of the tax amounts owed
to both the IRS and 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 assurance that these amounts will be paid
until the Plan of Reorganization is submitted and confirmed by the Bankruptcy
Court.
COLLECTION OF THE INTER-COMPANY AMOUNTS OWED TO ARM
As of April 2, 1996, ARS owed ARM approximately $1.2 Million and
ARInternet owed ARM $0.4 Million. These amounts resulted from ARM paying
certain operating expenses of ARS's and ARInternet during their start-up phases
and providing continued money thereafter to fund operations. Since these
amounts are owed to ARM, the ultimate collection of these advances will be
supervised and controlled by the Bankruptcy Court. As of November 30, 1996,
ARS has only one part-time employee and its sales are minimal. As a result,
ARS has still not achieved breakeven operations. Therefore payment of any of
the amount it owes ARM is extremely doubtful. On the other hand, ARInternet
has essentially achieved breakeven operations as of May 31, 1996. Therefore,
it can reasonably be expected that ARInternet will be required to repay some
amount to liquidate its debt to ARM. The ultimate amount will be determined by
the Bankruptcy Court.
IMPACT ON ARC AFTER THE SALE OF ARM IS COMPLETED
During the fiscal year ended May 31, 1996, ARM's operations constituted
94% of ARC's total revenue. The sale currently contemplated will sell
essentially all of ARM's operations to the Purchaser and eliminate all of ARM's
revenues. Therefore, ARS and ARInternet will be the only remaining operating
entities. Prior to the bankruptcy filing, ARM had been forced to continue to
fund ARS's and ARInternet's operations. During the fiscal year ended May 31,
1996, (through April 2, 1996), ARM funded approximately $204,600 of ARS and
ARInternet expenses. From April 2, 1996 on, because of the ARM bankruptcy
proceedings, ARM ceased all such advances and ARS and ARInternet were forced to
fund their own operations. ARS is still not operating at cash flow breakeven,
so it is doubtful that it can survive without a substantial infusion of cash or
a significant increase in revenues. Management is considering several options
for ARS, including ceasing its operations. ARInternet on the other hand, has
steadily increased its revenues and as of November 30, 1996, had approximately
1,000 subscribers and had essentially reached breakeven operations. Management
believes that ARInternet's revenues and business will continue to grow and that
ARInternet will ultimately be a successful business on its own, however there
can be no assurance of this.
The space currently occupied by ARM is not covered by the Bankruptcy
proceeding, since the lease is held by ARC. Management of ARC has enlisted the
services of a real estate broker to find a tenant to take over this space when
ARM's operation are sold. The landlord has also been apprised of the ARM sale
and is attempting to find an alternate tenant, but is under no obligation to
release ARC from its obligation under the lease. On December 1, 1996, ARM
vacated 6,349 sq. ft. or 64% of the 10,072 sq. ft. previously occupied by ARM.
Effective January 1, 1997, the Company signed a lease amendment that reduced
its rental obligation by 1,338 sq. ft. to 8,734 sq. ft., which includes 5,011
of the 6,349 sq. ft. vacated on December 1, 1996. The landlord and the Company
have been negotiating to relieve the Company of the remaining space (5,011 as
of January 1, 1997, and the remainder when the ARM sale is completed). The
landlord's last offer in this regard was that it would do so for a total
payment of approximately $56,000, $13,600 of which would be due at the time of
signing the lease amendment and the balance in equal installments over the
remainder of the lease. The Company countered this proposal, which
counteroffer is currently being considered by the Landlord. In addition to
continuing lease costs, ARC will continue to incur expenses to maintain its
status as a public company.
The sale of ARM, if completed, will dramatically change the Company's
balance sheet and statement of operations. Through the bankruptcy proceeding,
all of ARM's debts, which total $3.6 million at November 30, 1996, will be
either liquidated or discharged. This will decrease the interest and penalty
costs that the Company has been incurring. If ARS' and ARInternet's revenues
can be increased to produce net profits and a positive cash flow, the Company
may in fact benefit from the sale of ARM. However, unless and until this
occurs, the Company may not have sufficient capital to achieve its current
business plan, which raises substantial doubt as to the Company's ability to
continue as a going concern after the sale of ARM is completed.
INFLATION
- ---------
The Company anticipates increases in costs associated with the operation
of the business and reflects this in the cost of living escalation factors
proposed on all new work. In addition, the Company is continually researching
areas to minimize cost increases and strives for improved efficiencies in all
aspects of its business environment.
<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
- ------ ---------------------------------------------------
The Annual Meeting of Stockholders of Applied Research Corporation
was held on October 30, 1996, for the purpose of electing a board of directors
and approval of the execution of a certain Parent Consent and Indemnification
Agreement to be executed in conjunction with a sale of substantially all of the
assets of the Company's wholly-owned subsidiary, Applied Research of Maryland,
Inc. to Fidelity Technologies Corporation. Proxies for the meeting were
solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and
there were no solicitations in opposition to management's solicitation.
All of management's nominees for directors as listed in the proxy
statement were elected with the following vote:
Shares
Voted Shares
Nominee "FOR" "WITHHELD"
------------------ --------- ----------
Dr. S.P.S. Anand 5,766,492 30,900
Manjit Anand 5,766,492 30,900
Dennis H. O'Brien 5,766,992 30,400
The approval of the execution by the Company of that certain Parent
Consent and Indemnification Agreement to be executed at the Closing in
conjunction with the sale of substantially all of the assets of the Company's
wholly-owned subsidiary, Applied Research of Maryland, Inc., a Maryland
corporation, to Fidelity Technologies Corporation, a Pennsylvania corporation.
Shares Shares
Voted Voted Shares
"FOR" "AGAINST" "ABSTAINING"
--------- --------- ------------
4,769,794 25,200 25,350
ITEM 5: OTHER INFORMATION
- ----- ----------------------
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
None
<PAGE>
<PAGE>
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: January 17, 1997 By: Dr. S.P.S. Anand
---------------- -------------------------------------
Dr. S.P.S. Anand
President and Chief Executive Officer
Date: January 17, 1997 By: Dennis H. O'Brien
----------------- -------------------------------------
Dennis H. O'Brien
Vice President and Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF NOVEMBER 30, 1996 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> NOV-30-1996
<CASH> 228,851
<SECURITIES> 0
<RECEIVABLES> 1,326,488
<ALLOWANCES> 10,000
<INVENTORY> 222
<CURRENT-ASSETS> 1,574,512
<PP&E> 790,105
<DEPRECIATION> 677,962
<TOTAL-ASSETS> 1,722,979
<CURRENT-LIABILITIES> 3,875,244
<BONDS> 0
0
0
<COMMON> 3,155
<OTHER-SE> (2,155,420)
<TOTAL-LIABILITY-AND-EQUITY> 1,722,979
<SALES> 271,041
<TOTAL-REVENUES> 211,041
<CGS> 306,617
<TOTAL-COSTS> 306,617
<OTHER-EXPENSES> 2,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> (37,784)
<INCOME-TAX> 0
<INCOME-CONTINUING> (37,784)
<DISCONTINUED> 78,237
<EXTRAORDINARY> (90,569)
<CHANGES> 0
<NET-INCOME> (50,116)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
