<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, 1997
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 January 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 -
November 30, 1997 (unaudited) and May 31, 1997 3-4
Condensed Consolidated Statements of Operations -
Three months ended November 30, 1997 and
1996 (unaudited) 5
Condensed Consolidated Statements of Operations -
Six months ended November 30, 1997 and
1996 (unaudited) 6
Condensed Consolidated Statements of Cash Flows -
Six months ended November 30, 1997 and
1996 (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 24
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
November 30, May 31,
1997 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash $ 353,067 $ 228,414
Accounts receivable, net 207,737 1,165,749
Due from Space Applications Corporation,
short-term 34,900 -
Inventory, at cost 222 2,546
Other current assets 10,760 2,309
------------ -----------
TOTAL CURRENT ASSETS 606,686 1,399,018
------------ -----------
PROPERTY AND EQUIPMENT, AT COST
Furniture and equipment 20,728 167,741
Computer equipment 135,815 488,295
Laboratory equipment - 121,426
Leasehold improvements 200 22,322
------------ -----------
156,743 799,784
Less accumulated depreciation and
amortization 118,202 717,713
------------ -----------
NET PROPERTY AND EQUIPMENT 38,541 82,071
INTANGIBLE ASSETS, NET OF
AMORTIZATION 1,332 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 $ 934,059 $ 1,514,102
============ ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
<CAPTION>
November 30, May 31,
1997 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
LIABILITIES
- -----------
CURRENT LIABILITIES
Liabilities not subject to compromise:
Notes payable, current maturities $ 5,165 $ 512,121
Loans payable to officers and directors 49,900 41,900
Accounts payable 511,321 419,023
Accrued salaries and benefits 40,801 228,557
Accrued payroll taxes and withholdings 28,510 129,571
Other accrued liabilities 54,116 153,787
Deferred revenue 44,863 30,035
Income taxes payable 100 1,000
------------ -----------
Total liabilities not subject to compromise 734,776 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 1,951,497 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 (2,161,122) (3,461,940)
------------ -----------
TOTAL STOCKHOLDERS' DEFICIT (1,017,438) (2,318,256)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 934,059 $ 1,514,102
============ ==========
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
<CAPTION>
1997 1996
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Revenue $ 143,562 $ 127,285
------------ -----------
Operating costs and expenses:
Direct cost of services 55,970 42,822
General & administrative expenses 80,038 97,030
------------ -----------
Total operating costs and expenses 136,008 139,852
------------ -----------
Operating loss from continuing operations 7,554 (12,567)
------------ -----------
Other expense:
Interest expense, net 334 138
Other, net 4,547 1,510
------------ -----------
Total other expense 4,881 1,648
------------ -----------
Loss from continuing operations before
income taxes (benefit) 2,673 (14,215)
------------ -----------
Income taxes (benefit) 28,900 -
------------ -----------
Income (loss) from continuing operations (26,227) (14,215)
------------ -----------
(Loss) income from discontinued operations
before reorganization items, net of income
tax (tax benefit) of $(28,900) in 1997 (27,592) 15,069
Reorganization items:
Professional fees (18,421) (39,323)
------------ -----------
Income from discontinued operations (46,013) (24,254)
------------ -----------
Net income (loss) $ (72,240) $ (38,469)
============ ===========
Net income (loss) per common share:
Income (loss) before discontinued operations $ - $ -
Income from discontinued operations (0.01) -
------------ -----------
Net income (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>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1996
<CAPTION>
1997 1996
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Revenue $ 276,145 $ 271,041
------------ -----------
Operating costs and expenses:
Direct cost of services 117,797 100,534
General & administrative expenses 166,318 206,083
------------ -----------
Total operating costs and expenses 284,115 306,617
------------ -----------
Operating loss from continuing operations (7,970) (35,576)
------------ -----------
Other expense:
Interest expense, net 708 116
Other, net 7,668 2,092
------------ -----------
Total other expense 8,376 2,208
------------ -----------
Loss from continuing operations before
income taxes (benefit) (16,346) (37,784)
------------ -----------
Income taxes (benefit) (508,700) -
------------ -----------
Income (loss) from continuing operations 492,354 (37,784)
------------ -----------
(Loss) income from discontinued operations
before reorganization items, net of income
tax (tax benefit) of $(66,600) in 1997 (59,616) 78,237
Reorganization items:
Professional fees (46,226) (90,569)
Income from the sale of discontinued operations,
net of income tax of $575,300 914,306 -
------------ -----------
Income from discontinued operations 808,464 (12,332)
------------ -----------
Net income (loss) $ 1,300,818 $ (50,116)
============ ===========
Net income (loss) per common share:
Income (loss) before discontinued operations $ 0.08 $ (0.01)
Income from discontinued operations 0.13 -
------------ -----------
Net income (loss) per common share $ 0.21 $ (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>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1996
<CAPTION>
1997 1996
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 1,319,126 $ 4,439,049
Cash paid to suppliers and employees (1,797,959) (4,001,658)
Interest paid (20,172) (76,854)
Income taxes paid (900) (1,000)
------------ -----------
Net cash provided from operating activities
before reorganization items (499,905) 359,537
------------ -----------
Operating cash flows from reorganization items:
Professional fees paid for services
rendered in connection with the
Chapter 11 proceeding (46,266) (90,569)
------------ -----------
Net cash used by reorganization items (46,266) (90,569)
------------ -----------
Net cash provided from operating activities (546,171) 268,968
------------ -----------
Cash flows from investing activities:
Proceeds received from the sale of
discontinued operations 1,172,400 -
Capital expenditures (2,620) (16,746)
------------ -----------
Net cash provided from investing activities 1,169,780 (16,746)
------------ -----------
Cash flows from financing activities:
Proceeds from loans from officers and
directors 8,000 22,100
Proceeds of loans from receivables
assignment - post-petition 308,336 3,251,996
Repayment of loans from receivables
assignment - pre-petition - (24,800)
Repayment of loans from receivables
assignment - post-petition (812,379) (3,351,356)
Repayment of equipment loan - post petition (2,913) -
------------ -----------
Net cash used in financing activities (498,956) (102,060)
Net increase in cash 124,653 150,162
Cash at the beginning of period 228,414 78,689
------------ -----------
Cash at the end of period $ 353,067 $ 228,851
============ ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1996
<CAPTION>
1997 1996
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Reconciliation of net income (loss) to net
cash provided from operating activities:
Net income (loss) $ 1,300,818 $ (50,116)
Adjustments to reconcile net income (loss) to
net cash provided from operating activities:
Depreciation 19,009 37,373
Amortization 2,664 3,311
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 747,470 198,197
Decrease in inventory 2,324 1,270
Decrease (increase) in other current
assets (8,451) 2,142
Decrease (increase) in other assets 7,359 (744)
Decrease in accounts payable - pre-petition (52,854) (67,955)
Increase in accounts payable - post-petition 92,298 138,273
Decrease in accrued salaries and benefits
- pre-petition (182,581) (25,918)
Increase (decrease) in accrued salaries and
benefits - post-petition (187,756) 48,043
Decrease in accrued payroll taxes and
withholdings - pre-petition (559,367) (115,388)
Increase (decrease) in accrued payroll taxes
and withholdings - post-petition (101,061) 77,486
Increase (decrease) in other accrued
liabilities - post-petition (100,724) 21,970
Increase (decrease) in accrued interest and
penalties - pre-petition (49,641) 444
Decrease in billings in excess of costs and
anticipated profits - (820)
Increase in deferred revenue 14,828 2,400
Decrease in income taxes payable (900) (1,000)
------------ -----------
Net cash provided from operating activities $ (546,171) $ 268,968
============ ===========
</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 November 30, 1997, the
Condensed Consolidated Statements of Operations for the three and six months
ended November 30, 1997 and 1996, and the Consolidated Statements of Cash
Flows for the six months ended November 30, 1997 and 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, 1997, 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,
1997, 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 November 30, 1997, 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
six month periods ended November 30, 1996, and the Condensed Consolidated
Statements of Cash Flows for the six months then ended have been reclassified
to conform to the November 30, 1997, 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:
<TABLE>
<CAPTION>
PURCHASED ASSETS EXCLUDED ASSETS
---------------- ---------------
<S> <C>
- - All contract 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 (patents, capital stock of ARM,
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 receivable - ARM's rights to occupy real
as of the closing date. property pursuant to leases of
real property and any leasehold
improvements made thereto,
- Any other property identified by
the Purchaser prior to the
closing.
</TABLE>
PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES.
------------------------------------------------------------
Now that the sale has been completed, ARM 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 30-60 days. This Plan is expected to take several
months to receive Bankruptcy Court approval. It is also expected that between
the monies generated from the sale of ARM's contracts rights, plus the
collection of 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 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, 1997,
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 November 30,
1997. 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
November 30, 1997, had approximately 1,000 subscribers and had essentially
reached breakeven operations on a cash basis. 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 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 $1.637 million at
November 30, 1997, 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.
<PAGE>
<PAGE>
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 six months ended November 30, 1997 and 1996.
A reconciliation of the sales price to the net cash received is presented
below:
<TABLE>
<S> <C> <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>
<S> <C> <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 six months ended
November 30, 1997 and 1996 is shown on the next page:
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30, 1997 1997 1996
AND 1996: (Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Revenue $ - $ 2,039,567
------------ -----------
Operating costs and expenses:
Direct cost of services 55 1,257,494
Indirect operating costs 2,211 454,880
General & administrative expenses 53,899 268,507
------------ -----------
Total operating costs and expenses 56,165 1,980,881
------------ -----------
Operating (loss) profit from discontinued
operations (56,165) 58,686
------------ -----------
Other (income) expense:
Interest expense, net 281 38,345
Other, net 46 1,522
------------ -----------
Total other expense 327 39,867
------------ -----------
Income tax (tax benefit) (28,900) -
------------ -----------
(Loss) income from discontinued operations
before reorganization items (27,592) 18,819
Reorganization items - professional fees (18,421) (43,073)
------------ -----------
Loss from discontinued operations $ (46,013) $ (24,254)
============ ===========
SIX MONTHS ENDED NOVEMBER 30, 1997
AND 1996: 1997 1996
(Unaudited) (Unaudited)
------------ -----------
Revenue $ 280,683 $ 3,968,232
------------ -----------
Operating costs and expenses:
Direct cost of services 174,245 2,499,296
Indirect operating costs 74,435 844,670
General & administrative expenses 162,692 461,234
------------ -----------
Total operating costs and expenses 411,372 3,805,200
------------ -----------
Operating (loss) profit from discontinued
operations (130,689) 163,032
------------ -----------
Other (income) expense:
Interest expense, net 14,771 74,760
Other, net (19,244) 10,035
------------ -----------
Total other (income) expense (4,473) 84,795
------------ -----------
Income tax (tax benefit) (66,600) -
------------ -----------
(Loss) income from discontinued operations
before reorganization items (59,616) 78,237
Reorganization items - professional fees (46,226) (90,569)
------------ -----------
Loss from discontinued operations $(105,842) $ (12,332)
============ ===========
</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> <C>
SALES TO UNAFFILIATED CUSTOMERS:
- -------------------------------
QUARTER ENDED:
-------------
November 30, 1997 $ 38,834 $ 104,728 $ 143,562
November 30, 1996 $ 21,611 $ 105,674 $ 127,285
SIX MONTHS ENDED:
----------------
November 30, 1997 $ 75,376 $ 200,769 $ 276,145
November 30, 1996 $ 53,445 $ 217,596 $ 271,041
OPERATING LOSS FROM CONTINUING OPERATIONS BEFORE
OTHER INCOME (EXPENSE) AND INCOME TAXES:
- ---------------------------------------
QUARTER ENDED:
-------------
November 30, 1997 $ (8,380) $ 15,934 $ 7,554
November 30, 1996 $ (5,787) $ (6,780) $ (12,567)
SIX MONTHS ENDED:
----------------
November 30, 1997 $ (8,380) $ 15,934 $ 7,554
November 30, 1996 $ (5,787) $ (6,780) $ (12,567)
</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>
<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, 1997 COMPARED TO
1996
- ---------------------------------------------------------------------------
FROM CONTINUING OPERATIONS
--------------------------
The Company's revenues for the quarter ended November 30, 1997, were
$143,562, or 13% above revenues of $127,285 for the same period during 1996.
The increase of $16,277 in revenues during the quarter ended November 30,
1997, is primarily attributable to the increase in ARS' revenues of $17,223 or
80%, offset by an decrease in ARInternet's revenues of $946 or 1% under the
same period in 1996. The increase in ARS' revenues related to am increase in
the amount of products sold.
The Company's direct cost of services increased $13,148 or 31%, from
$42,822 during the quarter ended November 30, 1996, to $55,970 during the same
period in 1997. Of this amount, ARS increased $13,028 or 90%, while
ARInternet's cost of services increased $120. The increase in direct costs of
ARS was primarily related to the increased sales for the quarter compared to
the same period in 1996.
General and administrative ("G&A") expenses decreased $16,992 or 18%,
from $97,030 in 1996, to $80,038 during 1997. Most notably, the G&A expenses
associated with ARInternet decreased $(23,778), or 28% due to a reduction in
the amount of salaries. ARS' G&A expenses increased $6,786, which was
attributed to an increase in the rent expense resulting from the settlement
with ARC's landlord. The decrease in ARInternet's G&A expenses related to a
reduction in staffing during 1997 when compared to the same period in 1996.
As a result of the foregoing, the Company realized an operating income
from continuing operations for the quarter ended November 30, 1997, of $7,554
compared to an operating loss of $(12,567) for the same period during 1996.
ARS posted an operating loss of $(8,380) for the quarter ended November 30,
1997, which loss represented an regression of $2,593 or 45% from the operating
loss of $(5,787) during the same period in 1996. ARInternet posted an
operating income of $15,934 for the quarter ended November 30, 1997, which
represented a improvement of $22,714 from the operating loss of $(6,780)
during the same period in 1996.
Interest and other expenses increased $3,233, from $1,648 for the
quarter ended November 30, 1996, to $4,881 during the quarter ended November
30, 1997. The increase was primarily related to an increase in the reserve
for uncollectible accounts by ARInternet of $5,000 during the quarter ended
November 30, 1997, when compared to the same period in 1996.
The Company realized a loss from continuing operations of $(26,227) for
the quarter ended November 30, 1997, compared to a loss from continuing
operations of $(14,215) during the same period in 1996. This change in
results from continuing operations was caused by 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 did not change from $(0.00) in 1996 to $(0.00) in 1997.
FROM DISCONTINUED OPERATIONS
----------------------------
ARM's revenues for the quarter ended November 30, 1997, were $0, or
(100)% below revenues of $2,039,567 for the same period during 1996. The
decrease in revenues during the quarter ended November 30, 1997, 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 $1,257,439 or 100%, from
$1,257,494 during the quarter ended November 30, 1996, to $55 during the same
period in 1997. 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 $452,669 or 100%, from $454,880
during the quarter ended November 30, 1996, to $2,211 during the quarter ended
November 30, 1997. This decrease is directly related to a decrease in direct
labor costs incurred.
ARM's general and administrative ("G&A") expenses decreased $214,608 or
80%, from $268,507 in 1996, to $53,899 during 1997. 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
quarter ended November 30, 1997, of $(56,165) compared to operating income of
$58,686 for the same period during 1996. The $114,851 decrease in ARM's 1997
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 $39,540, from $39,867 for
the quarter ended November 30, 1996, to $327 during the quarter ended November
30, 1997. Net interest expense decreased $38,064 or 99% from 1996. The
decrease in interest costs was the result of ARM paying off its secured debt
during July 1997. Other expenses also decreased $1,476 during the quarter
ended November 30, 1997. 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 $(46,013) for
the quarter ended November 30, 1997, compared to a loss of $(24,254) during
the same period last year.
RESULTS FROM OPERATIONS - SIX MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO 1996
- ------------------------------------------------------------------------
FROM CONTINUING OPERATIONS
--------------------------
The Company's revenues for the six months ended November 30, 1997, were
$276,145, or 2% above revenues of $271,041 for the same period during 1996.
The increase of $5,104 in revenues during the six months ended November 30,
1997, is primarily attributable to an increase in ARS' revenues of $21,931 or
41% over the 1996 revenues of $53,445, offset by a decrease in ARInternet's
revenues of $(16,827) or (8%). The decrease in ARInternet's revenues related
to lower average revenues recognized as well as a slight loss in its customer
base during the current period when compared to the same period in 1996.
The Company's direct cost of services increased $17,263 or 17%, from
$100,534 during the six months ended November 30, 1996, to $117,797 during the
same period in 1997. Of this amount, ARS increased $19,342 while ARInternet's
cost of services decreased $(2,079). The increase in direct costs of ARS was
primarily related to the increased sales for the six month period compared to
the same period in 1996. 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 $39,765 or 19%,
from $206,083 in 1996, to $166,318 during 1997. Most notably, the G&A
expenses associated with ARInternet decreased $31,122, while ARS' G&A expenses
decreased $8,643 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 1996. 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 six months ended November 30, 1997, of
$(7,970) compared to an operating loss of $(35,576) for the same period during
1996. ARS posted an operating loss of $(9,623) for the six months ended
November 30, 1997, which loss represented an improvement of $11,231 or 54%
from the operating loss of $(20,854) during the same period in 1996. 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 operating income of $1,653 for the six months
ended November 30, 1997, which represented an improvement of $16,375 from the
operating loss of $(14,722) during the same period in 1996.
Interest and other expenses increased $6,168, from $2,208 for the six
months ended November 30, 1996, to $8,376 during the six months ended November
30, 1997. The increase was primarily related to an increase the reserve for
uncollectible accounts of $5,000 by ARInternet during the six months ended
November 30, 1997 when compared to the same period in 1996.
The Company realized income from continuing operations of $492,354 for
the six months ended November 30, 1997, compared to a loss from continuing
operations of $(37,784) during the same period in 1996. This change in
results from continuing operations was the result of a 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 1996 to $0.08 in 1997.
FROM DISCONTINUED OPERATIONS
----------------------------
ARM's revenues for the six months ended November 30, 1997, were
$280,683, or (93)% below revenues of $3,968,232 for the same period during
1996. The decrease in revenues during the quarter ended November 30, 1997, of
$3,687,549 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 $2,325,051 or 93%, from
$2,499,296 during the six months ended November 30, 1996, to $174,245 during
the same period in 1997. 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 $770,235 or 91% from $844,670
during the six months ended November 30, 1996, to $74,435 during the quarter
ended November 30, 1997. This decrease is directly related to a decrease in
direct labor costs incurred.
ARM's general and administrative ("G&A") expenses decreased $298,542 or
65%, from $461,234 in 1996, to $162,692 during 1997. 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 six
months ended November 30, 1997, of $(130,689) compared to operating income of
$163,032 for the same period during 1996. The $293,721 decrease in ARM's 1997
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 $89,268, from $84,795 for
the six months ended November 30, 1996, to $(4,473) during the six months
ended November 30, 1997. Net interest expense decreased $59,989 or 80% from
1996. The decrease in interest costs was the result of ARM paying off its
secured debt during July 1997. Other expenses also decreased $29,279 during
the six months ended November 30, 1997. 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 $(105,842)
for the six months ended November 30, 1997, compared to a loss of $(12,332)
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 $808,464 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 - 1997 COMPARED TO 1996
- -------------------------------------------------------
Total assets decreased $580,043 or 38%, from $1,514,102 at May 31, 1997,
to $934,059 at November 30, 1997. Total liabilities on the other hand
decreased from $3,832,358 to $1,951,497 over the same period, or a decrease of
$1,880,861, or 49%.
The most significant reason for the decrease in total assets was the
decrease in accounts receivable. At November 30, 1997, the Company had
$207,737 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 $747,470 or 78% 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 $781,218 decrease in post-petition
liabilities collectively, were decreases in: notes payable of $506,956,
accrued salaries and benefits of $187,756, accrued payroll taxes of $101,061
and other accrued liabilities of $99,671, while accounts payable increased by
$92,298. 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 45% during the quarter
ended November 30, 1997, from a deficit of $(2,433,340) at May 31, 1996 to a
deficit of $(1,344,811) at November 30, 1997.
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:
<TABLE>
PURCHASED ASSETS EXCLUDED ASSETS
---------------- ---------------
<S> <C>
- - All contract 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 (patents, capital stock of ARM,
etc.), - Billed accounts receivable as
- - All unbilled accounts receivables of closing
relating to expired contracts as - Intercompany receivables,
January 31, 1997, - All of ARM's cash accounts,
- - All other unbilled accounts - ARM's rights to occupy real
receibable as of the closing date. property pursuant to leases of
real property and any leasehold
improvements made thereto,
- Any other property identified by
the Purchaser prior to the
closing.
</TABLE>
PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES
-----------------------------------------------------------
Now that the sale has been completed, ARM 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 30-60 days. 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 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, 1997,
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 November 30,
1997. 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 November 30, 1997, 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 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
November 30, 1997, 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>
<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 November 24, 1997, for the purpose of electing a board of
directors. 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:
<TABLE>
<CAPTION>
Shares
Voted Shares
Nominee "FOR" "WITHHELD"
----------------- --------- ----------
<S> <C> <C> <C>
Dr. S.P.S. Anand 5,979,314 12,747
Manjit Anand 5,979,314 12,747
Dennis H. O'Brien 5,979,314 12,747
</TABLE>
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.
/s/ Dr. S.P.S. Anand January 19, 1998
- ------------------------------------- ------------------------
Dr. S.P.S. Anand Date
President and Chief Executive Officer
/s/ Dennis H. O'Brien January 19, 1998
- ------------------------------------- ------------------------
Dennis H. O'Brien Date
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOUND ON PAGES 4-6 OF THE COMPANY'S FORM 10-QSB FOR THE SIX MONTHS
ENDED NOVEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> NOV-30-1997
<CASH> 353,067
<SECURITIES> 0
<RECEIVABLES> 207,737
<ALLOWANCES> 0
<INVENTORY> 222
<CURRENT-ASSETS> 606,686
<PP&E> 156,743
<DEPRECIATION> 118,202
<TOTAL-ASSETS> 934,059
<CURRENT-LIABILITIES> 1,951,497
<BONDS> 0
0
0
<COMMON> 3,155
<OTHER-SE> (2,161,122)
<TOTAL-LIABILITY-AND-EQUITY> 934,059
<SALES> 276,145
<TOTAL-REVENUES> 276,145
<CGS> 0
<TOTAL-COSTS> 284,115
<OTHER-EXPENSES> 8,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 708
<INCOME-PRETAX> (16,346)
<INCOME-TAX> (508,700)
<INCOME-CONTINUING> 492,354
<DISCONTINUED> 854,690<F1>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,300,818
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
<FN>
<F1>EQUALS LOSS FROM DISCONTINUED OPERATIONS BEFORE REORGANIZATION OF $(59,616) AND
INCOME FROM THE SALE OF DISCONTINUED OPERATIONS OF $914,306.
</FN>
</TABLE>
