FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1998
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 1110, Landover, Maryland 20785
-------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(301) 459-8442
---------------
(Registrant's telephone number, including area code)
- ---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
As of April 14, 1998, 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 -
February 28, 1998 (unaudited) and
May 31, 1997 3-4
Condensed Consolidated Statements
of Operations -
Three months ended February 28, 1998
and 1997 (unaudited) 5
Condensed Consolidated Statements
of Operations -
Nine months ended February 28, 1998 and
1997 (unaudited) 6
Condensed Consolidated Statements of
Cash Flows -
Nine months ended February 28, 1998 and
1997 (unaudited) 7-8
Notes to Condensed Consolidated
Financial Statements 9-15
Item 2 Management's Discussion and Analysis of
Financial Condition and Results
of Operations 16-23
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>
<TABLE>
<CAPTION>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, May 31,
1998 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash $ 339,806 $ 228,414
Accounts receivable, net 169,802 1,165,749
Due from Space Applications
Corporation, short-term 34,900 -
Inventory, at cost 1,936 2,546
Other current assets 13,078 2,309
------------- -------------
TOTAL CURRENT ASSETS 559,522 1,399,018
------------- -------------
PROPERTY AND EQUIPMENT, AT COST
Furniture and equipment 20,728 167,741
Computer equipment 136,458 488,295
Laboratory equipment - 121,426
Leasehold improvements 200 22,322
------------- -------------
157,386 799,784
Less accumulated depreciation
and amortization 125,381 717,713
------------- -------------
NET PROPERTY AND EQUIPMENT 32,005 82,071
------------- -------------
INTANGIBLE ASSETS, NET OF
AMORTIZATION - 25,654
------------- -------------
OTHER ASSETS
Deposits - 7,359
Due from Space Applications
Corporation, long-term 287,500 -
------------- -------------
TOTAL OTHER ASSETS 287,500 7,359
------------- -------------
TOTAL ASSETS $ 894,027 $ 1,514,102
============ =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
February 28, May 31,
1998 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
LIABILITIES
- -----------
CURRENT LIABILITIES
Liabilities not subject to compromise:
Notes payable, current maturities $ 3,661 $ 512,121
Loans payable to officers and
directors 45,900 41,900
Accounts payable 543,569 419,023
Accrued salaries and benefits 42,105 228,557
Accrued payroll taxes and
withholdings 12,115 129,571
Other accrued liabilities 41,646 153,787
Deferred revenue 64,850 30,035
Income taxes payable 100 1,000
------------- -------------
Total liabilities not subject to
compromise 753,946 1,515,994
------------- -------------
Liabilities subject to compromise:
Accounts payable 272,338 325,192
Accrued salaries and benefits 382,781 820,562
Accrued payroll taxes and
withholdings 166,039 725,406
Accrued interest and penalties 395,563 445,204
------------- -------------
Total liabilities subject to
compromise 1,216,721 2,316,364
------------- -------------
TOTAL CURRENT LIABILITIES 1,970,667 3,832,358
------------- -------------
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 (2,235,324) (3,461,940)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIT (1,091,640) (2,318,256)
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 879,027 $ 1,514,102
============= =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
-----------------------------------------------
1998 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Revenue $ 89,446 $ 142,413
------------- -------------
Operating costs and expenses:
Direct cost of services 37,401 34,186
General & administrative expenses 75,606 94,671
------------- -------------
Total operating costs and expenses 113,007 128,857
------------- -------------
Operating (loss) income from
continuing operations (23,561) 13,556
------------- -------------
Other expense:
Interest expense, net 94 1,035
Other, net 2,328 775
------------- -------------
Total other expense 2,422 1,810
------------- -------------
(Loss) income from continuing
operations before income
taxes (benefit) (25,983) 11,746
------------- -------------
Income taxes (benefit) 18,600 -
------------- -------------
(Loss) income from continuing operations (44,583) 11,746
------------- -------------
Loss from discontinued operations
before reorganization items,
net of income tax (tax benefit)
of $(18,600) in 1998 (11,654) (42,208)
Reorganization items:
Professional fees (17,965) (34,324)
------------- -------------
Loss from discontinued operations (29,619) (76,532)
------------- -------------
Net loss $ (74,202) $ (64,786)
============= =============
Net loss per common share:
(Loss) income before discontinued
operations $ (0.01) $ -
Loss from discontinued operations - (0.01)
------------- -------------
Net loss per common share $ (0.01) $ (0.01)
============= =============
Weighted average number of shares
outstanding 6,311,083 6,311,083
============= =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
----------------------------------------------
1998 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Revenue $ 365,591 $ 413,454
------------- -------------
Operating costs and expenses:
Direct cost of services 155,198 134,720
General & administrative expenses 241,924 300,754
------------- -------------
Total operating costs and expenses 397,122 435,474
------------- -------------
Operating loss from continuing operations (31,531) (22,020)
------------- -------------
Other expense:
Interest expense, net 802 1,151
Other, net 9,996 2,867
------------- -------------
Total other expense 10,798 4,018
------------- -------------
Loss from continuing operations before
income taxes (benefit) (42,329) (26,038)
------------- -------------
Income taxes (benefit) (490,100) -
------------- -------------
Income (loss) from continuing operations 447,771 (26,038)
------------- -------------
(Loss) income from discontinued
operations before reorganization
items, net of income tax
(tax benefit) of $(85,200) in 1998 (71,270) 36,029
Reorganization items:
Professional fees (64,191) (124,893)
Income from the sale of discontinued
operations, net of income tax
of $575,300 914,306 -
------------- -------------
Income (loss) from discontinued
operations 778,845 (88,864)
------------- -------------
Net income (loss) $ 1,226,616 $ (114,902)
============= =============
Net income (loss) per common share:
Income (loss) before discontinued
operations $ 0.07 $ -
Income (loss) from discontinued
operations 0.12 (0.01)
------------- -------------
Net income (loss) per common share $ 0.19 $ (0.02)
============= =============
Weighted average number of shares
outstanding 6,311,083 6,311,083
============= =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
---------------------------------------------
1998 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 1,455,329 $ 6,348,416
Cash paid to suppliers and employees (1,923,351) (5,886,122)
Interest paid (20,172) (116,898)
Income taxes paid (900) (1,030)
------------- -------------
Net cash provided from operating
activities before reorganization
items (489,094) 344,366
------------- -------------
Operating cash flows from
reorganization items:
Professional fees paid for
services rendered in connection
with the Chapter 11 proceeding (64,191) (124,893)
------------- -------------
Net cash used by reorganization items (64,191) (124,893)
------------- -------------
Net cash provided from operating
activities (553,285) 219,473
------------- -------------
Cash flows from investing activities:
Proceeds received from the sale of
discontinued operations 1,172,400 -
Capital expenditures (3,263) (22,415)
------------- -------------
Net cash provided from investing
activities 1,169,137 (22,415)
------------- -------------
Cash flows from financing activities:
Proceeds from loans from officers
and directors 4,000 29,500
Proceeds of loans from receivables
assignment - post-petition 308,336 4,622,829
Repayment of loans from receivables
assignment - pre-petition - (24,800)
Repayment of loans from
receivables assignment -
post-petition (812,379) (4,852,829)
Repayment of equipment loan -
post petition (4,417) -
------------- -------------
Net cash used in financing activities (504,460) (225,300)
------------- -------------
Net increase in cash 111,392 (28,242)
Cash at the beginning of period 228,414 78,689
------------- -------------
Cash at the end of period $ 339,806 $ 50,447
============= =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
---------------------------------------------
1998 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Reconciliation of net income (loss)
to net cash provided from
operating activities:
Net income (loss) $ 1,226,616 $ (114,902)
Adjustments to reconcile net income
(loss) to net cash provided from
operating activities:
Depreciation 26,188 56,852
Amortization 3,997 4,967
Gain from the sale of discontinued
operations (914,306) -
Income tax benefit generated by
gain on the sale of discontinued
operations (575,300) -
Changes in assets and liabilities:
Decrease in accounts receivable 785,405 103,666
Decrease in inventory 610 1,270
Decrease (increase) in other
current assets (10,769) 8,443
Decrease (increase) in other assets 7,359 (744)
Decrease in accounts payable -
pre-petition (52,854) (67,255)
Increase in accounts payable -
post-petition 124,546 184,235
Decrease in accrued salaries and
benefits - pre-petition (182,581) (28,676)
Increase (decrease) in accrued
salaries and benefits -
post-petition (186,452) 167,118
Decrease in accrued payroll taxes
and withholdings - pre-petition (559,367) (160,388)
Increase (decrease) in accrued
payroll taxes and withholdings -
post-petition (117,456) 6,974
Increase (decrease) in other accrued
liabilities - post-petition (113,195) 49,867
Increase (decrease) in accrued
interest and penalties -
pre-petition (49,641) 7,496
Decrease in billings in excess of
costs and anticipated profits - (820)
Increase in deferred revenue 34,815 2,400
Decrease in income taxes payable (900) (1,030)
------------- -------------
Net cash provided from operating
activities $ (553,285) $ 219,473
============= =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The Condensed Consolidated Balance Sheet as of February 28, 1998, the
Condensed Consolidated Statements of Operations for the three and nine months
ended February 28, 1998 and 1997, and the Consolidated Statements of Cash
Flows for the nine months ended February 28, 1998 and 1997, have been prepared
by the Company and are unaudited. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
February 28, 1998, and for all periods presented, have been made.
The Company owns 95% of ARInternet which was formed during November, 1994.
However, because the minority interest in net losses of ARInternet exceeded
the carrying value of the minority interest amount at February 28, 1998, no
minority interest has been reflected in the Condensed Consolidated Financial
Statements.
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, 1997. The results of operations for
the period ended February 28, 1998, are not necessarily indicative of the
operating results for the full year.
2. INCOME (LOSS) PER COMMON SHARE
------------------------------
Income (loss) per share of common stock has been computed by dividing the net
income (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,
1997, the Condensed Consolidated Statements of Operations for the three and
nine month periods ended February 28, 1997, and the Condensed Consolidated
Statements of Cash Flows for the nine months then ended have been reclassified
to conform to the February 28, 1998, presentation.
4. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11/SALE OF APPLIED
RESEARCH OF MARYLAND, INC. AND MANAGEMENT'S PLANS TO CONTINUE AS A
GOING CONCERN
------------------------------------------------------------------
On April 2, 1996, ARM 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 ARM in existence prior to the filing
of the petitions for relief under the federal bankruptcy laws are stayed while
ARM continues business operations as Debtor-In-Possession. These claims are
reflected in the accompanying Condensed Consolidated Financial Statements
under "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 Bankruptcy Court (or agreement of the parties in
interest) of allowed claims for contingencies and other disputed amounts.
Claims secured against ARM'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 ARM's
property, including ARM'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 its request to continue to operate the business. Prior to the emergency
hearing, ARM reached an agreement with the IRS and its primary lender, CFC, 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.
Subsequent monthly payments have been and will continue to be made directly to
the IRS by CFC from borrowings made by ARM. ARM was also required to remit to
the IRS collections on certain billed receivables that were outstanding as of
April 2, 1996 (the final vouchers on 14 old contracts, which totaled
approximately $136,700). In addition, as part of the agreement with the IRS
and as required by the Bankruptcy Court, ARM was required to remit its post-
petition taxes when due and provide proof of such payments to the IRS and the
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.
ARM has determined that there is 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. ARM has curtailed accruing interest on all pre-petition obligations
except the amounts owed CFC because of the Bankruptcy filing. In addition,
ARM 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, a hearing on which was originally scheduled for
July 26, 1996. This hearing was subsequently moved to July 30, 1996. At the
hearing, a total of four qualified bidders attended, and after extensive
bidding, an offer was accepted for $2.1 Million.
During August 1996, a Bankruptcy Court order documenting the bidding procedure
as well as the related asset purchase agreement was submitted to the
Bankruptcy Court on September 26, 1996, and was approved on October 4, 1996.
The sale also required the approval of a majority of the Company's
shareholders. On October 30, 1996, at the Company's Annual Meeting of
Shareholders, a majority of the Company's shareholders approved the sale. The
sale was also subject to the successful novation of ARM's government
contracts, which request was submitted to the Government in October 1996, with
the information supporting the request for novation submitted in early
November 1996. Approval of the novation was expected to take approximately 60
to 90 days from submission. On January 31, 1997, because novation by the
government had not occurred, the purchaser chose to terminate the purchase
agreement.
During February 1997, management met with several other interested purchasers,
including the other three bidders that had attended the July 1996, hearing.
On March 3, 1997, the Company accepted a new contract for the sale of certain
of ARM's assets for $1.475 Million from Space Applications Corporation
("SAC"). The sale was subject to Bankruptcy Court approval, a hearing on
which was scheduled for April 11, 1997. At the hearing, a total of three
qualified bidders attended, and after extensive bidding, an offer was accepted
for $1.75 Million from SAC. The purchase price was payable as follows:
$1,172,400 in cash at closing, $322,400 payable over three years and the
assumption of liabilities totaling $255,200.
Because of the change in the purchase price as well as in the distribution of
funds, the original SAC contract required modifications. An amendment to the
contract reflecting these changes was signed on April 16, 1997. A Bankruptcy
Court order documenting the bidding procedure was approved by the Bankruptcy
Court on May 30, 1997. The sale was subject to the successful novation of
ARM's government contracts, which request was approved on June 19, 1997, at
which time the sale was completed with payment of the cash portion of the
purchase price being placed in escrow. The cash placed in escrow was
subsequently disbursed to creditors.
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
- - All furniture, fixtures and ARM's organization, existence
equipment, or capitalization, and the
- - All proprietary rights capital stock of ARM,
(patents, etc.), - Billed accounts receivable
- - All unbilled accounts receivable as of closing,
relating to expired contracts - Intercompany receivables,
as of January 31, 1997, - All of ARM's cash accounts,
- - All other unbilled accounts - ARM's rights to occupy real
receivable as of the closing date pursuant to leases of real property
and any leaseho,ld improvements
made thereto,
- Any other property identified by
the Purchaser prior to the closing.
PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES.
Now that the sale has been completed, ARM filed a Plan of Reorganization,
which among other things, specified how much of the outstanding pre-petition
liabilities will be paid and over what period of time. A Bankruptcy Court
hearing is scheduled on April 28, 1998, to determine if the information
contained in the document filed with the Court is adequate or needs to be
amended. This Plan is expected to take several months to receive Bankruptcy
Court approval. It is also expected that between the monies generated from
the sale of ARM's contract rights, plus the collection of outstanding accounts
receivable (which are not part of the sale), there will not be sufficient
monies to liquidate all of ARM's pre-petition liabilities. Furthermore, it
appears that the unsecured creditors (accounts payable) will receive little or
nothing towards their pre-petition claims. Specifically, it appears that the
following will be paid in full as a result of the expected Plan of
Reorganization: 1) the secured claim of CFC, ARM's pre-petition and post-
petition lender; 2) the principal portions of the tax amounts owed to the IRS;
3) approximately $255,200 of the $345,138 owed to the employees for accrued
vacation, $530,917 of the $676,000 owed to the 401(k) Plan as of April 2,
1996, as well as certain employees' pre-petition claims for unreimbursed
travel expenses of approximately $50,000; and 4) the majority of the principal
portions of the tax amounts owed to the various state authorities. Although
these are the current expectations, there can be no assurance that these
amounts will be paid until the Plan of Reorganization is 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 February 28, 1998, ARS has only
one part-time employee and its assets and sales are minimal. 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 (on a cash basis) as of February 28, 1998.
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 FROM THE SALE OF ARM.
During the fiscal year ended May 31, 1997, ARM's operations constituted 93% of
ARC's total revenue. The sale transferred essentially all of ARM's assets and
operations to the Purchaser and eliminated all of ARM's revenues. Therefore,
ARS and ARInternet are the only remaining operating entities. Up until the
bankruptcy filing, ARM had been forced to continue to fund ARS's and
ARInternet's operations. During the fiscal year ended May 31, 1996, (through
April 2, 1996), ARM funded approximately $204,600 of ARS's and ARInternet's
expenses. After April 2, 1996, because of the ARM bankruptcy proceedings, ARM
ceased all such advances and ARS and ARInternet were forced to fund their own
operations. ARS is still not operating at cash flow breakeven, so it is
doubtful that it can survive without a substantial infusion of cash or a
significant increase in revenues. Management is considering several options
for ARS, including ceasing its operations. ARInternet, on the other hand, has
steadily increased its revenues and as of February 28, 1998, had approximately
1,000 subscribers and had essentially reached breakeven operations on a cash
basis. Management believes that ARInternet's revenues and business should
stabilize and 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 previously occupied by ARM was not covered by the Bankruptcy
proceeding, because the lease is held by ARC. On December 1, 1996, ARM
vacated 6,349 sq. ft. or 64% of the 10,072 sq. ft. previously occupied by ARM.
Effective March 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. Effective August 1, 1997, the
Company signed a second lease amendment that reduced its rental obligation by
an additional 6,462 sq. ft. to 2,272 sq. ft.. The remaining 2,272 sq. ft. was
vacated on September 30, 1997. In return for reducing the space the landlord
required ARC to pay a total of $19,068, payable monthly at $1,362 over the
balance of the lease, plus forfeiture of the $5,650 deposit held by the
landlord. This settlement with the landlord will save the Company more than
$103,500 over the remainder of the lease. 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 dramatically changed the Company's Balance Sheet and statement
of operations. Through the Bankruptcy proceeding, all of ARM's debts, which
total $3.5 million at May 31, 1997, and $1.670 million at February 28, 1998,
will be either liquidated or discharged. This will decrease interest and
penalty costs that the Company has been incurring. If ARS and ARInternet's
revenues can be increased to produce net profits and a positive cash flow, the
likelihood of which cannot be assured, the Company may in fact benefit from
the sale of ARM. However, unless and until this occurs, the Company may not
have sufficient capital to achieve its current business plan, which raises
substantial doubt as to the Company's ability to continue as a going concern
after the sale of ARM is completed.
5. DISCONTINUED OPERATIONS
-----------------------
On June 19, 1997, the Company consummated the sale of substantially all of the
assets of ARM to SAC (the "Sale"). Accordingly, results from operations for
ARM have been shown as discontinued operations for the three and nine months
ended February 28, 1998 and 1997.
A reconciliation of the sales price to the net cash received is presented
below:
<TABLE>
<CAPTION>
<S> <C>
Sales price $ 1,750,000
Less: Payments due over a
period of one to three years (322,400)
Less: Assumption of vacation
liability (255,200)
---------------
Net cash received at closing $ 1,172,400
===============
</TABLE>
Distribution of the cash received at closing was as follows:
<TABLE>
<CAPTION>
<S> <C>
Internal Revenue Service -
pre-petition taxes $ 609,000
Employees - pre-petition
401(k) contributions 271,017
Employees - pre-petition expenses 50,000
Administrative expenses associated
with sale of ARM 60,000
Cash held in Escrow for
administrative claims 182,383
---------------
Net cash received at closing $ 1,172,400
===============
</TABLE>
A summary of ARM's results from operations for the three and nine months ended
February 28, 1998 and 1997 are shown on the next page:<PAGE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997:
1998 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Revenue $ (11,165) $ 1,861,484
------------- -------------
Operating costs and expenses:
Direct cost of services - 1,147,950
Indirect operating costs 1,620 468,313
General & administrative expenses 22,161 237,896
------------- -------------
Total operating costs and expenses 23,781 1,854,159
------------- -------------
Operating (loss) profit from
discontinued operations (34,946) 7,325
------------- -------------
Other (income) expense:
Interest expense, net (4,692) 38,463
Other, net - 11,070
------------- -------------
Total other expense (4,692) 49,533
------------- -------------
Income tax (tax benefit) (18,600) -
------------- -------------
Loss from discontinued operations
before reorganization items (11,654) (42.208)
Reorganization items - professional fees (17,965) (34,324)
------------- -------------
Loss from discontinued operations $ (29,619) $ (76,532)
============= =============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997:
1998 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Revenue $ 269,518 $ 5,829,716
------------- -------------
Operating costs and expenses:
Direct cost of services 174,245 3,647,246
Indirect operating costs 76,055 1,312,983
General & administrative expenses 184,853 699,130
------------- -------------
Total operating costs and expenses 435,153 5,659,359
------------- -------------
Operating (loss) profit from
discontinued operations (165,635) 170,357
------------- -------------
Other (income) expense:
Interest expense, net 10,079 113,223
Other, net (19,244) 21,105
------------- -------------
Total other (income) expense (9,165) 134,328
------------- -------------
Income tax (tax benefit) (85,200) -
------------- -------------
(Loss) income from discontinued
operations before reorganization
items (71,270) 36,029
Reorganization items - professional fees (64,191) (124,893)
------------- -------------
Loss from discontinued operations $ (135,461) $ (88,864)
============= =============
</TABLE>
6. SUPPLEMENTAL SEGMENT INFORMATION
--------------------------------
The Company's continuing operations have been classified into two business
segments:
<TABLE>
<CAPTION>
ARS ARInternet Consolidated
----------- ----------- -------------
<S> <C> <C> <C>
Sales to unaffiliated customers:
Quarter ended:
--------------
February 28, 1998 $ 13,724 $ 75,722 $ 89,446
February 28, 1997 $ 6,113 $ 136,300 $ 142,413
Nine months ended:
------------------
February 28, 1998 $ 89,100 $ 276,491 $ 365,591
February 28, 1997 $ 59,558 $ 353,896 $ 413,454
Operating loss from continuing operations
before other income (expense) and income taxes:
Quarter ended:
--------------
February 28, 1998 $ (2,797) $ (20,764) $ (23,561)
February 28, 1997 $ (7,167) $ 20,723 $ 13,556
Nine months ended:
------------------
February 28, 1998 $ (12,420) $ (19,111) $ (31,531)
February 28, 1997 $ (28,021) $ 6,001 $ (22,020)
</TABLE>
Operating 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
sold substantially all of the operating assets of ARM (see Note 5).
<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 February 28, 1998 Compared to
1997
- ---------------------------------------------------------------------------
FROM CONTINUING OPERATIONS
The Company's revenues for the quarter ended February 28, 1998, were $89,446,
or 37% below revenues of $142,413 for the same period during 1997. The
decrease of $(52,967) in revenues during the quarter ended February 28, 1998,
is primarily attributable to the decrease in ARInternet's revenues of
$(60,578) or (44%), offset by an increase in ARS' revenues of $7,611 or 125%
over the same period in 1997. The decrease in ARInternet's revenue were
caused by a reduction in the number of subscribers serviced by the company,
which the company beliefs is primarily related to the company not offering
digital access capability. Subsequent to February 28, 1998, ARInternet
contracted to upgrade its services for digital access capability. The
increase in ARS' revenues related to an increase in the amount of products
sold.
The Company's direct cost of services increased $3,215 or 9%, from $34,186
during the quarter ended February 28, 1997, to $37,401 during the same period
in 1998. Of this amount, ARS increased $5,116 or 168%, while ARInternet's
cost of services decreased $(1,901) or (6%). The increase in direct costs of
ARS was primarily related to the increased sales for the quarter compared to
the same period in 1997.
General and administrative ("G&A") expenses decreased $19,065 or 20%, from
$94,671 in 1997, to $75,606 during 1998. Most notably, the G&A expenses
associated with ARInternet decreased $(17,191), or 20% due to a reduction in
the amount of salaries. ARS' G&A expenses decreased $(1,874) or (18%), which
was attributed to the reduction in personnel costs. The decrease in
ARInternet's G&A expenses related to a reduction in staffing during 1997 when
compared to the same period in 1998.
As a result of the foregoing, the Company realized a operating loss from
continuing operations for the quarter ended February 28, 1998, of $(23,561)
compared to an operating income of $13,556 for the same period during 1997.
ARS realized a operating loss of $(2,797) for the quarter ended February 28,
1998, which loss represented an improvement of $4,370 or 61% from the
operating loss of $(7,167) during the same period in 1997. ARInternet
realized a operating loss of $(20,764) for the quarter ended February 28,
1998, which represented a regression of $(41,487) from the operating income of
$20,723 during the same period in 1997.
Interest and other expenses increased $612, from $1,810 for the quarter ended
February 28, 1997, to $2,422 during the quarter ended February 28, 1998. The
increase was primarily related to an increase in the amount of penalties that
are being incurred.
The Company realized a loss from continuing operations of $(44,583) for the
quarter ended February 28, 1998, compared to an income from continuing
operations of $11,746 during the same period in 1997. This change in results
from continuing operations was caused by the decrease in ARInternet's
operating income and the change in the income tax benefit being realized by
the sale of ARM, offset by the losses generated by ARM.
Based on the foregoing, income (loss) per common share from continuing
operations changed from $0.00 in 1997 to $(0.01) in 1998.
FROM DISCONTINUED OPERATIONS
ARM's revenues for the quarter ended February 28, 1998, were $(11,165), or
(101)% below revenues of $1,861,484 for the same period during 1997. The
decrease in revenues during the quarter ended February 28, 1998, is
attributable to the sale of ARM which was effective June 19, 1997. Effective
with the sale of ARM, all of ARM's direct employees terminated their
employment relationships with ARM and, as a result, all revenues of ARM
ceased. The negative revenue for the quarter ended February 28, 1998 resulted
from adjustments (write-downs) in the amount of accounts receivables that are
expected to be realized upon their ultimate collection.
ARM's direct cost of services decreased $1,147,950 or 100%, from $1,147,950
during the quarter ended February 28, 1997, to $0 during the same period in
1998. ARM's decrease in direct costs was due to the decrease in direct labor
due, which, in turn, was due to the sale of ARM.
ARM's indirect operating costs decreased $466,693 or 100%, from $468,313
during the quarter ended February 28, 1997, to $1,620 during the quarter ended
February 28, 1998. This decrease is directly related to a decrease in direct
labor costs incurred.
ARM's general and administrative ("G&A") expenses decreased $215,735 or 91%,
from $237,896 in 1997, to $22,161 during 1998. The decrease in ARM's G&A
expenses was directly attributable to the sale of ARM. ARM will, however,
continue to incur some minor G&A expenses while winding down ARM's affairs in
the Bankruptcy Court, which is expected to take a few months.
As a result of the foregoing, ARM realized an operating loss for the quarter
ended February 28, 1998, of $(34,946) compared to operating income of $7,325
for the same period during 1997. The $42,271 decrease in ARM's 1998 operating
margin was primarily related to the sale of ARM's contracts and the
discontinuation of ARM's operations.
ARM's interest and other expenses decreased $54,225, from $49,533 for the
quarter ended February 28, 1997, to $(4,692) during the quarter ended February
28, 1998. Net interest expense decreased $43,155 or 112% from 1997. The
decrease in interest costs was the result of ARM paying off its secured debt
during July 1997. Other expenses also decreased $11,070 or 100% during the
quarter ended February 28, 1998. This was primarily due to the fact that ARM
no longer has any operations and as a result, is not incurring any such
expenses.
ARM sustained a loss before the gain on the sale of ARM of $(29,619) for the
quarter ended February 28, 1998, compared to a loss of $(76,532) during the
same period last year.
Results from Operations - Nine months Ended February 28, 1998 Compared to 1997
- ---------------------------------------------------------------------------
FROM CONTINUING OPERATIONS
The Company's revenues for the nine months ended February 28, 1998, were
$376,591, or 11% below revenues of $413,454 for the same period during 1997.
The decrease of $47,863 in revenues during the nine months ended February 28,
1998, is primarily attributable to an decrease in ARinternet's revenues of
$(77,405) or (22%) compared to the 1997 revenues of $353,896, offset by a
increase in ARS' revenues of $29,542 or 50%. The decrease in ARInternet's
revenue were caused by a reduction in the number of subscribers serviced by
the company, which the company believes is primarily related to the company
not offering digital access capability. Subsequent to February 28, 1998,
ARInternet contracted to upgrade its services for digital access capability.
The increase in ARS' revenue resulted from an increase in the products sales
realized this year compared to 1997.
The Company's direct cost of services increased $20,478 or 15%, from $134,720
during the nine months ended February 28, 1997, to $155,198 during the same
period in 1998. Of this amount, ARS increased $24,459 while ARInternet's cost
of services decreased $(3,981). The increase in direct costs of ARS was
primarily related to the increased sales for the nine month period compared to
the same period in 1997. The decrease in ARInternet's direct costs of sales
was the direct result of decreased sales during the current period.
General and administrative ("G&A") expenses decreased $(58,830) or (20%), from
$300,754 in 1997, to $241,924 during 1998. Most notably, the G&A expenses
associated with ARInternet decreased $48,314, while ARS' G&A expenses
decreased $10,546 during the period. The decrease in ARInternet's G&A
expenses related to a reduction in staffing during 1997 when compared to the
same period in 1998. The decrease in ARS's G&A expenses was predominantly
attributable to a reduction in personnel and marketing related expenses during
the period.
As a result of the foregoing, the Company realized an operating loss from
continuing operations for the nine months ended February 28, 1998, of
$(31,531) compared to an operating loss of $(22,020) for the same period
during 1997. ARS posted an operating loss of $(12,420) for the nine months
ended February 28, 1998, which loss represented an improvement of $15,601 or
56% from the operating loss of $(28,021) during the same period in 1997. 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 $(19,111) for the nine
months ended February 28, 1998, which represented a regression of $(25,112)
from the operating income of $6,001 during the same period in 1997.
Interest and other expenses increased $6,780, from $4,018 for the nine months
ended February 28, 1997, to $10,798 during the nine months ended February 28,
1998. The increase was primarily related to an increase the reserve for
uncollectible accounts of $5,000 by ARInternet during the nine months ended
February 28, 1998 when compared to the same period in 1997.
The Company realized income from continuing operations of $447,771 for the
nine months ended February 28, 1998, compared to a loss from continuing
operations of $(26,038) during the same period in 1997. This change in
results from continuing operations was the result of a $490,100 tax benefit
from the realization of the net operating loss carryforwards of the company,
which offset the taxes ascribed to the gain on the sale of ARM.
Based on the foregoing, income (loss) per common share from continuing
operations increased from $(0.01) in 1997 to $0.12 in 1998.
FROM DISCONTINUED OPERATIONS
ARM's revenues for the nine months ended February 28, 1998, were $269,518, or
(95)% below revenues of $5,829,716 for the same period during 1997. The
decrease in revenues during the quarter ended February 28, 1998, of $5,560,198
is attributable to the sale of ARM which was effective June 19, 1997.
Effective with the sale of ARM, all of ARM's direct employees terminated their
employment relationships with ARM and, as a result, all revenues of ARM
ceased.
ARM's direct cost of services decreased $3,473,001 or 95%, from $3,647,246
during the nine months ended February 28, 1997, to $174,245 during the same
period in 1998. ARM's decrease in direct costs was due to the decrease in
direct labor due, which, in turn, was due to the sale of ARM.
ARM's indirect operating costs decreased $1,236,928 or 94% from $1,312,983
during the nine months ended February 28, 1997, to $76,055 during the quarter
ended February 28, 1998. This decrease is directly related to a decrease in
direct labor costs incurred.
ARM's general and administrative ("G&A") expenses decreased $514,277 or 74%,
from $699,130 in 1997, to $184,853 during 1998. The decrease in ARM's G&A
expenses was directly attributable to the sale of ARM. ARM will continue to
incur some minor G&A expenses while winding down ARM's affairs in the
Bankruptcy Court, which is expected to take a few months.
As a result of the foregoing, ARM realized an operating loss for the nine
months ended February 28, 1998, of $(165,635) compared to operating income of
$170,357 for the same period during 1997. The $335,992 decrease in ARM's 1997
operating margin was directly related to the sale of ARM's contracts and the
discontinuation of ARM's operations.
ARM's interest and other expenses decreased $143,493, from $134,328 for the
nine months ended February 28, 1997, to $(9,165) during the nine months ended
February 28, 1998. Net interest expense decreased $103,144 or 91% from 1997.
The decrease in interest costs was the result of ARM paying off its secured
debt during July 1997. Other expenses also decreased $40,349 during the nine
months ended February 28, 1998. This was primarily due to the fact that ARM
collected $19,290 against a previously written off bad debt during the period,
which was shown as other income.
ARM sustained a loss before the gain on the sale of ARM of $(135,461) for the
nine months ended February 28, 1998, compared to a loss of $(88,864) during
the same period last year. After recording the gain on the of $1,489,606 on
the sale of ARM, and after giving affect for the income taxes ascribed to the
Sale of $575,300, ARM reported income of $778,845 for the current fiscal
period. Because the Company had net operating loss carryforwards available to
offset the gain, no tax will actually be due (the tax benefit for the net
operating loss carryforwards realized is shown under continuing operations,
consistent with the current accounting reporting standards).
Liquidity and Capital Resources - 1998 Compared to 1997
- -------------------------------------------------------
Total assets decreased $620,075 or 41%, from $1,514,102 at May 31, 1997, to
$894,027 at February 28, 1998. Total liabilities on the other hand decreased
from $3,832,358 to $1,970,667 over the same period, or a decrease of
$1,861,691, or 49%.
The most significant reason for the decrease in total assets was the decrease
in accounts receivable. At February 28, 1998, the Company had $169,802 and $0
in billed and unbilled receivables, respectively. At May 31, 1997, the
Company had $955,207 and $210,542 in billed and unbilled receivables,
respectively. Billed receivables decreased $785,405 or 82% from May 31, 1997,
while unbilled receivables decreased $210,542 or 100% from May 31, 1997. The
decrease in billed accounts receivable was primarily the result of the
discontinuation of ARM's business as a result of the Sale on June 19, 1997,
and the subsequent collection of the majority of the previously outstanding
receivables. The decrease in unbilled accounts receivable resulted from the
Sale, as all unbilled receivables were purchased by SAC.
The most significant reasons for the $762,048 decrease in post-petition
liabilities collectively, were decreases in: notes payable of $508,460,
accrued salaries and benefits of $186,452, accrued payroll taxes of $117,456
and other accrued liabilities of $112,141, while accounts payable increased by
$124,546 as well as deferred revenue by $34,815. The decreases were caused by
the payment of the pre-closing liabilities after the sale of ARM was
completed. The majority of the post-petition accounts payable consisted of
unpaid professional fees related to the bankruptcy proceeding, which must be
court approved by the Bankruptcy Court before they can be paid.
The decrease in pre-petition liabilities of $(1,099,643) included decreases
of: $(52,854) in accounts payable, $(437,781) in accrued salaries and
benefits, $(559,367) of accrued payroll taxes and withholdings, and $(49,641)
of accrued interest and penalties. All of these decreases resulted from
payments from the proceeds of the sale of ARM to SAC, or the assumption of the
liability by SAC.
The Company's working capital deficit improved by 42% during the quarter ended
February 28, 1998, from a deficit of $(2,433,340) at May 31, 1997 to a deficit
of $(1,411,145) at February 28, 1998.
FILING OF CHAPTER 11 PETITION BY ARM
The following is a chronology of the events leading up to ARM filing for
protection under Chapter 11 of the United States Bankruptcy laws on April 2,
1996, as well as a discussion of what has happened since the filing and
subsequent signing of an agreement to sell the majority of ARM's assets to
SAC.
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 its primary lender, CFC, 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. Subsequent monthly
payments have been and will continue to be made directly to the IRS by CFC
from borrowings made by ARM. ARM was also required to remit to the IRS
collections on certain billed receivables that were outstanding as of April 2,
1996 (which totaled approximately $139,700 and consisted of final vouchers on
14 old contracts). In addition, as part of the agreement with the IRS, and as
required by the Bankruptcy Court, ARM was required to remit its post-petition
taxes when due and provide proof of such payments to the IRS and the
Bankruptcy Court on a timely basis. The Bankruptcy Court approved the
agreements with the IRS and CFC, and approved ARM's operating budget for 15
days through April 21, 1996. These agreements have continued to be renewed by
the Bankruptcy Court.
SALE OF ARM'S GOVERNMENT CONTRACTS
ARM informed the Bankruptcy Court and the IRS that it would continue to pursue
the sale of substantially all of ARM's assets . To that end, ARM placed ads
in several newspapers, including THE WALL STREET JOURNAL. ARM received
approximately 34 inquires to these ads. During May and June 1996, the Company
sent information about ARM to 18 Companies and held serious discussions with 7
Companies concerning the sale of ARM's assets.
On June 24, 1996, the Company accepted a contract for the sale of certain of
ARM's assets for approximately $1.5 Million. The sale was subject to
Bankruptcy Court approval, a hearing on which was originally scheduled for
July 26, 1996. This hearing was subsequently moved to July 30, 1996. At the
hearing, a total of four qualified bidders attended, and after extensive
bidding, an offer was accepted for $2.1 Million.
During August 1996, management and ARM's bankruptcy attorney negotiated a
contract, which was signed on August 30, 1996. A Bankruptcy Court order
documenting the bidding procedure as well as the related asset purchase
agreement was submitted to the Bankruptcy Court on September 26, 1996, and was
approved on October 4, 1996. The sale also required the approval of a
majority of the Company's shareholders. On October 30, 1996, at the Company's
Annual Meeting of Shareholders, a majority of the Company's shareholders
approved the sale. The sale was also subject to the successful novation of
ARM's government contracts, which request was submitted to the Government in
October 1996, with the information supporting the request for novation
submitted in early November 1996. Approval of the novation was expected to
take approximately 60 to 90 days from submission. On January 31, 1997,
because novation by the government had not occurred, the purchaser chose to
terminate the purchase agreement.
During February 1997, management met with several other interested purchasers,
including the other three bidders that had attended the July 1996, hearing.
On March 3, 1997, the Company accepted a new contract for the sale of certain
of ARM's assets for $1.475 Million from SAC. The sale was subject to
Bankruptcy Court approval, a hearing on which was scheduled for April 11,
1997. At the hearing, a total of three qualified bidders attended, and after
extensive bidding, an offer was accepted for $1.75 Million from SAC. The
purchase price was payable as follows: $1,172,400 in cash at closing,
$322,400 payable over three years and the assumption of liabilities totaling
$255,200.
Because of the change in the purchase price as well as in the distribution of
funds, the original SAC contract required modifications. An amendment to the
contract reflecting these changes was signed on April 16, 1997. A Bankruptcy
Court order documenting the bidding procedure was approved by the Bankruptcy
Court on May 30, 1997. The sale was subject to the successful novation of
ARM's government contracts, which request was approved on June 19, 1997, at
which time the sale was completed.
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 stock of ARM,
(patents, etc.) - Billed accounts receivable as
- - All unbilled accounts receivable of closing,
relating to expired contracts - Intercompany receivables,
as of January 31, 1997, - All of ARM's cash accounts,
- - All other unbilled accounts - ARM's rights to occupy real
receivable as of the closing property pursuant to leases of
date. real property and any leasehold
improvements made thereto,
- Any other property identified by
the Purchaser prior to the closing.
PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES
Now that the sale has been completed, ARM filed a Plan of Reorganization,
which among other things, specified how much of the outstanding pre-petition
liabilities will be paid and over what period of time. A Bankruptcy Court
hearing is scheduled on April 28, 1998, to determine if the information
contained in the document filed with the Court is adequate or needs to be
amended. This Plan is expected to take several months to receive Bankruptcy
Court approval. It is also expected that between the monies generated from
the sale of ARM's contract rights, plus the collection of outstanding accounts
receivable (which are not part of the sale), there will not be sufficient
monies to liquidate all of ARM's pre-petition liabilities. Furthermore, it
appears that the unsecured creditors (accounts payable) will receive little or
nothing towards their pre-petition claims. Specifically, it appears that the
following will be paid in full as a result of the expected Plan of
Reorganization: 1) the secured claim of CFC, ARM's pre-petition and post-
petition lender; 2) the principal portions of the tax amounts owed to the IRS;
3) approximately $255,200 of the $345,138 owed to the employees for accrued
vacation, $530,917 of the $676,000 owed to the 401(k) Plan as of April 2,
1996, as well as certain employees' pre-petition claims for unreimbursed
travel expenses of approximately $50,000; and 4) the majority of the principal
portions of the tax amounts owed to the various state authorities. Although
these are the current expectations, there can be no assurance that these
amounts will be paid until the Plan of Reorganization is 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 February 28, 1998, ARS has only
one part-time employee and its assets and sales are minimal. 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 (on a cash basis) as of February 28, 1998.
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 FROM THE SALE OF ARM.
During the fiscal year ended May 31, 1997, ARM's operations constituted 93% of
ARC's total revenue. The sale transferred essentially all of ARM's assets and
operations to the Purchaser and eliminated all of ARM's revenues. Therefore,
ARS and ARInternet are the only remaining operating entities. Up until the
bankruptcy filing, ARM had been forced to continue to fund ARS's and
ARInternet's operations. During the fiscal year ended May 31, 1996, (through
April 2, 1996), ARM funded approximately $204,600 of ARS's and ARInternet's
expenses. After April 2, 1996, because of the ARM bankruptcy proceedings, ARM
ceased all such advances and ARS and ARInternet were forced to fund their own
operations. ARS is still not operating at cash flow breakeven, so it is
doubtful that it can survive without a substantial infusion of cash or a
significant increase in revenues. Management is considering several options
for ARS, including ceasing its operations. ARInternet, on the other hand, has
steadily increased its revenues and as of February 28, 1998, had approximately
1,000 subscribers and had essentially reached breakeven operations on a cash
basis. Management believes that ARInternet's revenues and business should
stabilize and 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 previously occupied by ARM was not covered by the Bankruptcy
proceeding, because the lease is held by ARC. On December 1, 1996, ARM
vacated 6,349 sq. ft. or 64% of the 10,072 sq. ft. previously occupied by ARM.
Effective March 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. Effective August 1, 1997, the
Company signed a second lease amendment that reduced its rental obligation by
an additional 6,462 sq. ft. to 2,272 sq. ft. The remaining 2,272 sq. ft. was
vacated on September 30, 1997. In return for reducing the space the landlord
required ARC to pay a total of $19,068, payable monthly at $1,362 over the
balance of the lease, plus forfeiture of the $5,650 deposit held by the
landlord. This settlement with the landlord will save the Company more than
$103,500 over the remainder of the lease. 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 dramatically changed the Company's Balance Sheet and statement
of operations. Through the bankruptcy proceeding, all of ARM's debts, which
total $3.5 million at May 31, 1997, and $1.603 million at February 28, 1998,
will be either liquidated or discharged. This will decrease interest and
penalty costs that the Company has been incurring. If ARS and ARInternet's
revenues can be increased to produce net profits and a positive cash flow, the
likelihood of which cannot be assured, 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
- -------------------------------------------------------------
None
Item 5: Other Information
- ---------------------------
None
Item 6: Exhibits and Reports on Form 8-K
- ------------------------------------------
None<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.
- ------------------------------------------- --------------------
Dr. S.P.S. Anand Date
President and Chief Executive Officer
- ------------------------------------------- --------------------
Dennis H. O'Brien Date
Vice President and Chief Financial Officer <PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ S.P.S. Anand April 17, 1998
- ------------------------------------------- --------------------
Dr. S.P.S. Anand Date
President and Chief Executive Officer
/s/ Dennis H. O'Brien April 17, 1998
- ------------------------------------------- --------------------
Dennis H. O'Brien Date
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> FEB-28-1998
<CASH> 339,806
<SECURITIES> 0
<RECEIVABLES> 169,802
<ALLOWANCES> 0
<INVENTORY> 1,936
<CURRENT-ASSETS> 559,522
<PP&E> 157,386
<DEPRECIATION> 125,381
<TOTAL-ASSETS> 894,027
<CURRENT-LIABILITIES> 1,970,667
<BONDS> 0
0
0
<COMMON> 3,155
<OTHER-SE> (2,235,324)
<TOTAL-LIABILITY-AND-EQUITY> 879,027
<SALES> 89,446
<TOTAL-REVENUES> 89,446
<CGS> 113,007
<TOTAL-COSTS> 113,007
<OTHER-EXPENSES> 2,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> (25,983)
<INCOME-TAX> 18,600
<INCOME-CONTINUING> (44,583)
<DISCONTINUED> (29,619)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (74,202)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
