<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended May 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0l-10076
APPLIED RESEARCH CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 86-0585693
- - ------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8201 Corporate Drive, Suite 1110, Landover, Maryland 20785
- - ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301)459-3773
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of Each Class on which registered
-------------------- ----------------------
Common Stock, $.0005 par value None
Check whether the issuer (1) has 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for the fiscal year ended May 31, 1998 were $726,233.
On September 1, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $151,091.
On September 11, 1998, there were 6,311,083 shares of $0.0005 par value Common
Stock outstanding.
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-KSB
PART I Page
Item 1: Description of Business . . . . . . . . . . .4
Item 2: Description of Property . . . . . . . . . . .9
Item 3: Legal Proceedings . . . . . . . . . . . . . .9
Item 4: Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . .9
PART II
Item 5: Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . .10
Item 6: Management's Discussion and Analysis of
Financial Condition and Results
of Operations . . . . . . . . . . . . . . . .11
Item 7: Financial Statements and Supplementary Data .16
Item 8: Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . .16
PART III
Item 9: Directors and Executive Officers of the
Registrant. . . . . . . . . . . . . . . . . .17
Item 10: Executive Compensation. . . . . . . . . . . .17
Item 11: Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . .17
Item 12: Certain Relationships and Related
Transactions. . . . . . . . . . . . . . . . .17
PART IV
Item 13: Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . . .17
Signatures. . . . . . . . . . . . . . . . . . . . . . .40
<PAGE>
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant hereby incorporates by reference the following
Documents:
PART III
Item 9: Directors and Executive Officers of the Registrant
Item 10: Executive Compensation
Item 11: Security Ownership of Certain Beneficial Owners and Management
Item 12: Certain Relationships and Related Transactions
The foregoing are incorporated by reference from the Registrant's
definitive Proxy Statement relating to its annual meeting of Stockholders,
which will be filed in an amendment within 120 days of May 31, 1998.
PART IV - Exhibits
1. Incorporated herein by reference from the Registrant's May 31, 1997,
Annual Report on Form 10-KSB, filed with Securities and Exchange
Commission on September 12, 1997.
2. Incorporated herein by reference from the Registrant's May 31, 1996,
Annual Report on Form 10-KSB, filed with Securities and Exchange
Commission on September 12, 1996.
3. Incorporated herein by reference from the Registrant's May 31, 1995,
Annual Report on Form 10-K, filed with Securities and Exchange
Commission on August 29, 1995.
4. Incorporated herein by reference from the Registrant's May 31, 1994,
Annual Report on Form 10-K, filed with Securities and Exchange
Commission on September 6, 1994.
5. Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on June 28, 1994, S.E.C. File No. 01-10076.
6. Incorporated herein by reference from the Registrant's Current
Report on Form 8-K, dated August 25, 1997, filed with Securities and
Exchange Commission on August 27, 1997, as amended by the
Registrant's Amended Current Report on Form 8-K/A-1 filed with the
Securities and Exchange Commission on September 5, 1997.
7. Incorporated by reference from the Registrant's Registration
Statement on Form S-18, as amended, filed with Securities and
Exchange Commission on June 21, 1989, S.E.C. File No. 33-11943-LA.
<PAGE>
<PAGE>
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
----------------------
(a) Business Development
Applied Research Corporation was organized under the laws of the State of
Colorado on March 26, 1986, as Dollar Ventures, Inc., for the primary purpose
of engaging in a merger with or acquisition of, one or a small number of
private firms. On December 29, 1987, Dollar Ventures, Inc. acquired 100% of
the outstanding shares of common stock of Applied Research Corporation, a
Maryland corporation, in exchange for 5,000,000 shares of Dollar Ventures,
Inc. common stock. The acquisition was legally classified as a
reorganization. For accounting and financial reporting purposes, the
transaction was treated as a reverse acquisition at book value.
Following the acquisition, Applied Research Corporation (the original Maryland
corporation) changed its name to Applied Research of Maryland, Inc. ("ARM"),
and Dollar Ventures, Inc. changed its name to Applied Research Corporation
("ARC"). Applied Research of Maryland, Inc. was a high technology company
specializing in research and development, design and fabrication of sensors
and instrumentation, technical support services and software development. As
a result of continuing operating losses, on April 2, 1996, ARM filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code. On June 19, 1997, the majority of the operating assets of ARM were
sold. On July 30, 1998, ARM's Plan of Reorganization was approved by the
Bankruptcy Court, and ARM emerged from the Chapter 11 process. See Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ARSoftware Corporation ("ARS"), a Maryland corporation and wholly owned
subsidiary of ARC was formed in April, 1992, to diversify ARC's business by
developing niche markets in the computer software industry. The objective of
ARS is to develop and distribute scientific and technical software to
academic, commercial and federal, state and local government entities. ARS is
currently reselling existing products under licensing agreements.
ARInternet Corporation ("ARInternet"), a Maryland corporation and majority
owed (95%) subsidiary of ARC was formed in November 1994, to diversify the
business base of ARC by developing niche markets in the computer online
services industry.
As hereinafter used, and except when otherwise indicated by context, the term
"Company" shall refer to Applied Research Corporation and its wholly- owned
subsidiaries Applied Research of Maryland, Inc. and ARSoftware Corporation and
its majority-owned subsidiary, ARInternet Corporation.
(b) Business of Issuer:
The Company's wholly-owned subsidiary ARSoftware Corporation and its majority-
owned subsidiary ARInternet Corporation, are operating entities. As indicated
above, on June 19, 1997, the Company sold the majority of ARM's assets, at
which time, operations ceased. See additional information below.
APPLIED RESEARCH OF MARYLAND, INC.
- - ----------------------------------
On April 2, 1996, ARM filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code. Under Chapter 11, certain claims
against ARM (the "Debtor") in existence prior to the filing of the petition
for relief under the federal bankruptcy laws were stayed while ARM continued
business operations as Debtor-In-Possession. Subsequent to the filing, ARM
entered into an agreement to sell a majority of ARM's assets. At a Bankruptcy
Court hearing on April 11, 1997, this agreement was subjected to counter
offers, and the sale price ultimately became $1.75 Million (the "Asset
Purchase Agreement"). The court order approving the Asset Purchase Agreement
was signed by the Bankruptcy Court on May 30, 1997. Completion of the sale
was subject to approval of the transfer of certain contract rights and
obligations by ARM's principal customer. Approval was granted 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. See Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations for additional
information on the Bankruptcy proceedings and the sale.
ARM was the principal business of ARC. However, following completion of the
sale of ARM's assets, ARM's operations, for all intents and purposes, ceased.
ARSOFTWARE CORPORATION
- - ----------------------
ARS was established to diversify the Company's business base by developing
niche markets in the computer software industry. Currently, ARS is reselling
selected products to academic institutions, industry and Government agencies,
focusing on end users working on scientific and engineering applications.
ARINTERNET CORPORATION
- - ----------------------
From its inception, ARInternet has been committed to providing to its
customers three essential ingredients for a successful Internet experience:
reliable connectivity, quality service and support and innovative application
of state-of-the-art technology. ARInternet had approximately 750 subscribers
as of May 31, 1998. ARInternet offers monthly, quarterly, semi-annual and
annual subscription agreements, each requiring payment in advance. ARInternet
offers the ability to pay the subscription amounts by credit card to
facilitate payment.
Connectivity
------------
ARInternet provides a reliable, high-speed full-service link to the
Internet, utilizing state-of-the-art networking hardware and software with
built-in capacity for expansion and improvement. ARInternet currently
operates with a T1 connection (1.544Mpbs) off the Sprint backbone. Sprint was
chosen as the Internet provider due to its reputation, the size and scope of
its network, the upgradability of its service and its strong customer support.
In keeping with its clear emphasis on customer service, ARInternet
arranges for almost any type of Internet connection the customer needs, at a
reasonable price.
FULL-SERVICE DIALUP (SHELL) ACCOUNT: Subscribers have access to all
the "standard" connection options, such as e-mail, telnet. ftp, WWW,
gopher, and finger, etc.
SLIP (SERIAL-LINE INTERNET PROTOCOL) AND PPP (POINT-TO-POINT
PROTOCOL) CONNECTIONS: This type of account establishes the customer's
own computer as a peer-to-peer host with all other Internet host
computers. It allows the user to navigate the World Wide Web using
popular multimedia-capable programs, such as Netscape, and to directly
download a vast array of programs from software archives around the
world.
DEDICATED AND LEASED-LINE ACCESS: These connections range from
dedicated phone line access (private line), to high bandwidth frame
relay and Centrex-based ISDN, for those who need full-time or high-speed
access.
Internet Support Services
-------------------------
WWW SERVICES: The remarkable growth of interest in the Internet
that has occurred over the last several years is largely due to the
introduction of the WWW protocol suite and the increasing sophistication
of its graphical browsers. These factors, in combination with the
surging tide of commercialization, have lead to the rapid emergence of
several new phenomena: online advertising via company brochures
(hyperlinked HTML pages), virtual shopping malls, which are really
collections of these documents (stores) organized in creative ways, and
companies providing services in support of these activities.
ARInternet offers several very competitively-priced Web services:
- Hosting of Web pages on ARI servers.
- Collection of customer equipment on ARI's Ethernet.
- Database integration and other customized applications.
- Design and installation of turnkey WWW servers.
INTERNET TRAINING: ARInternet offers customized instruction to meet
the needs of its clients, ranging from introducing staff of a small
business to e-mail and ftp, or guiding managers and systems specialists
through advanced features of various TCP/IP services.
SYSTEMS INTEGRATION AND CONSULTING: Today, many businesses are
installing "Intranet" and "extranets" (virtual private networks which
use the TCP/IP protocol suite) to leverage the tremendous potential of
the technology to deliver information to (and collect information from)
its employees and field agents. ARInternet's network specialists
provide consulting for the design and installation of such systems.
Commitment to growth and innovation
-----------------------------------
The pace of development of Internet-related products and services is
enormous. In order to keep abreast of all of the important new developments
(i.e. Java, ActiveX, VRML) ARInternet has initiated strategic alliances or
sub-contracting relationships with experts in these areas, and as the need
arises, hires new staff with these skills.
RESEARCH AND DEVELOPMENT
- - ------------------------
ARM conducted research and development activities in several areas. Through
its ARInstruments division, ARM conducted research and development related to
the development of a proprietary technique and instrument, the BIO-UVB Meter,
for directly measuring biological effects of solar UVB. During the years
ended May 31, 1998 and 1997, $0 and approximately $95,000 was spent,
respectively on research and development.
ARS does not conduct any significant research and development effort. ARS
does, however, capitalize the cost of producing "product masters", in
accordance with Statement of Financial Accounting Standards No. 86. However,
during the years ended May 31, 1998 and 1997, nothing was spent or
capitalized. ARS does not anticipate any such expenditures for the year ended
May 31, 1999.
ARInternet had no research and development expenditures during the years ended
May 31, 1998 and 1997.
INTELLECTUAL PROPERTY
- - ---------------------
Patents, copyrights, trademarks and trade secrets are the principal protection
source for the Company's intellectual property. The Company also holds
various copyrights covering its published materials and proprietary software,
most of which are derived from original works created by employees of the
Company and/or its subsidiaries or by independent contractors hired under
specific project agreements. The remaining copyrights are held by the Company
through licensing agreements with the authors.
ARM applied for and has been granted two (2) patents relating to instrument
technology it developed. These two patents were sold under the Asset Purchase
Agreement. See Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional information concerning the
sale.
All of the patents, copyrights, trademarks and licenses are considered by the
Company to be valuable property rights. The protection afforded by these
intellectual property rights and the law of trade secrets is believed by the
Company to be adequate. However, notwithstanding the Company's intellectual
property rights, it is possible for a competitor to develop near imitations of
the Company's products by implementing modifications, without violating those
rights.
SEASONALITY
- - -----------
In the past, ARS revenues have been seasonal, with ARS typically showing
greater revenues in the second, third and fourth fiscal quarters. ARS also
has experienced inventory and accounts receivable variations due to the
seasonal nature of its business.
Revenues for ARInternet have not been seasonal.
CUSTOMERS - MARKETS AND MARKETING
- - ---------------------------------
Predominantly all of ARM's revenues (99%) were derived from agencies of the
Government and prime contractors to those agencies. During fiscal 1998, ARM
had one customer that accounted for approximately 34 percent (34%) of its
revenue during the year. This customer, NASA, had 2 contracts with ARM, of
which one contract provided 19 percent (19%) and a second provided 15 percent
(15%) of ARM's revenue. Another customer, Hughes Corporation, had two
contracts which accounted for 64 percent (64%) of ARM's revenue, of which the
largest accounted for 47 percent (47%). The contracts held by ARM were sold
under the Asset Purchase Agreement.
ARS has no significant major customers.
ARInternet has no significant major customers. At May 31, 1998, ARInternet
had approximately 750 subscribers. At May 31, 1997, ARInternet had
approximately 1,000 subscribers.
On a local level, ARInternet reaches its target market primarily through
advertisements placed in the Washington Post. ARInternet intends to increase
its marketing efforts, particularly on a national level, by placing
advertisements in certain widely distributed scientific journals, and,
possibly, through direct mailings to members of its target market.
Additionally, ARInternet participates in a number of e-mail discussion groups
and cultivates subscribers through ARInternet-sponsored Internet training
sessions, and through word-of-mouth advertising.
BACKLOG
- - -------
ARM had no contract backlog as of May 31, 1998, as the contracts were sold on
June 19, 1997, as part of the Asset Purchase Agreement. ARM's backlog of
contracts as of May 31, 1997, was approximately $20.8 million ($2.8 million
funded and $18 million unfunded).
ARS had no backlog at May 31, 1998. ARS also had no backlog at May 31, 1997.
ARInternet's backlog as of May 31, 1998, was approximately $64,300 which
related to prepaid subscriptions received in advance. This amount will be
earned during the current fiscal year. ARInternet's backlog as of May 31,
1997, was approximately $30,000 which related to prepaid subscriptions
received in advance. This amount was earned during fiscal year 1998.
COMPETITION
- - -----------
ARS faces competition from other firms which provide similar products and
services. Some of these firms are larger and better capitalized than ARS.
The Company does not consider any one firm to hold a dominant position in the
industry.
ARInternet faces competition from many businesses offering Internet access
ranging in size from sole proprietorships to large corporations. The services
provided by these competitors vary from simply furnishing Internet
connectivity to providing a full complement of services including e-mail, in-
home shopping and banking, and complete on-line research and document delivery
services. Many of these competitors are larger and have greater financial
resources than ARInternet.
EMPLOYEES
- - ---------
At May 31, 1998, 3 full-time and no part-time employees, all of whom were
employed by ARInternet. Outside consultants with specialized knowledge and
experience in designing and operating TCP/IP networks, client/server and
database application development, CD-ROM publishing and familiarity with
biological and medical resources and markets have been utilized to extend the
Company's capabilities and to enhance the range of services covered. As
resources permit and circumstances warrant, additional personnel with
specialized talents and experience will be added to the present staff.
Anticipated needs include application software developers, customer service
representatives, database specialists, and technical assistants.
ITEM 2. DESCRIPTION OF PROPERTY
----------------------
The Company's corporate headquarters are located at 8201 Corporate Drive,
Landover, Maryland 20785. The existing lease covers 2,561 sq. ft. at a
monthly rate of $4,805 and runs through September 30, 1998. The Company has
negotiated a one year extension though September 30, 1999, but has not signed
a formal lease amendment.
Of the total space, ARS occupies 1,551 sq. ft. of office space and ARInternet
occupies 1,010 sq. ft. of office space. The Company's corporate headquarters
are expected to be adequate to meet the Company's needs for the foreseeable
future.
The Company's capital equipment consists primarily of furniture and office
equipment, laboratory equipment and computer hardware located at its corporate
headquarters. ARS' capital equipment is believed to be adequate to meet its
projected needs for the foreseeable future. ARInternet will require
additional computer-related equipment as its customer base increases. The
amount of such purchases required for fiscal 1999 will depend on growth and
therefore can not be reasonably determined at this time.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Neither ARC, ARS, or ARInternet is currently a party to any pending litigation
or other material legal proceeding.
On April 2, 1996, ARM filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code. Under Chapter 11, certain claims
against ARM in existence prior to the filing of the petition for relief under
the federal bankruptcy laws were stayed while the ARM continued business
operations as Debtor-In-Possession. On July 30, 1998, the Bankruptcy Court
approved ARM's Plan of Reorganization, at which time ARM emerged from Chapter
11. See Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations for additional information concerning the bankruptcy
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1998. <PAGE>
<PAGE>
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
(a) Market Information
The Company's common stock is traded on the Over-the-Counter Electronic
Bulletin Board ("OTCBB") under the symbol "APLS". The high and low bid prices
as quoted on the OTCBB system, are shown below for the period June 1, 1996
through August 31, 1998. The high and low bid information as quoted on the
OTCBB represents prices between brokers and dealers and does not include
retail mark-ups and mark-downs or any commissions to the broker-dealer. The
prices may not reflect prices in actual transactions.
<TABLE>
<CAPTION>
High Low Last
---- --- ----
<S> <C> <C> <C>
FISCAL 1997
First Quarter 0.1500 0.0600 0.0600
Second Quarter 0.1200 0.0200 0.0200
Third Quarter 0.0500 0.0200 0.0250
Fourth Quarter 0.0500 0.0200 0.0200
FISCAL 1998
First Quarter 0.1250 0.0200 0.0500
Second Quarter 0.0800 0.0300 0.0600
Third Quarter 0.0300 0.0300 0.0300
Fourth Quarter 0.0200 0.0200 0.0200
FISCAL 1999
First Quarter 0.0625 0.0200 0.0450
</TABLE>
NUMBER OF SHAREHOLDERS
- - ----------------------
The approximate number of shareholders of record for the Company's common
stock as of August 31, 1998, was 240. This amount represents the number of
certificate holders and excludes individual non-objecting beneficial owners of
the Company's common stock held in "street name".
DIVIDENDS
- - ---------
No cash dividends have been declared on the common stock of the Company for
the fiscal years ending May 31, 1998 and 1997. In addition, while there are
no limitations on the ability of the Company to pay dividends, management does
not anticipate the declaration of a cash dividend on any class of common stock
of the Company in the foreseeable future.
<PAGE>
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 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 (95%) subsidiary, ARInternet
Corporation ("ARInternet"). ARM consisted 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 Consolidated Financial Statements, including the related notes
thereto, appearing elsewhere in this report.
On April 2, 1996, ARM filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code. Under Chapter 11, certain claims
against ARM in existence prior to the filing of the petition for relief under
the federal bankruptcy laws were stayed while ARM continued business
operations as Debtor-In-Possession. Prior to the filing of the Chapter 11
petition, management for ARM had been attempting to sell the assets of ARM.
Subsequent to the filing, and following one (1) unsuccessful attempt to sell a
majority of ARM's assets, ARM entered into an agreement to sell a majority of
ARM's assets to Space Applications Corporation ("SAC"). At a Bankruptcy Court
hearing on April 11, 1997, this agreement was subjected to counter offers from
three qualified bidders and after extensive bidding, an offer was accepted for
$1.75 Million from SAC. Completion of this sale was subject to approval, by
ARM's principal customer, of the transfer of certain contract rights and
obligations, which was received on June 19, 1997, at which time the sale was
completed, with the cash portion of the purchase price being placed in escrow.
The cash placed in escrow was subsequently disbursed to creditors. Following
consummation of the sale of ARM's assets, ARM, for all intents and purposes,
ceased all continuing operations. On July 30, 1998, the Bankruptcy Court
approved ARM's Plan of Reorganization and ARM emerged from the Bankruptcy
process. See Notes to Consolidated Financial Statements, Note 14.
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
- - ---------------------------------------------
From Continuing Operations
- - --------------------------
The Company's revenues for the year ended May 31, 1998, were $456,715, or
(16)% below revenues of $542,575 for the same period during 1997. The
decrease in revenues during the year ended May 31, 1998, of $85,860 is
primarily attributable to the decrease in ARInternet's revenues of $109,131 or
24% when compared with revenues of $462,454 generated during the same period
in 1997. ARS' revenues were $103,392, an increase of $23,271 or 29%, over the
previous year, and partially offset the declines experienced by ARInternet.
The Company's direct cost of services increased $12,759 or 7%, from $180,150
during the year ended May 31, 1997, to $192,909 during the same period in
1998. Of this amount, ARS increased $21,598 while ARInternet's cost of
services decreased $8,839. The increase in direct costs of ARS was primarily
related to the higher sales for the period, compared to the same period in
1997. The decrease in ARInternet's direct costs of sales was the direct
result of the lower sales during the current year.
General and administrative ("G&A") expenses decreased $114,797 or 28%, from
$405,749 in 1997, to $290,952 during 1998. Most notably, the G&A expenses
associated with ARInternet decreased $99,523 or 29%, while ARS' G&A expenses
decreased $15,274 or 26%, during the year ended May 31, 1998. The decrease in
ARS' G&A expenses was predominantly attributable to a reduction in personnel
and marketing related expenses during the period when compared to the same
period in 1997. The decrease in ARInternet's G&A expenses related to a
reduction in staffing during 1998 when compared to the same period in 1997.
As a result of the foregoing, the Company realized an operating loss from
continuing operations for the year ended May 31, 1998, of $(27,146) compared
to an operating loss of $(43,324) for the same period during 1997. ARS posted
an operating loss of $(14,843) for the year ended May 31, 1998, which
represented an improvement of $16,947 or 53% from the operating loss of
$(31,790) 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 $(12,303) for the year ended May 31, 1998, which represented
a regression of $769, or 7%, from the operating loss of $(11,534) during the
same period in 1997. This reduction for ARInternet was directly attributable
to an decrease in the overall revenue levels from the previous year.
Interest and other expenses increased $4,778 or 65%, from $7,379 for the year
ended May 31, 1997, to $12,157 during the current fiscal year. The increase
was primarily related to increased penalties incurred by the Company during
the year ended May 31, 1998, when compared to the same period in 1997.
The Company realized income from continuing operations of $435,897 for the
year ended May 31, 1998, compared to a loss from continuing operations of
$(50,703) during the same period in 1997. This change in results from
continuing operations was the direct result of a $475,200 tax benefit realized
by the Company as a result of its net operating loss carryforwards, which
offset the taxes ascribed to the gain on the sale of ARM's assets.
Based on the foregoing, income (loss) per common share from continuing
operations increased from $(0.01) in 1997 to $0.07 in 1998.
From Discontinued Operations
- - ----------------------------
ARM's revenues for the year ended May 31, 1998, were $269,518, or (97)% below
revenues of $7,727,647 for the same period during 1997. The decrease in
revenues during the year ended May 31, 1998, of $7,458,129 is attributable to
the sale of a majority of ARM's assets which was effective June 19, 1997.
Effective with the sale of ARM's assets, 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 $4,715,375 or 96%, from $4,888,897
during the year ended May 31, 1997, to $173,522 during the same period in
1998. ARM's decrease in direct costs was due to the decrease in direct labor,
which, in turn, was due to the sale of ARM's assets.
ARM's indirect operating costs decreased $1,587,428 or 95% from $1,665,097
during the year ended May 31, 1997, to $77,669 during the same period in 1998.
This decrease is directly related to a decrease in direct labor costs
incurred.
ARM's general and administrative ("G&A") expenses decreased $707,556 or 78%,
from $908,075 in 1997, to $200,519 during 1998. The decrease in ARM's G&A
expenses was directly attributable to the sale of ARM's assets. ARM continued
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 year
ended May 31, 1998, of $(182,192) compared to operating income of $265,578 for
the same period during 1997. The $447,770 decrease in ARM's 1998 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 $286,129, from $273,539 for the
year ended May 31, 1997, to $(12,590) during the same period in 1998. Net
interest expense decreased $154,030 or 96% from 1997. The decrease in
interest costs was the result of ARM paying off its secured debt during July
1997. Other expenses also decreased $66,052 during the year ended May 31,
1998. This was primarily due to the fact that ARM collected a $19,290 debt
during the period which had previously been written off as a bad debt, the
collection of which increased other income. Other expenses also decreased as
a result of decreases in other unallowable costs from 1997. In addition, this
category decreased $60,000 from 1997 due to a one time charge associated with
the first unsuccessful attempted sale of ARM's assets.
ARM sustained a loss before the sale of its assets of $(159,183) for the year
ended May 31, 1998, compared to a loss of $(165,404) during the same period
last year. After recording the gain of $1,489,606 on the sale of ARM's
assets, and after giving affect for the income taxes ascribed to the Sale of
$575,300, ARM reported income of $755,123 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 current financial reporting standards).
LIQUIDITY AND CAPITAL RESOURCES - 1998 COMPARED TO 1997
- - -------------------------------------------------------
Total assets decreased $940,992 or 62%, from $1,514,102 at May 31, 1997, to
$573,110 at May 31, 1998. Total liabilities on the other hand decreased from
$3,832,358 to $1,700,346 over the same period, or a decrease of $2,132,012, or
56%.
The most significant reason for the decrease in total assets was the decrease
in accounts receivable. At May 31, 1998, the Company had $163,477 and $0 in
billed and unbilled receivables, respectively. This compares with $955,207
and $210,542 in billed and unbilled receivables, respectively, reported at May
31, 1997. Billed receivables decreased $791,730 or 83% 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 of ARM's assets 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 of ARM's assets, as all unbilled receivables were
purchased by SAC.
The most significant reasons for the $1,032,369 decrease in post-petition
liabilities collectively, were decreases in: notes payable of $510,011,
accounts payable of $155,028, accrued salaries and benefits of $189,123,
accrued payroll taxes of $122,697, other accrued liabilities of $91,662 and
accrued income taxes payable of $1,000, while deferred revenue increased by
$34,232 and loans to officers and directors increased by $2,910. The
decreases were caused by the payment of the post-petition liabilities after
the sale of ARM's assets was completed. The majority of the post-petition
accounts payable consisted of unpaid professional fees related to the
bankruptcy proceeding, a majority of which, have been approved by the
Bankruptcy Court and 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) in accrued payroll taxes and withholdings, and $(49,641)
in accrued interest and penalties. All of these decreases resulted from
payments from the proceeds of the sale of ARM's assets to SAC, and/or the
assumption of certain ARM liabilities by SAC.
As a result of the foregoing, the Company's working capital deficit improved
by 41% during the year ended May 31, 1998, from a deficit of $(2,433,340) at
May 31, 1997 to a deficit of $(1,440,230) at May 31, 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 a
third party purchaser.
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 principal 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 continued 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 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.
Thereafter, these agreements continued to be renewed by the Bankruptcy Court.
While ARM was in bankruptcy, it curtailed accruing interest on all pre-
petition obligations except the amounts owed CFC, the secured lender approved
by the Bankruptcy Court.
Sale of ARM's Government Contracts.
- - -----------------------------------
On March 3, 1997, the Company accepted a 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, 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 of 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. This 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 as
- - - All unbilled accounts receivable of closing,
relating to expired contracts as - Intercompany receivables,
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. property pursuant to leases of
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.
- - ------------------------------------------------------------
After the sale was completed, ARM filed a Plan of Reorganization, which, among
other things, specified how much of the outstanding pre-petition liabilities
would be paid and over what period of time. On July 30, 1998, the Plan was
approved by the Bankruptcy Court. Between the monies generated from the sale
of ARM's assets plus the collection of outstanding accounts receivable (which
were not part of the sale), there were not sufficient monies to liquidate all
of ARM's pre-petition liabilities. See Note 14 to the Consolidated Financial
Statements for the amounts that are expected to be paid as part of the
approved Plan of Reorganization.
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 was controlled by
the Bankruptcy Court. As part of the approved Plan of Reorganization,
ARInternet agreed to pay as settlement for the inter-company amounts owed to
the Debtor: 1) $150,000 over three years, 2) half of any net surplus in cash
flow derived from ARS or ARInternet operations after debt service, and 3) half
of the net profit from any future sale of ARInternet. This settlement is
secured by a lien on all assets of ARS and ARInternet, and was personally
guaranteed by the President of ARC.
Impact on ARC after the Sale of ARM is Completed.
- - -------------------------------------------------
During the fiscal year ended May 31, 1998, ARM's operations constituted 37% 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 and ARInternet
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, as
of May 31, 1998, had approximately 750 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 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 $1.4 million at May 31, 1998, will be either liquidated or discharged
(See Note 14). 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 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.
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.
Other than the foregoing, the Company is not aware of any trends, demands or
uncertainties that are reasonably likely to have a material impact on the
Company's results of operations and/or liquidity and capital resources.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Index to Consolidated Financial Statements and Supplementary Data: Page
- - ----------------------------------------------------------------- ----
Report of Independent Auditors 19
Financial Statements:
Consolidated Balance Sheet - May 31, 1998 20-21
Consolidated Statements of Operations - Years Ended
May 31, 1998 and 1997 22
Consolidated Statements of Changes in Stockholders'
Deficit - Years Ended May 31, 1998 and 1997 23
Consolidated Statements of Cash Flows - Years Ended
May 31, 1998 and 1997 24-25
Notes to Consolidated Financial Statements 26-37
The Financial Statement Schedules and Exhibits
are Listed in Part IV Item 13 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
NONE<PAGE>
<PAGE>
PART III
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Part III, Items 9, 10, 11 and 12, are incorporated by reference from the
Registrant's definitive Proxy Statement relating to its Annual Meeting of
Shareholders which will be filed in an amendment within 120 days of May 31,
1998.
PART IV
-------
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) Certain documents filed as part of the Form 10-KSB
(1) The financial statements included are listed
in Part II Item 7 16
(b) Reports on Form 8-K.
The Company did not file any Current Report on Form 8-K
during the quarter ended May 31, 1998.
(c) Index to Exhibits 38
All schedules not included herewith are presented in the
footnotes to the consolidated financial statements or are not applicable.
<PAGE>
<PAGE>
==============================================================================
APPLIED RESEARCH CORPORATION
FINANCIAL STATEMENTS
==============================================================================
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Applied Research Corporation:
We have audited the accompanying consolidated balance sheet of Applied
Research Corporation and subsidiaries as of May 31, 1998, the consolidated
statements of operations, changes in stockholders' deficit and cash flows for
the years ended May 31, 1998 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Applied
Research Corporation and subsidiaries as of May 31, 1998, and the consolidated
results of their operations and their cash flows for the years ended May 31,
1998 and 1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3,
substantially all of the assets of the Company's principal subsidiary were
sold during June 1997. In addition, that subsidiary emerged from bankruptcy
in July 1998, and the remaining assets will be used to repay pre and post-
petition creditors as directed by the approved plan of reorganization. At May
31, 1998, the two remaining subsidiaries had a combined working capital
deficit of approximately $240,000. In addition, both subsidiaries have a
history of losses. The foregoing factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ARONSON, FETRIDGE & WEIGLE
Rockville, Maryland
July 30, 1998
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
- - ------
CURRENT ASSETS
Cash (Note 2) $ 46,965
Accounts receivable, net (Note 4) 163,477
Due from Space Applications Corporation,
short-term (Notes 3 and 14) 34,900
Other current assets 14,774
-------------
TOTAL CURRENT ASSETS 260,116
-------------
PROPERTY AND EQUIPMENT, AT COST (Notes 2 and 5)
Furniture and equipment 20,728
Computer equipment 136,458
Leasehold improvements 200
-------------
157,386
Less accumulated depreciation and amortization 131,892
-------------
NET PROPERTY AND EQUIPMENT 25,494
-------------
OTHER ASSETS
Due from Space Applications Corporation,
long-term (Notes 3 and 14) 287,500
-------------
TOTAL ASSETS $ 573,110
=============
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - Continued
MAY 31, 1998
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES
- - -----------
CURRENT LIABILITIES
Liabilities not subject to compromise:
Notes payable (Note 5) $ 2,120
Loans payable to an officer and director (Note 12) 44,810
Accounts payable 263,995
Accrued salaries and benefits (Notes 6 and 7) 39,434
Accrued payroll taxes and withholdings 6,874
Other accrued liabilities 62,125
Deferred revenue (Note 2) 64,267
-------------
Total liabilities not subject to compromise 483,625
-------------
Liabilities subject to compromise: (Notes 3 and 14)
Accounts payable 272,338
Accrued salaries and benefits (Notes 6 and 7) 382,781
Accrued payroll taxes and withholdings (Note 8) 166,039
Accrued interest and penalties (Notes 7 and 8) 395,563
-------------
Total liabilities subject to compromise 1,216,721
-------------
TOTAL CURRENT LIABILITIES 1,700,346
-------------
TOTAL LIABILITIES 1,700,346
-------------
STOCKHOLDERS' DEFICIT
- - ---------------------
Preferred stock, $.10 par value, 40,000,000 shares
authorized, none issued -
Common stock, $.0005 par value, 60,000,000 shares
authorized, 6,311,083 shares issued and
outstanding (Note 11) 3,155
Capital in excess of par value 1,140,529
Accumulated deficit (2,270,920)
-------------
TOTAL STOCKHOLDERS' DEFICIT (1,127,236)
-------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 7, 8, 10, 11 and 14)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 573,110
=============
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Revenue (Notes 2 and 13) $ 456,715 $ 542,575
------------- -------------
Operating costs and expenses:
Direct cost of services 192,909 180,150
General & administrative expenses 290,952 405,749
------------- -------------
Total operating costs and expenses 483,861 585,899
------------- -------------
Operating loss from continuing operations (27,146) (43,324)
------------- -------------
Other expense:
Interest expense, net 857 1,531
Penalties 9,018 4,927
Other, net 2,282 921
------------- -------------
Total other expense 12,157 7,379
------------- -------------
Loss from continuing operations before
income taxes (39,303) (50,703)
Income tax benefit 475,200 -
------------- -------------
Income (loss) from continuing operations 435,897 (50,703)
------------- -------------
Loss from discontinued operations before
reorganization items, net of income tax
of $(65,500) in 1998 and $619 in 1997
(Note 14) (104,102) (8,580)
Reorganization items:
Professional fees, net of income tax benefit
of $(34,700) in 1998 (55,081) (156,824)
Income from the sale of discontinued operations,
net of income tax of $575,300 914,306 -
------------- -------------
Income (loss) from discontinued operations 755,123 (165,404)
------------- -------------
Net income (loss) $ 1,191,020 $ (216,107)
============= =============
Basic net income (loss) per common share:
Income (loss) before discontinued operations $ 0.07 $ (0.01)
Income (loss) from discontinued operations 0.12 (0.03)
------------- -------------
Basic net income (loss) per common share $ 0.19 $ (0.03)
============= =============
Weighted average number of shares of
common stock and common stock equivalents
outstanding 6,311,083 6,311,083
============= =============
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common
Stock Capital in
Par Excess of Accumulated Stockholders'
Value Par Value Deficit Deficit
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance
May 31, 1996 $ 3,155 $ 1,140,529 $ (3,245,833) $ (2,102,149)
Net loss - - (216,107) (216,107)
------------- ------------- ------------- -------------
Balance
May 31, 1997 3,155 1,140,529 (3,461,940) (2,318,256)
Net income - - 1,191,020 1,191,020
------------- ------------- ------------- -------------
Balance
May 31, 1998 $ 3,155 $ 1,140,529 $ (2,270,920) $ (1,127,236)
============= ============= ============= =============
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 1,552,778 $ 8,561,558
Cash paid to suppliers and employees (2,293,286) (7,922,503)
Interest paid (12,206) (165,539)
Income taxes paid (1,000) (1,000)
------------- -------------
Net cash provided from (used by) operating
activities before reorganization items (753,714) 472,516
Operating cash flows from reorganization items:
Professional fees paid for services
rendered in connection with the
Chapter 11 proceeding (89,781) (156,824)
------------- -------------
Net cash provided from (used by)
operating activities (843,495) 315,692
------------- -------------
Cash flows from investing activities:
Proceeds received from the sale of
discontinued operations 1,172,400 -
Capital expenditures (3,263) (26,425)
------------- -------------
Net cash provided by (used by)
investing activities 1,169,137 (26,425)
------------- -------------
Cash flows from financing activities:
Proceeds of loans from officer and director 2,910 37,900
Proceeds from equipment loans - not
subject to compromise - 9,774
Proceeds of loans from receivables
assignment - not subject to compromise 308,336 6,466,890
Repayment of loans from receivables
assignment - subject to compromise - (24,800)
Repayment of loans from receivables
assignment - not subject to compromise (812,379) (6,627,610)
Repayment of equipment loan - not
subject to compromise (5,958) (1,696)
------------- -------------
Net cash used by financing activities (507,091) (139,542)
------------- -------------
Net increase (decrease) in cash (181,449) 149,725
Cash at the beginning of year 228,414 78,689
------------- -------------
Cash at the end of year $ 46,965 $ 228,414
============= =============
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Reconciliation of net income to net cash
provided from (used by) operating activities:
Net income (loss) $ 1,191,020 $ (216,107)
Adjustments to reconcile net income (loss)
to net cash provided from (used in)
operating activities:
Depreciation 32,700 77,124
Amortization 3,997 6,622
Provision for contract losses - (60,000)
Gain on 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 791,730 358,936
Increase (decrease) in inventory 2,546 (1,054)
Increase (decrease) in other current assets (12,465) 18,784
Increase (decrease) in other assets 7,359 (744)
Decrease in accounts payable -
subject to compromise (52,854) (78,620)
Increase (decrease) in accounts payable -
not subject to compromise (155,028) 256,709
Decrease in accrued salaries and benefits -
subject to compromise (182,581) (40,589)
Increase (decrease) in accrued salaries and
benefits - not subject to compromise (189,123) 51,983
Decrease in accrued payroll taxes and
withholdings - subject to compromise (559,367) (205,388)
Increase (decrease) in accrued payroll
taxes and withholdings - not subject
to compromise (122,697) 72,428
Increase (decrease) in accrued interest and
penalties - subject to compromise (49,641) 7,496
Increase (decrease) in other accrued
liabilities - not subject to compromise (92,717) 76,122
Decrease in billings in excess of costs and
anticipated profits - (9,999)
Increase in deferred revenue 34,232 2,400
Decrease in income taxes payable (1,000) (411)
------------- -------------
Net cash provided from (used by)
operating activities $ (843,495) $ 315,692
============= =============
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
1. ORGANIZATION
------------
Applied Research Corporation is organized under the laws of the state of
Colorado and is comprised of two wholly-owned subsidiaries, Applied Research
of Maryland, Inc. ("ARM") and ARSoftware Corporation ("ARS"), and one
majority-owned subsidiary, ARInternet Corporation ("ARInternet"). In
addition, the Company formed ARInstruments Division ("ARInstruments"), an
unincorporated commercial instrumentation division of ARM.
ARM was a high technology company specializing in research and development,
design and fabrication of sensors and instrumentation, technical support
services and scientific related software creation. ARM's major areas of
service included Astronomy and Astrophysics, Atmospheric Sciences,
Meteorology, the Space Sciences and Computer Related Analytical Services. On
April 2, 1996, ARM filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code. On June 19, 1997, substantially all of the
assets of ARM were sold, and thereafter, ARM discontinued all continuing
operations. On July 30, 1998, the Bankruptcy Court approved ARM's Plan of
Reorganization, whereby ARM emerged from Chapter 11. See Notes 3 and 14 to
the Consolidated Financial Statements for additional information.
ARS was established in April 1992, to diversify the business base of the
Company by developing niche markets in the computer software industry. ARS is
currently reselling existing products under licensing agreements.
ARInternet was established in November 1994, to diversify the business base of
the Company by developing niche markets in the on-line computer services
industry. ARInternet is an Internet provider and plans on providing
scientific and other information to the scientific and engineering
communities.
Applied Research Corporation maintains only minimal resources and derives all
of its income from its subsidiaries. As hereinafter used, Applied Research
Corporation or the term "Company" shall refer to Applied Research Corporation
and its subsidiaries, except when otherwise indicated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
- - ---------------------------
The accompanying consolidated financial statements include the accounts of
Applied Research Corporation and its wholly and majority-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Contract Revenue
- - ----------------
Revenue on cost-plus fixed fee contracts was recorded on the basis of
recoverable direct costs incurred plus indirect expenses and an allocable
portion of the fixed fee. Fixed price contracts were accounted for under the
percentage of completion method measured by cost of services performed to
total estimated cost of services. Revenue under time and material contracts
was recorded at negotiated rates as labor hours and other direct costs are
incurred. Cost-to-complete estimates were reviewed periodically and revised
as required and a provision for estimated losses on contracts was recorded
when identified.
All contract costs, including direct and indirect costs are subject to audit
by the Defense Contract Audit Agency ("DCAA") and ultimate reimbursement of
costs is contingent upon the outcome of such audits. As of May 31, 1998, the
DCAA has completed audits for the years 1982 to 1996 and all adjustments
resulting from these audits are reflected in the consolidated financial
statements presented.
On June 19, 1997, the Company sold its unbilled receivables, so the 1997 and
1998 audits will not result in any adjustments to the financial statements.
Software Revenue
- - ----------------
ARS resells software products developed by other companies as well as state of
the art proprietary software products developed by the Company for use in the
scientific and engineering communities. Revenue is recorded when the software
program is shipped to the customer.
Subscription Revenue
- - --------------------
ARInternet provides online computer access to the internet (information super
highway). ARInternet offers monthly, quarterly, semi-annual and annual
subscriptions to its customers. These subscriptions are billable in advance.
ARInternet recognizes revenue on an as-earned basis. Deferred revenue is
recorded for amounts received from customers in advance. Subscriptions may be
canceled by the customer at any time, upon written notice.
Cash Equivalents
- - ----------------
Cash equivalents are defined as highly liquid short-term investments whose
maturity dates do not extend past three months from the original date of
purchase. At May 31, 1998, the Company held no such investments.
Depreciation and Amortization
- - -----------------------------
Depreciation of furniture, office equipment and computer equipment is computed
on the straight-line method over the estimated useful economic lives of the
assets, generally 3 to 5 years. Leasehold improvements are amortized over the
estimated economic life of the improvement or the remaining term of the lease,
whichever is shorter.
Minority Interest in Consolidated Subsidiary
- - --------------------------------------------
The Company owns 95% of ARInternet which was formed during November 1994.
However, because the minority interest in net losses of ARInternet exceeded
the carrying value of the minority interest amount at May 31, 1998, no
minority interest has been reflected in the consolidated financial statements.
In the future, if ARInternet earns profits, to the extent that such profits
attributable to the minority interest exceed the minority interest losses
absorbed by the Company, such minority interest will be recognized in the
financial statements.
Use of Estimates in Preparation of Financial Statements
- - -------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Income Taxes
- - ------------
Deferred income taxes result from temporary differences in the recognition of
revenue and expenses for financial accounting and tax purposes. The principal
source of temporary differences relates to differences in the amount of
financial statement and tax treatment of net operating loss carryforwards,
compensated absences, capitalized software development costs, certain accrued
expenses and certain accrued contract amounts.
Income (Loss) Per Share of Common Stock
- - ---------------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS no. 128). This statement established standards for computing and
presenting earnings per share. In accordance with this statement, basic net
income (loss) per share of common stock has been computed based on the
weighted average number of shares of common stock outstanding for the period.
Diluted net income per share of common stock is computed on the weighted
average number of shares of common stock and common stock equivalents
outstanding for the year. Diluted net income (loss) per share has not been
shown in 1998 and 1997 as the stock options would be anti-dilutive.
3. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11/SALE OF ARM'S ASSETS 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 petition for relief under the federal bankruptcy laws were stayed while
ARM continued business operations as Debtor-In-Possession. These claims are
reflected in the information provided in Note 14 under "liabilities subject to
compromise". Claims secured against the ARM's assets ("secured claims") also
were stayed, although the holders of such claims had the right to move the
court for relief from the stay. Secured claims were 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 continue to operate the business. Prior to the emergency hearing, ARM
reached an agreement with the IRS and its principle 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 of cash seized by the IRS on April 1, 1996. Subsequent monthly
payments continued 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 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.
Thereafter, these agreements continued to be renewed by the Bankruptcy Court.
While ARM was in bankruptcy, it curtailed accruing interest on all pre-
petition obligations except the amounts owed CFC, the secured lender approved
by the Bankruptcy Court.
Sale of ARM's Government Contracts.
- - -----------------------------------
On March 3, 1997, the Company accepted a 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, 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 of 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. This 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 as
- - - All unbilled accounts receivable of closing,
relating to expired contracts as - Intercompany receivables,
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. property pursuant to leases of
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.
- - ------------------------------------------------------------
After the sale was completed, ARM filed a Plan of Reorganization, which, among
other things, specified how much of the outstanding pre-petition liabilities
would be paid and over what period of time. On July 30, 1998, the Plan was
approved by the Bankruptcy Court. Between the monies generated from the sale
of ARM's contracts rights plus the collection of outstanding accounts
receivable (which were not part of the sale), there was not sufficient monies
to liquidate all of ARM's pre-petition liabilities. See Note 14 for the May
31, 1998, amounts that are expected to be paid as part of the approved Plan of
Reorganization.
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 was controlled by
the Bankruptcy Court. As part of the approved Plan of Reorganization,
ARInternet agreed to pay as settlement for the inter-company amounts owed to
the Debtor: 1) $150,000 over three years, 2) half of any net surplus in cash
flow derived from ARS or ARInternet operations after debt service, and 3) half
of the net profit from any future sale of ARInternet. This settlement is
secured by a lien on all assets of ARS and ARInternet, and was personally
guaranteed by the President of ARC.
Impact on ARC after the Sale of ARM's assets was Completed.
- - -----------------------------------------------------------
During the fiscal year ended May 31, 1998, ARM's operations constituted 37% 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 and ARInternet
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, as
of May 31, 1998, had approximately 750 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 sale of ARM's assets dramatically changed the Company's balance sheet and
statement of operations. Through the bankruptcy proceeding, all of ARM's
debts, which total $1.4 million at May 31, 1998, will be either liquidated or
discharged (See Note 14). 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 Company may in
fact benefit from the sale of ARM's assets. 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's assets.
4. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable are comprised of the following at May 31, 1998:
Billed accounts receivable $ 165,105
Less: allowance for doubtful accounts 1,628
-------------
Accounts receivable - net of allowance $ 163,477
=============
Principally all of the ARM's revenues were generated from contracts with
departments or agencies of the U.S. Government ("Government") and are subject
to audit by Government auditors (see Note 2 - Contract Revenue). In 1998 and
1997, net sales to the Government or to prime contractors under Government
contracts amounted to approximately $269,518 and $7,632,300, respectively.
The Company extends unsecured credit to essentially all of its customers. As
of May 31, 1998, billed accounts receivable included approximately $127,010,
due from either the Government or from prime contractors under Government
contracts.
5. NOTES PAYABLE
-------------
Notes payable are comprised of the following at May 31, 1998:
Equipment loan $ 2,120
-------------
Total notes payable $ 2,120
=============
During September 1996, ARInternet entered into an equipment financing
arrangement to provide capital to purchase equipment and related software.
The loan carries an interest rate of 10%, is payable over two years and is
secured by the equipment.
6. ACCRUED SALARIES AND BENEFITS
-----------------------------
Accrued salaries and benefits are comprised of the following at May 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
Liabilities not subject to compromise:
Accrued salaries $ 12,600
Accrued vacation 5,083
Retirement plan contributions
(employer) (see Note 7) 6,307
Retirement plan contributions
(employee) (see Note 7) 13,699
Retirement plan loan payments (employee) 1,745
-------------
Total accrued salaries and benefits -
not subject to compromise $ 39,434
=============
Liabilities subject to compromise:
Accrued vacation $ 86,856
Retirement plan contributions
(employer) (see Note 7) 201,632
Retirement plan contributions
(employee) (see Note 7) 93,412
Retirement plan loan payments
(employee) 881
-------------
Total accrued salaries and benefits -
subject to compromise $ 382,781
=============
</TABLE>
As part of the agreement to sell the majority of assets of ARM, the purchaser
agreed to assume $255,200 of the combined pre and post-petition vacation
liability. In addition, the purchase agreement provides for total combined
payments to the 401(k) plan of $530,917, of which $271,017 has been made as of
May 31, 1998. Subsequent to May 31, 1998, the purchaser agreed to make the
final two payments early (originally due in June 1999 and June 2000), in
exchange for discounting the payments at a discount rate of 10%. The discount
amounts to $25,620. The President of ARC has agreed to personally pay the
discount amount to the Plan.
7. RETIREMENT PLAN
---------------
The Company has a retirement plan (401(k) Plan) which is available to all
qualified employees. Employee contributions up to 10 percent of annual
compensation, $10,000 for calendar year 1998, may be made to the plan. The
Company provides matching funds up to 25 percent of the employee's
contributions to the plan. The plan provides that forfeitures may be used to
reduce the Company's contribution. The Company's matching funds, net of
forfeitures, totaled $0 and $39,647 in 1998 and 1997, respectively.
As of April 2, 1996, ARM had not remitted employee contributions of $326,383,
employer contributions of $203,449, and loan payments of $37,103, as well as
$109,000 of accrued interest to the Plan. Prior to the bankruptcy filing, ARM
had accrued interest at the rate of 15% per annum on the unpaid employee
withholdings and approximately 5% on the unpaid employer contributions. Of
the total amount due to the Plan of $675,935 as of April 2, 1996, $530,917 is
scheduled to be paid as part of the Asset Purchase Agreement.
The Company's failure to remit 401(k) contributions in a timely fashion and/or
bring its past due obligations current may subject the Company to legal
proceedings seeking to collect unpaid contributions, together with interest
thereon, liquidated damages and attorney's fees.
During December 1995, the Department of Labor ("DOL") conducted an
investigation into the Company's 401(k) Plan and the status of the past due
contributions. During April 1998, DOL filed a civil suit against the
President of ARC, as plan trustee, seeking approximately $118,000.
During 1996, the IRS notified the Company of its intent to audit the 1994 tax
return for the Plan. Although the Company has cooperated with the IRS, there
has been no indication from the IRS that it will seek to impose any interest
and/or penalties on the Company as a result of the past due contributions.
Therefore no estimate can be made regarding any potential additional
liabilities. Any amounts imposed by the IRS would be subject to approval by
the Bankruptcy Court. At May 31, 1998, other than the interest that has
already been accrued as discussed above, no additional amounts have been
recorded.
8. WITHHOLDING TAXES
-----------------
As of April 2, 1996, ARM had not remitted pre-petition federal payroll tax
withholdings and unemployment taxes totaling $764,755. ARM accrued penalties
and interest on those delinquent amounts totaling approximately $315,000
through April 2, 1996. During 1998, $559,367 of the pre-petition federal
payroll tax withholdings and unemployment taxes were paid upon the closing of
the ARM asset sale.
As of April 2, 1996, ARM was also delinquent in remitting $153,062 of 1995 and
1996 state withholding taxes, as well as $12,977 in 1996 state unemployment
taxes. These claims are all pre-petition claims covered by the Bankruptcy
proceeding. Collection of these taxes are stayed by the Bankruptcy
proceeding. See Note 14 for the amount of state taxes that are expected to be
paid as part of the approved Plan of Reorganization.
9. INCOME TAXES
------------
Statement of Financial Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
SFAS 109 provides that deferred tax assets be reduced by a valuation allowance
if it is more likely than not that some portion of the deferred asset will not
be realized.
The tax effects of temporary differences computed at statutory rates in effect
as of May 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred tax assets:
Accrued vacations $ 35,000
Bad debt allowances 1,000
Unfunded pension (employer) 80,000
Unfunded pension (employee) 36,000
Depreciation 8,000
Accrued interest 51,000
Deferred revenue 25,000
Net operating loss (NOL)
carryforward 214,000
------------
450,000
Valuation allowance (450,000)
-------------
$ -
=============
</TABLE>
The net decrease in the deferred tax asset valuation allowance during the 1998
was $476,000. In recognizing its deferred tax assets, the Company has used
assumptions about levels of future pretax income that are consistent with
historical results.
The Company had federal taxable income of approximately $1,344,000 for fiscal
1998, which was fully absorbed by application of NOL carryforwards. The
Company had a net loss for federal income tax purposes of approximately
$(570,000) for fiscal year 1997. A provision for current state income taxes
for fiscal year 1997 of $619 has been included in the determination of net
income. This provision arose from the reporting of taxable income by the
Company's ARM subsidiary on its separately filed state returns. The Company
no longer files returns with the states giving rise to the 1997 tax provision
and, therefore, no provision for current state income taxes has been included
in the determination of net income for fiscal year 1998.
At May 31, 1998, the Company has unused net operating loss (NOL) carryforwards
of approximately $555,000 for consolidated federal and state income tax
purposes. These carryforwards expire between fiscal years 2012 and 2013, if
not previously used.
10. LEASE COMMITMENTS
-----------------
The Company has a noncancelable operating lease for its office facilities
which expires in September 1998. This lease is subject to standard real
estate escalation factors and building operating expense pass-throughs.
Rental expense for operating leases was approximately $66,600 and $201,600 for
the years ended May 31, 1998, and 1997, respectively.
Future minimum operating lease payments on the noncancelable lease is as
follows:
Fiscal Year 1999 $ 19,200
-------------
11. STOCK OPTION PLAN
-----------------
Under the terms of its 1986 stock option plan, options to purchase shares of
the Company's common stock were granted at $.50 per share, which was the
market price at the time of the reorganization of the Company. All shares
were exercisable over a 5 year period at 20 percent per year and if
unexercised, expire 10 years from the date of grant. As of May 31, 1998,
there were no options outstanding under the 1986 plan.
During fiscal 1995, the Company adopted a new incentive stock option plan.
This plan was approved by the shareholders on November 15, 1995. Under this
plan, the Company may issue options to purchase up to 300,000 shares of the
Company's common stock, at a price not less than the then current market price
of the Company's common stock. All shares are exercisable over a 5 year
period at 20 percent per year and if unexercised, expire no later than 10
years from the date of grant.
The following is a summary of transactions for common shares under options as
of May 31, 1998:
Stock Under Options:
Outstanding, beginning of year 211,000
Granted during the year -
Canceled or expired during year (51,000)
-------------
Outstanding, end of year 160,000
=============
Shares eligible for exercise at
end of year 120,000
=============
As of May 31, 1998, no options issued under the plans have been exercised.
12. RELATED PARTY TRANSACTION
-------------------------
During fiscal 1997 and 1998, the President advanced $37,900 and $2,910,
respectively, to ARInternet and ARS to cover operating expenses. These
advances in addition to $4,000 in advances in a prior period, do not bear
interest and are due on demand. Therefore these advances have been shown as
short term loans payable in the accompanying financial statements.
13. SIGNIFICANT CUSTOMERS
---------------------
For fiscal 1998, one customer of ARM accounted for approximately 12 percent of
the Company's total revenue. This customer, NASA, had 2 contracts with the
Company of which one contract provided 7 percent and a second provided 5
percent of total revenue. Another customer of ARM accounted for 24 percent of
the Company's revenue during the year. This customer, Hughes Corporation
("Hughes"), had two contracts with the Company of which one provided 18
percent of total revenue.
For fiscal 1997, one customer of ARM accounted for approximately 33 percent of
the Company's total revenue. This customer, NASA, had 8 contracts with the
Company of which one contract provided 18 percent and a second provided 14
percent of total revenue. Another customer of ARM accounted for 56 percent of
the Company's revenue during the year. This customer, Hughes Corporation
("Hughes"), had two contracts with the Company of which one provided 42
percent of total revenue.
14. DISCONTINUED OPERATIONS
-----------------------
On June 19, 1997, the Company consummated the sale of substantially all of the
assets of ARM to SAC (the "Sale").
A reconciliation of the sales price to the net cash received is as follows:
<TABLE>
<CAPTION>
<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>
<CAPTION>
<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>
On July 30, 1998, the Bankruptcy Court approved ARM's Plan of Reorganization.
ARM's balance sheet as of May 31, 1998, and a pro-forma balance sheet adjusted
to reflect the approved Plan of Reorganization, as if it had taken place on
May 31, 1998, is shown below:
<TABLE>
<CAPTION>
Pro-Forma
Adjusted for
Court
Approved
Plan of
As of Reorgan-
May 31, 1998 ization
------------- -------------
<S> <C> <C>
ASSETS
- - ------
CURRENT ASSETS
Cash $ 38,859 $ 38,859
Accounts receivable from customers, net 127,010 127,010
Intercompany advances receivable 1,601,205 150,000
Due from Space Application Corporation,
short-term 34,900 34,900
Other current assets 12,184 12,184
------------- -------------
TOTAL CURRENT ASSETS 1,814,158 362,953
------------- -------------
PROPERTY AND EQUIPMENT, AT COST
Total property and equipment, at cost - -
Less accumulated depreciation and
amortization - -
------------- -------------
NET PROPERTY AND EQUIPMENT - -
------------- -------------
OTHER ASSETS:
Due from Space Applications
Corporation, long-term 287,500 287,500
------------- -------------
TOTAL ASSETS $ 2,101,658 $ 650,453
------------- -------------
LIABILITIES
- - -----------
CURRENT LIABILITIES:
Liabilities not subject to compromise:
Accounts payable $ 136,200 $ 136,200
Other accrued liabilities 60,540 60,540
------------- -------------
Total liabilities not subject to
compromise 196,740 196,740
------------- -------------
Liabilities subject to compromise:
Accounts payable 272,338 -
Accrued salaries and benefits 382,781 259,900
Accrued payroll taxes and withholdings 166,039 150,000
Accrued interest and penalties 395,563 43,813
------------- -------------
Total liabilities subject to compromise 1,216,721 453,713
------------- -------------
TOTAL CURRENT LIABILITIES 1,413,461 650,453
------------- -------------
STOCKHOLDERS' EQUITY
- - --------------------
Investment by ARC 1,029,621 1,029,621
Accumulated deficit (341,424) (1,029,621)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 688,197 -
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,101,658 $ 650,453
============= =============
</TABLE>
A summary of ARM's results from operations for the years ended May 31, 1998
and 1997, are shown below:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Revenue $ 269,518 $ 7,727,647
Operating costs and expenses:
Direct cost of services 173,522 4,888,897
Indirect operating costs 77,669 1,665,097
General & administrative expenses 200,519 908,075
------------- -------------
Total operating costs and expenses 451,710 7,462,069
------------- -------------
Operating profit from discontinued operations (182,192) 265,578
------------- -------------
Other (income) expense:
Interest expense, net 6,654 160,684
Expenses associated with the sale - 60,000
Penalties 57 6,104
Other, net (19,301) 46,751
------------- -------------
Total other expense (12,590) 273,539
------------- -------------
Income tax (tax benefit) (65,500) 619
------------- -------------
Loss from discontinued operations before
reorganization items (104,102) (8,580)
Reorganization items - professional fees,
net of income tax benefit of
$(34,700) in 1998 (55,081) (156,824)
------------- -------------
Loss from discontinued operations $ (159,183) $ (165,404)
============= =============
</TABLE>
5. INDUSTRY SEGMENT INFORMATION
----------------------------
The Company's continuing operations have been classified into two business
segments:
<TABLE>
<CAPTION>
ARS ARInternet Consolidate
--- ---------- -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers:
Years ended:
------------
May 31, 1998 $ 103,392 $ 353,323 $ 456,715
May 31, 1997 $ 80,121 $ 462,454 $ 542,575
Operating loss from continuing
operations before income taxes:
Years ended:
------------
May 31, 1998 $ (14,843) $ (12,303) $ (27,146)
May 31, 1997 $ (31,790) $ (11,534) $ (43,324)
Capital expenditures:
Years ended:
-------------
May 31, 1998 $ - $ 3,263 $ 3,263
Depreciation and amortization:
Years ended:
------------
May 31, 1998 $ 4,253 $ 32,444 $ 36,697
May 31, 1997 $ 7,754 $ 36,603 $ 44,357
Research and development costs:
Years ended:
-------------
May 31, 1998 $ - $ - $ -
May 31, 1997 $ - $ - $ -
Identifiable assets at:
Years ended:
------------
May 31, 1998 $ 14,714 $ 57,943 $ 72,657
</TABLE>
Operating loss equals total net revenues less operating expenses. In
computing operating loss, items comprising other income (expense) have not
been added or deducted.
Identifiable assets by segment are those assets that are used in the Company's
operations in each industry segment, net of intercompany eliminations.<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION
FORM 10-KSB FOR THE YEAR ENDED MAY 31, 1998
INDEX TO EXHIBITS
Number Description
- - ------ -----------
3.1 Articles of Incorporation of Applied Research Corporation
(Note 1)
3.2 Amended Articles of Incorporation of Applied Research Corporation
(Note 1)
3.3 By-Laws of Applied Research Corporation (Note 1)
4.1 Specimen Certificate of Common Stock (Note 2)
4.2 Specimen Class A Common Stock Purchase Warrant (Note 2)
4.3 Specimen Subscription Agreement (Note 2)
10.1 Employment Agreements (Note 1)
10.2 Sovran Bank Loan (Note 1)
10.3 401(k) Plan of Applied Research Corporation (Note 1)
10.4(a) Lease Agreement on Maryland Property, dated October 22, 1993 (Note
3)
10.4(b) First Amendment to Lease Agreement on Maryland Property, dated
October 22, 1993 (Note 3)
10.4(c) Second Amendment to Lease Agreement on Maryland Property, dated May
12, 1994 (Note 3)
10.4(d) Third Amendment to Lease Agreement on Maryland Property, dated
January 13, 1997 (Note 7)
10.4(e) Fourth Amendment to Lease Agreement on Maryland Property, dated
August 1997 (Note 7)
10.5 Patent (Note 4)
10.6 Patent (Note 4)
10.7 Contract with Hughes Applied Information Systems, dated 6-03-93
(Note 3)
10.8 Contract with NASA, dated 9-27-93 (Note 3)
10.9 Contract with NASA, dated 1-10-94 (Note 3)
10.10 (a) Financing Agreement with PrinCap Finance Company, L.L.C., dated
March 21, 1994 (Note 3)
10.10 (b) Amended Financing Agreement with Princeton Capital Finance Company,
L.L.C., dated May 10, 1995 (Note 4)
10.10 (c) Default letter from Princeton Capital Finance Company, L.L.C., dated
November 14, 1995 (Note 5)
10.11 1994 Incentive Stock Option Plan (Note 4)
10.12 (a) Consolidated Asset Purchase Agreement with Fidelity Technologies
Corporation (Note 5)
10.12 (b) Asset Purchase Agreement with Space Applications Corporation (Note
7)
10.12 (c) First Amendment to the Asset Purchase Agreement with Space
Applications Corporation (Note 7)
10.12 (d) Second Amendment to the Asset Purchase Agreement with Space
Applications Corporation (Note 7)
10.13 Intercompany Settlement Agreement between ARM, ARS and ARI
(Note 8)
10.14 Security Agreement between ARS and ARI as the "Obligor" and ARM as
the "Second Party" (Note 8)
10.15 Promissory Note of ARI and ARS in the original principal amount of
$150,000 (Note 8)
10.16 Guaranty of Payment executed by S.P.S. Anand as Guarantor
(Note 8)
10.17(a) Debtor's Plan of Reorganization (Note 8)
10.17(b) Disclosure Statement (Note 8)
10.17(c) Order Confirming Debtor's Plan of Reorganization (Note 8)
10.17(d) Addendum to Order confirming Debtor's Plan of Reorganization (Note
8)
16.1 Letter of Friedman & Fuller, dated August 25, 1997 (Note 6)
21 Subsidiaries of the Registrant (Note 8)
27 Financial Data Schedule (Note 8)
Notes to Exhibits:
- - ------------------
(1) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Registration Statement on Form, S-
18, as amended, filed with Securities and Exchange Commission on
June 2, 1989, S.E.C. File No. 33-11943-LA.
(2) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Registration Statement on Form, S-3,
filed with Securities and Exchange Commission on June 28, 1994,
S.E.C. File No. 01-10076.
(3) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1994, filed with Securities and Exchange
Commission on September 6, 1994, S.E.C. File No. 01-10076.
(4) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1995, filed with Securities and Exchange
Commission on August 29, 1995, S.E.C. File No. 01-10076.
(5) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 1996, filed with Securities and Exchange
Commission on September 12, 1996, S.E.C. File No. 01-10076.
(6) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Current Report on Form 8-K, dated
August 25, 1997, filed with Securities and Exchange Commission on
August 27, 1997, S.E.C. File No. 01-10076.
(7) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 1997, filed with Securities and Exchange
Commission on September 12, 1997, S.E.C. File No. 01-10076.
(8) Filed herewith.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Applied Research Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized:
APPLIED RESEARCH CORPORATION
/s/ S.P.S. Anand September 14, 1998
- - ------------------------------------ ------------------
Dr. S.P.S. Anand, Director, Date
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ S.P.S. Anand September 14, 1998
- - ------------------------------------ ------------------
Dr. S.P.S. Anand, Director Date
/s/ Manjit K. Anand September 14, 1998
- - ------------------------------------ ------------------
Dr. Manjit K. Anand, Director & Treasurer Date
/s/ Dennis H. O'Brien September 14, 1998
- - ------------------------------------ ------------------
Dennis H. O'Brien, Director, Secretary, Date
Vice President & Chief Financial Officer
<PAGE>
INTERCOMPANY SETTLEMENT AGREEMENT BETWEEN APPLIED RESEARCH OF
MARYLAND, INC. AND ARSOFTWARE, INC. AND ARINTERNET, INC.
THIS AGREEMENT made this ___ day of __________, 1998, by and between
ARSoftware, Inc. and ARInternet, Inc. (hereinafter jointly and severally
referred to as the "Obligor") and Applied Research of Maryland, Inc.
(hereinafter referred to as the "ARM").
WHEREAS, ARM filed a Chapter 11 Petition in the U.S. Bankruptcy Court for
the District of Maryland; and
WHEREAS, ARM has claims against ARSoftware and ARInternet for
intercompany loans; and
WHEREAS, Obligor agrees to pay to ARM the sum of One-Hundred Fifty-
Thousand Dollars ($150,000.00) to settle said claims; and
WHEREAS, Obligor agrees to provide collateral to secure the payment of
its obligation to ARM; and
WHEREAS, a Plan of Reorganization was approved by the Bankruptcy Court on
the ___ day of __________, 1998 approving the settlement of the Parties.
NOW, THEREFORE, in consideration of the mutual representations, covenants
and agreements contained herein, and upon the terms and subject to the
conditions hereinafter set forth, the parties do hereby agree as follows:
1. Obligor agrees to pay to the Obligee the sum of One-Hundred Fifty
Thousand Dollars ($150,000.00), in thirty six (36) equal
installments of Four Thousand One Hundred and Sixty-Seven Dollars
($4,167.00) per month commencing the ___ day of __________, 1998 and
due and payable on the ___ day of each month thereafter until paid
in full. Obligor shall execute concurrent herewith a promissory
note, security agreement and financing statements. Obligor agrees to
execute any and all documents, and perform any other actions,
necessary for the Obligee to maintain a perfected security interest
in the agreed upon collateral. The amount to be paid by ARSoftware
and ARInternet is not subject to interest, however, in the event of
a default interest shall accrue at the rate of twelve percent (12%)
per annum. Further, in the event that payments are not timely made
a late fee equal to five percent (5%) of the monthly amount shall be
incurred.
2. If for any fiscal year the cash flow of ARS and ARI exceeds its
operating expenses and any debt service including the debt service
required under this Agreement, then one-half (1/2) of the surplus
of the Net Cash Flow shall be paid to the Obligee.
Net Cash Flow is defined as that sum remaining after the payment of
operating expenses, including debt service, on a consistent
historical basis. Net Cash Flow shall be supported by a Statement of
Cash Flow prepared in accordance with GAAP. The fiscal year-end for
ARSoftware and ARInternet is May 31, and the fiscal year ending May
31, 1998 shall be the base line. Commencing on September 1, 1998
and each year thereafter, if appropriate, the monthly payment shall
be increased by one-twelfth (1/12) of the net surplus, the total of
which shall equal one-half (1/2) of the Net Cash Flow. For each
fiscal year where there is a net surplus the payments shall continue
for twelve (12) consecutive months. The Statement of Cash Flow and
supporting documents shall be delivered to James M. Greenan,
Greenan, Walker, Trainor & Billman, Attorneys for Obligee commencing
August 31, 1998 and on the 31st day of August each year thereafter
until the promissory note is paid in full.
In calculating Net Cash Flow, future general administrative expenses
should not exceed as a percentage of sales the greater of those
years ended May 31, 1997 and May 31, 1998.
3. ARSoftware and ARInternet will be jointly and severally liable for
the settlement amount. The obligations of ARSoftware and ARInternet
will be secured by all of their assets, including equipment,
fixtures, accounts receivable, copy rights and intangibles.
4. In the event the stock or assets ARSoftware and/or ARInternet are
sold during the three (3) year payout period, the net proceeds of
any such sale, after payment of all costs of sale and payment to any
outstanding creditors of the sold entity including the Promissory
Note, shall be split equally between the Obligee and the
shareholders of the sold entity.
5. Dr. S.P.S. Anand shall guaranty the obligations of ARSoftware and
ARInternet as provided in this Agreement and will execute a Guaranty
concurrent herewith.
6. Failure of Obligor to abide by any of the terms of the Agreement
shall constitute a default. Should Obligor fail to cure any default
within ten (10) days of written notice of default, ARM may declare
the entire indebtedness due and payable, exercise all its rights
available pursuant to the Promissory Note, Security Agreement and
Guaranty and exercise any and all legal and equitable available to
it against Obligor and Guarantor.
7. All notices and other formal communications under this Agreement or
required by law shall be in writing and shall be by certified or
registered mail:
Notices to ARI and ARS, 8201 Corporate Drive, Suite 1120,
Landover, Maryland 20785; and to ARM in c/o James M. Greenan,
Esquire, Greenan, Walker, Trainor & Billman, 6411 Ivy Lane
Suite, 706, Greenbelt, Maryland 20770.
8. Miscellaneous
-------------
The parties hereto agree to cooperate fully in the execution,
acknowledgment and delivery of all instruments, pleadings and other
papers and to take such other action as may be necessary to further
carry out and fully accomplish the intent and purpose of this
Agreement.
This instrument contains the entire understanding and agreement
amount the parties concerning the subject matter of this Agreement,
and this Agreement supersedes and merges herein all prior and
contemporaneous understandings, agreements, covenants, negotiations
and representations concerning the subject matter of this Agreement.
Any party's failure to insist on compliance or enforcement of any
provision of this Agreement shall not affect its validity or any
other provision of this Agreement. The rights and remedies provided
herein and all other agreements, instruments and documents delivered
pursuant hereto or in connection herewith, are cumulative and are in
addition to and not exclusive of any rights or remedies provided by
law.
This Agreement shall be construed in accordance with the laws of the
State of Maryland.
Applied Research of Maryland, Inc.
By: ----------------------------------
- - -
ARInternet, Inc.
By:
-----------------------------------
ARSoftware, Inc.
By:
-----------------------------------
<PAGE>
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT made this ___ day of __________, 1998, by and
between ARSoftware, Inc. and ARInternet, Inc. (hereinafter jointly and
severally referred to as the "Obligor") and Applied Research of Maryland, Inc.
(hereinafter referred to as the "Secured Party").
RECITALS
--------
1. WHEREAS, ARI and ARS entered into a Intercompany Settlement
Agreement (the "Intercompany Agreement") dated __________ ___, 1998
and,
2. WHEREAS, Obligor, jointly and severally agree to pay to the Obligee
the sum of One-Hundred Fifty Thousand Dollars ($150,000.00), in
thirty six (36) equal installments of Four Thousand One Hundred and
Sixty-Seven Dollars ($4,167.00) per month commencing the ___ day of
__________, 1998 and due and payable on the ___ day of each month
thereafter until paid in full and,
3. WHEREAS, Obligor, agrees to provide collateral to secure the payment
of its Obligation to ARM.
NOW, THEREFORE, in consideration of the terms extended to them
pursuant to the Intercompany Agreement and in order to secure the prompt
payment of the Obligation set forth therein and all charges and advances, as
herein provided, the receipt and sufficiently of which is hereby acknowledge,
the parties hereto agree as follows:
1. RECITALS. The Recitals are hereby incorporated by reference into
this Agreement.
2. INDEBTEDNESS AND PLEDGE.
(a) In order to secure the due and timely observance and
performance of Obligee's covenants and obligations under the Intercompany
Settlement Agreement and Promissory Note, and in order to induce Secured Party
to enter into an Intercompany Settlement Agreement with Obligor to settle its
claims against Obligor, Obligor hereby pledges and grants to Secured Party a
security interest in the property described in Section 2 below ("Collateral").
3. COLLATERAL. The Collateral consists of:
(a) All equipment, inventory and fixtures of Obligee, now owned or
hereafter acquired by Obligor;
(b) All accounts receivables;
(c) All copyrights and intangibles;
(d) All proceeds of and contract rights relating to any and all of
the Collateral. For purposes of this Agreement, the term "proceeds" includes
whatever is receivable or received when any item of Collateral is sold,
collected, exchanged or otherwise disposed of, whether such disposition is
voluntary or involuntary, and all rights to payment, including return
premiums, with respect to any insurance provided for hereunder.
4. COVENANTS WITH RESPECT TO COLLATERAL.
(a) Obligor shall (i) maintain, preserve and protect the Collateral
and keep it in good condition and repair; (ii) take all reasonable steps to
protect the Collateral against theft and casualty; (iii) duly observe all
applicable legal and insurance requirements with respect to the operation of
its business and the use, sale or other disposition of the Collateral; (iv)
pay when due all taxes assessments, charges, encumbrances and liens now or
hereafter imposed upon or affecting any part of the Collateral; (v) shall keep
and maintain property insurance for the above-mentioned collateral, with
carriers and against all risks and liabilities in a minimum amount of
____________________ Dollars ($__________), and to apply the proceeds of any
claim thereunder, to replacement of the Collateral. Obligor shall furnish the
Secured Party with a certificate of insurance as evidence of compliance with
the provisions of this paragraph and the Secured Party shall be named as a co-
insured; (vi) assume all risks and agree that no loss, damage or casualty
shall release Obligor from any obligations hereunder; (vii) keep accurate and
complete records of the Collateral and any disposition thereof and provide
Secured Party with such accounts, reports and information relating to the
disposition of the Collateral as Secured Party may require from time to time;
(viii) keep the Collateral free of all liens, charges and encumbrances; (ix)
except as provided in subsection (b) below, not surrender or lose possession
of, sell, encumber, lease, or otherwise dispose of or transfer any Collateral
or any right or interest therein; (x) the Collateral shall be kept at 8201
Corporate Drive, Suite 1120, Landover, Maryland 20785 where the Secured Party
may inspect it at any time. The Collateral may be removed in whole or in part
from this location only with the written consent of the Secured Party.
5. EVENTS OF DEFAULT. If any one or more of the following described
events of default ("Events of Default") shall occur: (a) any Event of Default
specified in this Promissory Note, or Intercompany Settlement Agreement, (b)
any breach of any provision of this Security Agreement; (c) any breach of any
obligation, or covenant in the agreement and upon failure, within ten (10)
days of written notice of such "event of default", Secured Party may (1)
declare the entire obligation immediately due and payable and proceed to
collect same, (2) require Obligor to assemble the Collateral and deliver or
make it available to Secured Party at a place to be designated by Secured
Party, (3) enter onto the property or without judicial process, (4) foreclose,
realize upon or otherwise enforce Secured Party's security interest in any
manner permitted by law or provided for in this Agreement, (5) sell, lease or
otherwise dispose of any Collateral at one or more public or private sales on
such terms and in such manner as Secured Party may determine, and (6) recover
from Obligor all charges, costs and expenses, including reasonable attorney's
fees, incurred or paid by Secured Party in exercising any right, power or
remedy provided by this Agreement or by law.
6. CUMULATIVE REMEDIES; NO WAIVER.
(a) All rights, powers and remedies of Secured Party hereunder are
cumulative and not alternative, shall be in addition to all rights, powers and
remedies given to Secured Party by virtue of any statute, rule of law or other
agreement, and may be exercised successively or concurrently without thereby
impairing any interest of Secured Party in the Collateral.
(b) Any forbearance or delay by Secured Party in exercising any
right, power or remedy shall not constitute a waiver or preclude the further
exercise thereof or the exercise of any other right, power or remedy. This
Agreement and terms hereof shall not be modified, amended, waived, discharged
or terminated except by an instrument in writing signed by Secured Party.
7. BINDING EFFECT.
All rights of Secured Party hereunder shall inure to the benefit of
its successor and assigns, and all obligations of Obligor shall bind its
successors and assigns.
8. MISCELLANEOUS.
(a) All notices and other formal communications under this
Agreement or required by law shall be in writing and shall be by certified or
registered mail according to the following terms:
Notices to Obligor shall be sent to 8201 Corporate Drive, Suite 1120,
Landover, Maryland 20785; and notices to Secured Party shall be sent to James
M. Greenan, Esquire, Greenan, Walker, Trainor & Billman, 6411 Ivy Lane Suite,
706, Greenbelt, Maryland 20770.
(b) If any of the provisions of this Agreement shall contravene or
be held invalid under the laws of any jurisdictions, the provisions shall be
construed as if such provisions were omitted and the rights and obligations of
the parties shall be enforced accordingly. This Security Agreement shall be
governed by the Laws of the State of Maryland.
(c) Obligor may convey the assets described herein as secured to a
bona fide purchaser thereof subject to this Security Agreement, only with the
written consent of the Secured Party, which consent shall not be unreasonably
withheld, provided that any such conveyance consented to by the Secured Party
shall not be deemed to relieve the Obligor from its continuing joint and
several liability and obligation as represented by that Promissory Note
described herein and attached hereto in the event that such third party shall
default in the payment thereof when and as prescribed therein.
(d) Obligor shall have the right to deal in and with the assets
secured hereby in favor of the Secured Party provided that the same is done in
the ordinary course of continuing business operated by Obligor for purposes of
replacement and/or improvement and the consent of the Secured Party as to
dispositions of the property secured hereby shall not be required in such
events except as provided for in (c) above upon a bulk transfer of said
property to a third party.
(e) Should Obligor acquire any property in connection with the
premises and businesses referred to herein, it may finance the acquisition
thereof by granting a security interest therein at the time of acquisition to
a vendor thereof or financing institution lending funds in connection
therewith, without the consent of the Secured Party, but all equity value
owned or acquired by Obligor in such property shall become and be subject to
the security interest granted hereby to the Secured Party.
WITNESS: ARSoftware, Inc.
- - -------------------- --------------------------------------
By: S.P.S. Anand, President
ARInternet, Inc.
--------------------------------------
By: S.P.S. Anand, President
<PAGE>
PROMISSORY NOTE
---------------
$150,000.00 Greenbelt, Maryland
______________, 1998
FOR VALUE RECEIVED, THE UNDERSIGNED ARInternet, Inc. and ARSoftware, Inc.
("Maker"), jointly and severally promise to pay to the order of Applied
Research of Maryland Inc., One Hundred Fifty Thousand Dollars ($150,000.00).
PAYMENT: Maker shall pay the balance due herein in thirty-six consecutive
monthly installments, of Four Thousand One Hundred and Sixty-Seven Dollars
($4,167.00) commencing on the ___ day of __________, 1998 and continuing
thereafter for a full term of thirty-six months, until the Principal Amount is
paid in full.
INTEREST: The amount to be paid by ARInternet and ARSoftware is not subject
to interest, however, in the event of a default interest thereafter shall
accrue on the entire balance until paid in full at the rate of twelve percent
(12%) per annum.
LATE PAYMENT: In the event that any payment is not made within five (5) days
of its due date, a late fee equal to five percent (5%) of the monthly amount
shall be due and payable.
AMOUNT OF PAYMENTS: Monthly payments of principal shall be in the amount of
Four Thousand One Hundred and Sixty-Seven Dollars ($4,167.00).
PREPAYMENT: The Maker has the privilege to prepay any portion of the entire
Principal Amount of this Note at any time without penalty.
DEFAULT AND ACCELERATION: At the option of Applied Research of Maryland, Inc.
the unpaid balance of this Note shall become immediately due and payable after
ten (10) days written notice and failure to cure (a) if any payment required
by this Note is not made when due; or (b) upon the occurrence of a default or
noncompliance of any of the terms or conditions contained in the Intercompany
Settlement Agreement and Security Agreement of even date herewith by and
between ARInternet, Inc. and ARSoftware, Inc. and Applied Research of
Maryland, Inc.
WAIVER OF NOTICE AND PRESENTMENT: The Maker and any guarantors or endorsers
hereof, jointly and severally, waive presentment, notice of dishonor and
protest, and assent to any extension of time with respect to any payment due
under this Note, to any substitution or release of collateral and to the
addition or release of any party. Any waiver of any payment or any right
under this Note shall not operate as a waiver of any other payment or right.
APPLICATION OF PAYMENTS: All payments on account of this Note, when paid,
shall be applied first to the payment on of all interest then due on the
unpaid balance of the Principal Amount and the balance, if any, shall be
applied in reduction of the unpaid balance of the Principal Amount.
PLACE OF PAYMENT: All payments of the unpaid balance of the Principal Amount
thereon shall be paid in lawful money of the United States of America during
regular business hours at Greenan, Walker, Trainor & Billman, 6411 Ivy Lane
Suite 706, Greenbelt, Maryland 20770 or at such other place as Applied
Research of Maryland, Inc. may at any time or from time to time designate in
writing to the maker.
COSTS OF COLLECTION: If this Note is forwarded to an attorney for collection
after maturity hereof (whether by acceleration, declaration, extension, or
otherwise), the Maker and any quarantors and endorsers hereof, jointly and
severally, shall pay on demand all costs and expenses of collection, including
attorney's fees of fifteen percent (15%) of the unpaid balance of the
Principal Amount then outstanding.
CONFESSION OF JUDGMENT: After maturity of this Note whether by acceleration,
declaration, extension, or otherwise, the Maker and any guarantors or
endorsers hereof, hereby authorize any attorney designated by the Lender or
any clerk of any court of record to appear for Maker and any guarantors or
endorsers hereof to appear in any court of record and confess judgment against
the Maker and any guarantors or endorsers of the Note, without prior hearing,
in favor of the Lender for and in the amount of unpaid balance of the
Principal Amount, then outstanding plus interest accrued and unpaid thereon,
together with costs of suit and attorney's fees of fifteen percent (15%) of
the unpaid balance of the Principal Amount then outstanding.
MISCELLANEOUS: It is agreed that if this Note is executed in, or the
collateral covered by said Note or Pledge Agreement are intended for or
maintained in any jurisdiction where the inclusion of a clause authorizing the
judgment by confession is prohibited, then the provisions hereof with respect
thereto shall be treated as if they do not appear herein.
ENTIRE AGREEMENT: This Note contains the full agreement of the parties stated
herein and may be modified only by writing executed by all parties hereto.
GOVERNING LAW: This Note is secured by an Agreement of even date herewith and
shall be construed under and governed by the laws of the State of Maryland.
IN WITNESS WHEREOF, the Maker has caused this Note to be executed in its
name, under its seal, and on its behalf the day and year first written above.
WITNESS/ATTEST ARSoftware, Inc.
- - -------------------- --------------------------------------
By: S.P.S. Anand, President
ARInternet, Inc.
--------------------------------------
By: S.P.S. Anand, President
<PAGE>
GUARANTY OF PAYMENT
-------------------
THIS GUARANTY OF PAYMENT (this "Guaranty"), made this ___ day of
__________, 1998, to Applied Research of Maryland, Inc. ("ARM"), by S.P.S.
Anand (the "Guarantor"). ARM and Guarantor are sometimes collectively
referred to herein as the "Parties" or individually as "Party."
WHEREAS, ARInternet, Inc. and ARSoftware, Inc. (collectively, the
"Obligor") is indebted to ARM in the amount of One Hundred and Fifty Thousand
Dollars ($150,000.00) [the "Obligation"] as evidenced by an Intercompany
Settlement Agreement, a Promissory Note, and Security Agreement dated
______________, 1998; and
WHEREAS, S.P.S. Anand has agreed to guarantee the full payment of the
Obligation to ARM; and
WHEREAS, in order to secure Guarantor's payment of the Obligation,
Guarantor has provided ARM with certain collateral; and
WHEREAS, ARM has agreed to accept said Guaranty and collateral upon the
terms and conditions stated herein.
NOW THEREFORE, in consideration of the terms extended to ARSoftware, Inc.
and ARInternet in the Intercompany Settlement Agreement and Plan of
Reorganization in "Re Applied Research of Maryland, Inc." in the United States
Bankruptcy Court of the District of Maryland, Case Number 96-1-2425-DK, that
shall be deemed to be a substantive part of the Guaranty, and based upon the
mutual covenants, promises, agreements, representations contained in this
Guarantee, the Guarantor does hereby covenant, promise, agree, represent and
warrant as follows:
1. GUARANTY. The Guarantor hereby unconditionally and irrevocably
guarantees to ARM the full and punctual payment of all of the Obligation by
Obligor, when and as said Obligation shall become due and payable, including,
without limitation all interest and related expenses.
As to the Guarantor, the guarantee provided for in this section is an
absolute unconditional, continuing guarantee of payment and not of
collectability, and is in no way conditioned upon or limited by: (a) any
attempt to collect from the Obligor; (b) any attempt to collect from, or the
exercise of any rights and remedies against, any person other than Obligor who
may at any time now or hereafter be primarily or secondarily liable for any or
all of the Obligation, including, without limitation, any other maker,
endorser, surety, or guarantor of all or a portion of the Obligation; or (c)
any resort or recourse to or against any security or collateral now or
hereafter pledged, assigned, or granted to ARM. If the Obligor fails to pay
any of the Obligation, when and as the same shall become due and payable
(whether by acceleration, declaration, extension or otherwise), the Guarantor
shall on demand pay the same to ARM in immediately available funds, in lawful
money of the United States of America, at its address as specified herein.
2. NATURE OF OBLIGATIONS. The obligators and liabilities of the
Guarantor under this Guaranty are primary obligations of the Guarantor, are
continuing, absolute, and unconditional, shall not be subject to any
counterclaim, recoupment, set-off, reduction, or defense based upon any claim
that the Guarantor may have against the Obligor, are independent of any other
guaranty or guaranties at any time in effect with respect with to all or any
part of the Guaranty, and may be enforced regardless of the existence of such
other guaranty or guaranties.
3. WAIVER BY GUARANTOR. The Guarantor unconditionally waive to the
extent permitted by applicable Laws; (a) presentment, demand, dishonor,
protest, notice of non-payment, and notice of dishonor of the Obligation, the
Intercompany Settlement Agreement, Promissory Note or Security Agreement; (b)
all notices required by statute, rule of law, or otherwise to preserve any
rights against the Guarantor hereunder, including, without limitation, any
demand, proof, or notice of non-payment of any of the Obligation by Obligor,
to perform or comply with any obligation relating to or arising from the
Obligation; and (c) until such time as the provisions of this Guaranty are no
longer in effect, any right to subrogation against ARM and any right to
subrogation, reimbursement, and indemnity against any property or other
security serving at any time as collateral for any or all of the Obligation.
4. DEFAULT. The occurrence of any one or more of the following events
shall constitute an event of default (an "Event of Default") under this
Guaranty: (a) the failure of the Guarantor to pay to ARM as and when due and
payable any and all amounts payable by the Guarantor to ARM under the
provisions of the Promissory Note; (b) the failure of the Guarantor to
perform, observe, or comply with any of the provisions of this Guaranty; (c)
the occurrence of any event of default (as defined therein) under the
Intercompany Settlement Agreement.
Whenever there is an Event of Default under this Guaranty, ARM may at its
option, declare an amount equal to any or all of the then unpaid balance of
the Obligation (whether then due or not) to be immediately due and payable by
the Guarantor, and the Guarantor shall, on demand pay the same to ARM in
immediately available funds in lawful money of the United States of America,
at its address specified herein.
5. ENFORCEMENT EXPENSES. The Guarantor shall indemnify and hold
harmless ARM against any loss, liability, or expense, including attorneys'
fees and disbursements and any other fees and disbursements, that may result
from any failure of Obligor to pay any of the Obligation when and as due and
payable or that may be incurred by or on behalf of ARM in enforcing any
obligation of Obligor or the Guarantor, to pay any of the Obligation.
6. CONFESSION OF JUDGMENT. UPON THE OCCURRENCE OF A DEFAULT AS
DESCRIBED HEREIN, THE GUARANTOR HEREBY AUTHORIZES ANY ATTORNEY DESIGNATED BY
THE GUARANTOR OR ANY CLERK OF ANY COURT OF RECORD IN MARYLAND TO APPEAR FOR
THE GUARANTOR IN ANY COURT OF RECORD IN THE STATE OF MARYLAND, VIRGINIA, OR IN
ANY JURISDICTION THE UNITED STATES OF AMERICA AND CONFESS JUDGMENT AGAINST THE
GUARANTOR WITHOUT PRIOR HEARING IN FAVOR OF APPLIED RESEARCH OF MARYLAND, INC.
FOR, AND IN THE AMOUNT OF THE UNPAID BALANCE DUE OF THE OBLIGATION, ALL
ACCRUED AND UNPAID INTEREST THEREON, ALL OTHER AMOUNTS PAYABLE BY THE
GUARANTOR TO APPLIED RESEARCH OF MARYLAND, INC. PURSUANT TO THE OBLIGATION,
AND COSTS OF SUIT AND REASONABLE ATTORNEYS' FEES.
7. DELAY AND WAIVER BY OBLIGOR. No delay in the exercise of, or
failure to exercise, any right, remedy, or power accruing upon any default or
failure of the Guarantor in the performance of any obligation under this
Guaranty shall impair any such right, remedy, or power or shall be construed
to be a waiver thereof, but any such right, remedy, or power maybe exercised
from time to time and as often as may be deemed by ARM expedient. In order to
entitle ARM to exercise any right, remedy or power reserved to it in this
Guaranty, it shall not be necessary to give any notice to the Guarantor. If
the Guarantor should default in the performance of any obligation under this
Guaranty, and such default should thereafter be waived by ARM, such waiver
shall be limited to the particular default so waived. No waiver, amendment,
release, or modification of this Guaranty shall be established by conduct,
custom or course of dealing.
8. NOTICES AND COMMUNICATIONS. All Notices, requests, demands,
consents, and other communications which are required or may be given under
this Agreement (collectively, the "Notices"), shall be in writing and shall
begin as follows: by personal delivery against a receipted copy; by telefax,
telegram or overnight courier; or by U. S. registered or certified mail,
return receipt requested, postage prepaid.
If to the Guarantor: Dr. S.P.S. Anand
8201 Corporate Drive, Suite 1120
Landover, Maryland 20785
If to Applied Research of Maryland: C/O James M. Greenan, Esquire
Greenan, Walker, Trainor & Billman
6411 Ivy Lane, Suite 706
Greenbelt, Maryland 20770
Any party may from time to time change address to which Notices to it are to
be sent by giving notices of such change to the other parties in the manner
set forth herein. Notice shall be deemed given and received on the next
business day following the day such notice is mailed or sent by overnight
courier in the manner described above, or, if personally delivered or if sent
by telefax or telegram, on the date so delivered or sent. Any time period
shall commence on the day such Notice is deemed given and received. For
purposes of this Guaranty, the term "business day" shall include all days
other than Saturdays, Sundays and federal banking holidays.
9. SUCCESSORS AND ASSIGNS. This Guaranty may not be assigned by any
Party, in whole or in part, without the written consent of the other Party.
Subject to the foregoing, all covenants and agreements set forth in this
Guaranty shall bind the Guarantors and their respective heirs, personal
representatives, successors, and assigns and shall inure to the benefit of,
and be enforceable by, the Obligor and its successors and assigns, including,
without limitation, any holder of any or all of the Security Agreement, Note
or other Purchase Documents. This Guaranty contains the entire agreement of
the Parties with respect to the subject matter hereof.
10. GOVERNING LAW. This Guaranty shall be construed under and governed by
the laws of the State of Maryland.
11. MISCELLANEOUS. Neither this Guaranty nor any term hereof may be
terminated, amended, supplemented, waived, released, or modified orally, but
only by and instrument in writing signed by the Party against which the
enforcement of the termination, amendment, supplement, waiver, release, or
modification is sought. If any term of this Guaranty or any obligation
thereunder shall be held to be invalid, illegal or unenforceable, the
remainder of this Guaranty and any other application of such term shall not be
affected thereby.
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be signed,
sealed, and delivered as of the day and year first written above.
-----------------------------------
S.P.S. Anand
STATE OF MARYLAND, ___________________ of _______________, to wit:
I HEREBY CERTIFY, that on this ___ day of __________ , 1998, before me, the
subscriber, a Notary Public in and for the state aforesaid, personally
appeared S.P.S. Anand, known to me to be the person whose name is described to
the foregoing instrument, and made oath in due form of law that they executed
the same voluntarily for the purposes therein contained.
IN WITNESS my hand and Notarial Seal.
------------------------------------
Notary Public
My Commission Expires:
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
- - ------------------------------
In re: )
)
APPLIED RESEARCH OF ) Case No.96-1-2425-DK
MARYLAND, INC. )
Debtor. )
)
- - ------------------------------
DEBTOR'S PLAN OF REORGANIZATION
--------------------------------
Applied Research of Maryland, the debtor and debtor-in-possession herein
( the "Debtor"), hereby proposes and presents this Plan of Reorganization (the
"Plan"), pursuant to the provisions of Chapter 11 of the United States
Bankruptcy Code, 11 U.S.C. Sections 101, "et seq," and, upon an Order of
Confirmation, agrees to be bound hereby.
ARTICLE I
DEFINITIONS
-----------
For purposes of this Plan, unless the context otherwise requires, the
following terms shall have the respective meanings hereinafter set forth:
1.1 "ADMINISTRATIVE EXPENSE CLAIM" shall mean any Claim arising or
accruing on or after the Petition Date which is entitled to Priority Status
pursuant to Sections 503(b) and 507(a) (1) of the Bankruptcy Code.
Administrative Expense Claim includes Claims of persons, such as attorneys,
accountants and other professionals, retained and entitled to compensation and
reimbursement in the Chapter 11 Case pursuant to Sections 327, 328, 330, 331
and 503(b) of the Bankruptcy Code.
1.2 "ALLOWED AMOUNT" or "ALLOWED CLAIM" shall mean (a) the amount of a
Claim for which a proof of Claim has been filed, or amended if necessary, with
the Bankruptcy Court by the Bar Date, to which no objection has been
interposed, (b) if no proof of Claim is timely filed, the amount of any Claim
listed in the Schedules, including any timely amendments thereto, which is not
listed as disputed, contingent or unliquidated as to amount, and (c) if an
objection to the allowance of any Claim has been filed, the amount of such
Claim allowed by Final Order of the Bankruptcy Court or by agreement of the
Debtor.
1.3 "ALLOWED SECURED CLAIM" shall mean that portion of an Allowed
Claim which is secured by a properly perfected, non-avoidable lien or security
interest in property of the estate.
1.4 "BANKRUPTCY CODE" shall mean the Bankruptcy Reform Act of 1978, as
amended from time to time, and codified at 11 U.S.C. Sections 101 "et seq."
1.5 "BANKRUPTCY COURT" shall mean the United States Bankruptcy Court
for the District of Maryland or any other court having jurisdiction over the
Debtor's Chapter 11 Case or any proceeding arising under or arising in or
related to the Debtor's Chapter 11 Case.
1.6 "BANKRUPTCY RULES" shall mean the Federal Rules of Bankruptcy
Procedure promulgated August 1, 1991, or as more recently amended.
1.7 "BAR DATE" shall mean the deadline established by the Bankruptcy
Court pursuant to Bankruptcy Rule 3003(c)(3) as the date by which Claims which
must be filed shall be filed, failing which such Claims may be disallowed for
purposes of voting or distribution. Further, no Claims shall be amended,
modified or transferred after the Bar Date.
1.8 "CASH DISTRIBUTIONS" shall mean the cash payable from Cash Flow to
Classes of Claims other than Administrative Expense Claims entitled to payment
under the terms of the Plan.
1.9 "CASH FLOW" shall mean all Revenues after payment of
Administrative Expense Claims, funding of necessary reserves, and payment of
current disbursements.
1.10 "CHAPTER 11 CASE" shall mean the Chapter 11 case of Applied
Research of Maryland, Case No. 96-1-2425-DK pending in the Bankruptcy Court.
1.11 "CLAIM" shall mean:
(a) a right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured or
unsecured; or
(b) a right to an equitable remedy for breach of a performance if such
breach gives rise to a right to payment, whether or not such right
to an equitable remedy is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed, secured or unsecured.
1.12 "CLAIMS DISTRIBUTION FUND" shall mean the account for Cash
Distributions funded by all Cash Flow of the Debtor existing or realized after
the Confirmation Date.
1.13 "CLASS" shall mean a Claim or Interest or a group of Claims or
Interests consisting of those Claims or Interests which are substantially
similar to each other, as classified under the Plan, or a group of Claims or
Interests which are otherwise required to be separately classified.
1.14 "CONFIRMATION DATE" shall mean when the Confirmation Order becomes
a Final Order.
1.15 "CONFIRMATION ORDER" shall mean the order of the Bankruptcy Court
confirming the Plan under Section 1129 of the Bankruptcy Code.
1.16 "CREDITOR" shall mean any entity which holds a Claim against the
Debtor.
1.17 "DEBT" shall mean a liability on a Claim.
1.18 "DISALLOWED AMOUNT" shall mean, with respect to any particular
Disputed Claim, that amount which is equal to the difference, if any, between
the Face Amount of such Disputed Claim and the Allowed Amount thereof.
1.19 "DISPUTED CLAIM" shall mean any Claim for which an Allowed Amount
has not yet been determined.
1.20 "EFFECTIVE DATE" shall mean the thirtieth (30th) day following the
Confirmation Date, or the Closing Date, whichever is later.
1.21 "EMPLOYEE" shall mean any employee as defined by the Asset
Purchase Agreement or any employee or consultant engaged or employed by the
Debtor as of the Effective Date, whether such engagement or employment is
pursuant to a written or unwritten contract or is at will. Notwithstanding
the foregoing, "Employee" shall not include Dr. Anand.
1.22 "EQUITY INTEREST HOLDER" shall mean any employee as defined by the
Asset Purchase Agreement or any person who holds a ownership interest in the
Debtor as of the Petition Date.
1.23 "EXCLUDED ASSETS" shall mean any assets which are not to be
acquired by Space Applications Corporation under the Asset Purchase Agreement.
1.24 "FACE AMOUNT" shall mean, with respect to a particular Claim:
(a) if the holder of such Claim has not filed a proof of Claim with
the Bankruptcy Court by the Bar Date, the amount if any, for which
such Claim is listed in the Schedules as fixed, undisputed,
noncontingent and liquidated; or
(b) if the holder of such Claim has filed a proof of claim with the
Bankruptcy Court by the Bar Date, the amount stated in such proof
of Claim; or
(c) with respect to an Administrative Expense Claim in the form of an
application for allowance of compensation or reimbursement of
expenses of Professional Persons filed and pending in the
Bankruptcy Court, the net amount to which such professional would
be entitled if its application were to be granted in full.
1.25 "FINAL ORDER" shall mean an order of a court from which the time
for appeal and reconsideration under Bankruptcy Rules 8002 and 9023 has
expired without the commencement of an appeal or request for reconsideration,
or an order of a court as to which an appeal or reconsideration has been
taken, and where such order has been affirmed by appeal, or, in the case of
reconsideration, such request for reconsideration has been denied, and no
appeal from such denial of the request for reconsideration has been taken.
1.26 "IMPAIRED" shall refer to any Class of Claims or Interests treated
under the Plan in such a manner as described pursuant to Section 1124 of the
Bankruptcy Code.
1.27 "INTEREST" shall mean the ownership interest(s) held by an Equity
Interest Holder.
1.28 "PETITION DATE" shall mean April 2, 1996, the date the Debtor
voluntarily commenced its Chapter 11 Case pursuant to the provisions of the
Bankruptcy Code.
1.29 "PLAN" shall mean this Plan of Reorganization and any and all
modifications or corrections hereof or amendments or supplements hereto.
1.30 "PRIORITY STATUS" shall mean the priority in distribution which is
afforded ro certain Claims against the Debtor pursuant to Section 507(a) of
the Bankruptcy Code.
1.31 "PROFESSIONAL PERSONS" shall mean persons retained or to be
compensated pursuant to Sections 327, 328, 330, 331 and 503(b) of the
Bankruptcy Code.
1.32 "PRO-RATA" shall mean:
(a) with respect to Allowed Claims, the same proportion that the
Allowed Amount of a Claim of a Creditor in any Class of Claims
bears to the aggregate of:
(i) the Allowed Amount of all Claims of that particular Class
of Claims or other Classes of Claims if applicable; plus
(ii) the aggregate Face Amount of all Claims which are subject
to dispute as of the Confirmation Date of that particular
Class of Claims or other Classes of Claims if applicable,
as reduced from time to time as and to the extent that the
Disallowed Amount of such Claims is determined, and
(b) with respect to Disputed Claims, the same proportion that the Face
Amount of a Disputed Claim of a creditor in any Class of Claims
bears to the aggregate of:
(i) the Disputed Amount of all Claims of that particular Class
of Claims or other Classes of Claims if applicable; plus
(ii) the aggregate Face Amount of all Claims which are subject
to dispute as of the Confirmation Date of that particular
Class of claims or other Classes of Claims if applicable,
as reduced from time to time as and to the extent that the
Disallowed Amount of such Claims is determined.
1.33 "SCHEDULES" shall mean the schedules of assets and liabilities, as
may be amended, filed by the Debtor with the Bankruptcy Court in the Chapter
11 Case. Such Schedules may be amended by the Debtor through ninety (90) days
following the Effective Date.
1.34 "SECURED CREDITOR" shall mean the holder of an Allowed Secured
Claim.
1.35 "U.S. TRUSTEE" shall mean the Office of the United States Trustee
in Greenbelt, Maryland.
1.36 "UNSECURED CLAIM" shall mean a Claim which is not an
Administrative Expense Claim, an Allowed Secured Claim, an Allowed Deficiency
Claim, an Administrative Convenience Claim, or a Claim otherwise entitled to
Priority Status, if any.
ARTICLE II
DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS
-----------------------------------------------
For purposes of the Plan, Claims and Interests are classified as follows:
2.1 "CLASS 1 CLAIM" shall consist of the Secured Claim of the Internal
Revenue Service.
2.2 "CLASS 2 CLAIM" shall consist of the Secured Claim of Commerce
Funding Corp.
2.3 "CLASS 3 CLAIM" shall consist of all Claims entitled to Priority
Status under Section 507(a)(3), (a)(4), and (a)(6) and 1129(a)(9)(B) of the
Bankruptcy Code.
2.4. "CLASS 4 CLAIM" shall consist of all Allowed Unsecured Claims.
2.5. "CLASS 5 INTERESTS" shall consist of all Equity Interests in the
Debtor.
2.6 The Debtor has not designated any Class of Claims under Sections
507(a)(1), 507(a)(2) or 507(a)(8) pursuant to Section 1123(a)(1) of the
Bankruptcy Code. The Plan contemplates that all Allowed Administrative Expense
Claims shall be accorded treatment and payment as provided for by the
Bankruptcy Code and as otherwise addressed by this Plan.
ARTICLE III
TREATMENT OF CLASSES OF CLAIMS AND INTERESTS
--------------------------------------------
3.1 CLASS 1 CLAIM IS IMPAIRED. The prior sale of the assets, pursuant
to the terms of the Asset Purchase Agreement, transferred substantially all of
the assets of the Debtor free and clear of all liens without any preservation
of the asserted lien of Class 1. The Claim of the Internal Revenue Service
shall be deemed fully satisfied by the treatment afforded by the Asset
Purchase Agreement. Accordingly, the Claim of the Internal Revenue Service
will receive no treatment as an Allowed Secured Claim under the Plan.
3.2 THE CLASS 2 CLAIM IS NOT IMPAIRED. The prior sale of the assets,
pursuant to the terms of the Asset Purchase Agreement, transferred the
substantially all of the assets of the Debtor free and clear of all liens
without any preservation of the asserted lien of Class 2. Commerce Funding
Corp. has been paid in full pursuant to the terms of the Asset Purchase
Agreement and its loan documents. Accordingly, the Secured Claim of Commerce
Funding Corp. will receive no treatment as an Allowed Secured Claim under the
Plan.
3.3 THE CLASS 3 CLAIMS ARE IMPAIRED. Priority Claims in this Class are
Claims entitled to priority in accordance with 11 U.S.C. Section 507(a) other
than those designated in 11 U.S.C. Section 1123(a)(1) ("Priority Claims"). In
full and complete satisfaction and release of the Class 3 Claims, and unless
otherwise agreed by the Claimant and the Debtor, the holders of Class 3
Claims, which are Allowed Claims entitled to priority pursuant to 11 U.S.C.
Sections 507(a)(3), (a)(4) and (a)(6), shall be paid pursuant to the Asset
Purchase Agreement. All claims by the Employees of the Debtor for wages,
salaries, or commissions, including vacation, severance, sick leave, 401K
benefits, and expenses shall be deemed fully satisfied by the treatment
afforded the Employees in the Asset Purchase Agreement. Accordingly, the
Employees of the Debtor will receive no additional treatment as Priority
Claimants under the Plan because those claims have been waived. Approximately
One Hundred Forty-Five Thousand Dollars ($145,000.00) of Claims due the
Employees will remain as Class 4 Unsecured Claims.
3.4 THE CLASS 4 CLAIMS ARE IMPAIRED. If, and to the extent funds
become available, all Allowed Unsecured Claims shall receive periodic Cash
Distributions from the liquidation of Excluded Assets after disbursement to
all Administrative Expense Claims, Priority Claims and Classes 1 through 3, to
the extent Revenues remain available, commencing on the Effective Date, and
continuing thereafter to the extent additional Revenues are received by the
Debtor through and including the date of final administration of this Case.
Class 4 Claims will be paid after payment in full to all Administrative
Expense Claims, Priority Claims, Class 1 Claims, Class 2 Claims, and Class
3 Claims.
3.5 THE CLASS 5 INTERESTS ARE IMPAIRED. Class 5 Interests will be
treated under either of two (2) alternatives. First, if the Intercompany
Settlement Agreement and the Plan are approved as proposed, then the stock in
the Debtor will be retained by its parent corporation. The Debtor anticipates
that this will improve the possibility of the cash flow payments to Class 4
Claimants under the Intercompany Settlement Agreement.
Alternatively, if the Intercompany Settlement Agreement is not approved,
and the treatment of Class 5 as described above is not approved, then the
Class 5 Interests will be terminated on the Confirmation Date and the Class 5
Claimants will retain no interest in the Debtor thereafter.
3.6 THE ADMINISTRATIVE EXPENSE CLAIMS. Administrative Expense Claims
are Claims against the Debtor for any costs or expenses of the Chapter 11 case
allowable under 11 U.S.C. Sections 503(b), including all actual and necessary
costs and expenses incurred to preserve the Debtor's estate, as well as the
operations of the Debtor's business, including compensation or reimbursement
of expenses to the extent allowed under the Code. In this case, the Debtor-
In-Possession and its affiliates have agreed pursuant to the Intercompany
Settlement Agreement that net proceeds for a Sale or improved cash flow if
achieved, enhance the divided to Class Four Creditors. Administrative Expense
Claims consist primarily of fees owed to Professionals.
Unless otherwise agreed by the Professionals, Administrative Expense
Claims of Professionals retained pursuant to Court Order shall be paid, in
cash, the full amount of their Allowed Claim as follows: (1) unpaid fees and
expenses, if any, which were approved prior to the Effective Date shall be
paid on the Effective Date, and (2) fees and expenses which are allowed after
the Effective Date shall be paid when allowed. All reasonable post-
confirmation Professional fees and expenses shall be paid within thirty (30)
days from receipt of a bill. The Debtor believes that the Professional fees
in this case, which are subject to approval by this Court, are approximately
$493,000.00.
The Administrative Expense Claims shall be paid from the liquidation of
the Excluded Assets, the funds designated for the repayment of this debt
pursuant to the terms of the Asset Purchase Agreement, and to the extent
necessary, the proceeds of the Intercompany Settlement Agreement with
ARSoftware and ARInternet. In the event that Administrative Expense Claims
must be paid from the proceeds of the Intercompany Settlement Agreement, such
claims will be satisfied prior to any distribution to the Priority Tax
Claimants.
The treatment of the claims of the Employees of the Debtor for wages,
salaries, unused vacation pay, 401K benefits, and expenses in the Asset
Purchase Agreement shall be in full and complete satisfaction all of their
claims against the Debtor. Accordingly, the Employees will receive no
treatment as an Administrative Expense Claim Holder under the Plan as those
claims have been waived.
3.7 THE PRIORITY CLAIMS PURSUANT TO SECTIONS 507(A)(1), 507(A)(2) OR
507(A)(8) OF THE BANKRUPTCY CODE. In full and complete satisfaction, and
release of the Interests of the Priority Tax Claims entitled to priority
status under 11 U.S.C. Section 507(a)(8), the Priority Tax Claimants shall
receive payment from the liquidation of the Excluded Assets and proceeds from
the Intercompany Settlement Agreement with ARSoftware and ARInternet to the
extent any proceeds remain after payment of the Administrative Expense Claims.
The Claims of the State of Maryland, the State of California, and
Washington D.C. (the "State Tax Claimants"), are for withholding taxes and
unemployment taxes. The Debtor estimates that the claim of the State of
Maryland is in the approximate amount of $163,479.00, that the claim of
Washington D.C. is in the amount of $1,447.00, and the claim of the State of
California is in the amount of $916.00. In full and complete satisfaction and
release of the claims of the State Tax Claimants, the State Tax Claimants
shall receive a "pro rata" distribution from the proceeds of the Intercompany
Settlement Agreement after payment to the Administrative Expense Claimants, if
necessary. The payment of the State claims as provided herein shall
constitute a full and complete release of claims against any officer,
director, or responsible person of the debtor.
The treatment of the claim of the Internal Revenue Service pursuant to
the terms of the Asset Purchase Agreement shall be in full and complete
satisfaction of all of its claims against the Debtor. Accordingly, the
Internal Revenue Service will receive treatment as a Priority Claim Holder
under the Plan only in the event that there are remaining proceeds after
payment to Administrative Expense Claimants and the State Tax Claimants. To
the extent that the Priority Tax Claim of the Internal Revenue Service exceeds
the payment received from the Asset Purchase Agreement and the remaining
proceeds from the Intercompany Settlement Agreement, if any, the Internal
Revenue Service has waived its right to such claim.
3.8 Any Class of Claims entitled to timely elect treatment pursuant to
Section llll (b)(2) of the Bankruptcy Code shall receive treatment as required
by law. Further, nothing in this Plan shall be deemed to preclude any Class
of Claims entitled to elect treatment pursuant to Section 1111 (b)(2) of the
Bankruptcy Code from timely making such election.
ARTICLE IV
MEANS OF EXECUTION OF PLAN
--------------------------
4.1. This Plan is a liquidating plan under Section 1129(a)(11) of the
Bankruptcy Code and is materially premised upon the disposition of the
Debtor's assets pursuant to the Asset Purchase Agreement as well as the
disposition of the Excluded Assets. The proceeds from the disposition of these
assets will be distributed to Classes of Claims in accordance with the
priorities and terms identified in Articles III and IV of the Plan.
4.2. Unless otherwise ordered by the Bankruptcy Court, all Cash
Distributions contemplated by the Plan shall only occur on or subsequent to
the Effective Date. All Cash Distributions under the Plan shall be paid in the
manner generally set forth in Article III of the Plan. Upon the Confirmation
Date, Greenan, Walker, Trainor & Billman shall act as disbursing agent in
respect of all Cash Distributions required under the Plan.
4.3. The Debtor may generally prepay in part or in full any Allowed
Claim without penalty or charge.
ARTICLE V
CRAM DOWN
---------
5.1. In order to confirm the Plan, among other things, the Debtor must
establish that, in accordance with Section 1129(a)(8) of the Bankruptcy Code,
each Class of Claims or Interests either (i) has accepted the Plan or (ii) is
not Impaired under the Plan. In the event that this requirement cannot be
satisfied, however, and all other applicable requirements for confirmation
under Section 1129(a) of the Bankruptcy Code are met, the Debtor may, and
hereby does, invoke the "cramdown" entitlement under Section 1129(b) of the
Bankruptcy Code, such that, as long as the Plan does not discriminate
unfairly, and is fair and equitable, with respect to any Class of Claims or
Interests that is impaired under, and has not accepted, the Plan, the Plan may
be confirmed by the Bankruptcy Court.
ARTICLE VI
MODIFICATION OF THE PLAN
------------------------
6.1. The Debtor may modify this Plan at any time prior to the Effective
Date as permitted by Section 1127(a) of the Bankruptcy Code. If so modified,
after the Debtor files the modification with the Bankruptcy Court, the Plan as
modified becomes the Plan.
6.2. The Debtor may modify this Plan at any time after the Effective
Date and before substantial consummation of this Plan as permitted by Sections
1101(2) and 1127(b) of the Bankruptcy Code. The Plan as so modified under this
subsection becomes the Plan only if the Bankruptcy Court, after notice and a
hearing, confirms such Plan as modified under Section 1127 of the Bankruptcy
Code.
6.3. Before or after the Confirmation Date, or in the Confirmation
Order, the Debtor or the Bankruptcy Court may remedy any defect or omission,
or reconcile any inconsistencies in the Plan or amend the Plan, in such a
manner as may be necessary to carry out the provisions, purposes and effect of
the Plan.
ARTICLE VII
DISPUTED CLAIMS
---------------
7.1. Any party objecting to Claims that were made and existed or arose
on or before the Petition Date, or that are listed as undisputed,
non-contingent and liquidated in the Debtor's Schedules, must file such
objection within thirty (30) days following the Effective Date of the Plan.
7.2. The acceptance of any vote of any Claim or Interest by The Debtor
shall not constitute an acceptance of such Claim or Interest for any purpose
other than voting, nor shall the Debtor be deemed estopped from objecting to
any Claim or Interest on such grounds. The recognition of any Claim or
Interest by the Debtor for any purpose(s) preceding the entry of the
Confirmation Order during the Chapter 11 Case shall not constitute a waiver of
the Debtor's duty to its estate to investigate all Claims and Interests for
objection. The Debtor reserves the right to object to any Claim or Interest
and to treat same as a Disallowed Claim or Interest under the Plan.
ARTICLE VIII
CONTRACTS AND UNEXPIRED LEASES
------------------------------
8.1. Any and all executory contracts and unexpired leases within the
meaning of Section 365(a) of the Bankruptcy Code which have not been assumed
or as to which the Debtor has not applied to the Court for authority to assume
within the Ninety (90) Days after the Effective Date or which have not been
assumed pursuant to the terms of this Plan, shall be deemed to have been
rejected by the Debtor as of the Confirmation Date.
ARTICLE IX
RETENTION OF JURISDICTION
-------------------------
9.1. The Bankruptcy Court shall retain jurisdiction over the Debtor and
its Chapter 11 proceedings through and including the date that all Claims have
been satisfied in the manner required under this Plan to the extent permitted
under the Bankruptcy Code, including, "inter alia," to determine any and all
controversies and disputes arising under, or in conjunction with the Plan
including, but not limited to, issuing any orders appropriate under Section
105 of the Bankruptcy Code; to effectuate payments under, and performance of,
the provisions of the Plan, to modify the terms of the Plan; and to determine
such other matters and acts for such other purposes as may be provided for in
the Confirmation Order.
9.2 The Bankruptcy Court shall retain jurisdiction to enforce the
provisions of the Asset Purchase Agreement and to resolve any dispute
concerning the Asset Purchase Agreement, the Order Approving Sale of
Substantially All Assets Free and Clear of Liens and Encumbrances, as well as
the rights and duties of the parties obligated under the Asset Purchase
Agreement.
9.3 In the event of a default under the Asset Purchase Agreement by
Space Applications Corporation, each party affected by such default may move
on its own behalf to enforce the terms of the Asset Purchase Agreement.
9.2. Notwithstanding such retention of jurisdiction, the Debtor, any
party in interest or creditor may move to reopen the Chapter 11 Case in the
event necessary to afford any party in interest relief under Section 350 of
the Bankruptcy Code.
ARTICLE X
PREFERENCES AND AVOIDABLE TRANSFERS
-----------------------------------
10.1. Any action by the Debtor or any other authorized party-in-interest
to recover property of the estate and avoid any transfer pursuant to Sections
542, 543, 544, 547, 548 or 549 of the Bankruptcy Code shall be commenced by
the filing of a complaint pursuant to Bankruptcy Rule 7003 within ninety (90)
days following the Confirmation Date.
ARTICLE XI
EQUITY INTEREST HOLDERS AND MANAGEMENT
--------------------------------------
11.1. The Equity Interest Holders shall be treated in accordance with
Class 5 of the Plan. As stated previously herein, the Class 5 Interests will
be treated under either of two (2) alternatives. First, if the Intercompany
Settlement Agreement and the Plan are approved as proposed, then the stock in
the Debtor will be retained by its parent corporation. The Debtor anticipates
that this will improve the possibility of the cash flow payments to Class 4
Claimants under the Intercompany Settlement Agreement.
Alternatively, if the Intercompany Settlement Agreement is not approved,
and the treatment of Class 5 as described above is not approved, then the
Class 5 Interests will be terminated on the Confirmation Date and the Class 5
Claimants will retain no interest in the Debtor thereafter.
ARTICLE XII
MISCELLANEOUS
-------------
12.1. Upon the Confirmation Date, the entry of the Confirmation Order
shall supersede, amend and modify any prior Orders entered by this Court, or
any other court, to the extent such prior Orders are inconsistent with the
terms or effect of the Plan.
12.2. Prior to the Effective Date, the Debtor shall establish a Claims
Distribution Fund to fund Cash Distributions to Allowed Claims under the Plan
from Cash Flow. The Debtor shall establish, and fund from Revenues,
appropriate reserves to fund Allowed Administrative Expense Claims, necessary
disbursements incidental to the distribution of funds pursuant to the terms
and provisions of the Asset Purchase Agreement as well as any other
appropriate expenditures, including satisfaction of Allowed Administrative
Expense Claims.
12.3. Except for any default or event of default which occurs under the
terms of the Plan, if any Creditor holding an Allowed Claim fails to receive a
Cash Distribution as provided under the Plan, or if any Creditor wishes to
dispute the Debtor's compliance with the Plan, such Creditor shall serve upon
the Debtor written notice thereof, and the Debtor shall not be deemed to be in
default of the provisions of this Plan unless the Debtor fails to cure such
noncompliance, if any, or fails to take any other affirmative response within
20 days from its uncontested receipt of service.
ARTICLE XIII
TERMINATION OF THE CREDITORS COMMITTEE
--------------------------------------
13.1 The appointment and tenure of the Creditor's Committee shall be
terminated as of the Effective Date, provided that there are no pending or
unresolved motions, appeals, objections, or other pleadings in which the
Creditor's Committee seeks affirmative relief. In the event that such a
pleading is pending, such pleading shall constitute an extension of the term
of the Creditor's Committee.
ARTICLE XIV
SETTLEMENT AGREEMENT WITH UNITED STATES DEPARTMENT OF LABOR
------------------------------------------------------------
14.1 Dr. Anand currently is negotiating a settlement agreement with the
United States Department of Labor regarding the administration (and
liquidation and distribution when appropriate) of the assets of the 401(k)
pension plan, and his role as pension plan administrator and plan trustee.
14.2 The United States Department of Labor has determined that it will
not pursue the Debtor, or any other employee of the Debtor beside Dr. Anand,
for any liability with regard to the 401(k) pension plan.
ARTICLE XV
SETTLEMENT AGREEMENT BETWEEN
THE DEBTOR AND ARSOFTWARE AND ARINTERNET
------------------------------------------
15.1 Subject to approval by the Bankruptcy Court, the Debtor and
ARSoftware and ARInternet have entered into a settlement agreement whereby
ARSoftware and ARInternet shall pay to the Debtor One Hundred and Fifty
Thousand Dollars ($150,000.00) over the period of three (3) years (the
"Intercompany Settlement Agreement").
15.2 Specifically, the terms of the Intercompany Settlement Agreement
are as follows:
A. ARSoftware and ARInternet shall execute a promissory note
obligating ARSoftware and ARInternet to pay to the Debtor One
Hundred and Fifty Thousand Dollars ($150,000.00) over the period
of three (3) years at a rate of Four Thousand One Hundred and
Sixty-Seven Dollars ($4,167.00) per month (the "Settlement
Amount"). ARSoftware and ARInternet agree to execute any and all
documents, and perform any other actions, necessary for the Debtor
to maintain a perfected security interest in the agreed upon
collateral. The amount to be paid by ARSoftware and ARInternet
shall not be subject to interest, however, in the event of a
default interest shall accrue at a rate of twelve percent (12%)
per annum. Further, in the event that payments are not timely
made a late fee equal to five percent (5%) of the monthly amount
shall be incurred.
B. If for any fiscal year the cash flow of ARSoftware and ARInternet
exceeds its operating expenses and any debt service including the
debt service required under the Intercompany Settlement Agreement,
then one-half (1/2) of the surplus of the Net Cash Flow shall be
paid to the Bankruptcy Estate.
Net Cash Flow is defined as that sum remaining after the payment
of operating expenses, including debt service, on a consistent
historical basis. Net Cash Flow shall be supported by a Statement
of Cash Flow prepared in accordance with GAAP. The fiscal year-
end for ARSoftware and ARInternet is May 31, and the fiscal year
ending May 31, 1998 shall be the base line. Commencing on
September 1, 1998 and each year thereafter, if appropriate, the
monthly payment shall be increased by one-twelfth (1/12) of the
net surplus, the total of which shall equal one-half (1/2) of the
Net Cash Flow. For each fiscal year where there is a net surplus
the payments shall continue for twelve (12) consecutive months.
The Statement of Cash Flow and supporting documents shall be
delivered to Debtor's estate commencing August 31, 1998 and on the
31st day of August each year thereafter until the promissory note
is paid in full.
In calculating Net Cash Flow, future general administrative
expenses should not exceed as a percentage of sales the greater of
those years ended May 31, 1997 and May 31, 1998.
C. Both ARSoftware and ARInternet will be jointly and severally
liable for the settlement amount. The obligations of ARSoftware
and ARInternet will be secured by all of their assets, including
equipment, fixtures, accounts receivable, copy rights and
intangibles.
D. In the event the stock or assets ARSoftware and/or ARInternet are
sold during the three (3) year payout period, the net proceeds of
any such sale, after payment of all costs of sale and payment to
any outstanding creditors of the sold entity including the
Intercompany Settlement Note, shall be split equally between the
Debtor and the shareholders of the sold entity. Those monies due
shall be paid to the Debtor's estate at closing.
E. Dr. Anand shall guaranty the obligations of ARSoftware and
ARInternet under the Intercompany Settlement Agreement.
15.3 The Intercompany Settlement Agreement is subject to approval of
the Bankruptcy Court. Copies of the Intercompany Settlement Agreement,
Promissory Note, Security Agreement and Guaranty are available for inspection
and copying at the office of Debtor's counsel. The obligation of ARSoftware
and ARInternet shall be deemed substantially consummated upon delivery of the
executed Settlement Agreement and the first payment to the Debtor.
15.4 The proceeds generated from the Intercompany Settlement Agreement
will be used to pay the Priority Tax Claims of the State of Maryland, the
State of California, and Washington, D.C. The remaining proceeds from the
Intercompany Settlement Agreement, after payment of Administrative Expense
Claimants, if any, shall be paid to the Internal Revenue Service to the extent
it still has a claim. The balance of any proceeds, if any, will be paid to
Class 4 Unsecured Claims. The Internal Revenue Service has consented to the
distribution of the proceeds of the Intercompany Settlement Agreement as
stated herein.
15.5 The terms of the Settlement Agreement are deemed approved by the
Bankruptcy Court, upon confirmation of the Plan.
Dated: February ___, 1998
Respectfully submitted,
APPLIED RESEARCH OF MARYLAND
______________________________
BY:
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
- - ------------------------------
In re: )
)
APPLIED RESEARCH OF ) Case No.96-1-2425-DK
MARYLAND, INC. )
Debtor. )
)
- - ------------------------------
DISCLOSURE STATEMENT
---------------------
On April 2, 1996, Applied Research of Maryland, the debtor and debtor-in-
possession herein (the "Debtor") filed a petition under Chapter 11 of the
Bankruptcy Code. An Order of Relief under Chapter 11 of the Bankruptcy Code
was entered upon such filing. Subsequent to the entry of the Order of Relief,
the Debtor has remained in possession of its assets, and has continued to own,
operate and manage its business, in accordance with 11 U.S.C. Sections 1107
and 1108, pending the approval of a Plan in accordance with the provisions of
the Bankruptcy Code (11 U.S.C. Section 101, "et seq.") (the "Code").
Pursuant to 11 U.S.C. Section 1125, the Debtor now files this Disclosure
Statement (the "Disclosure Statement") together with a proposed Plan of
Reorganization (the "Plan") to be submitted, following approval of the
Disclosure Statement, to holders of claims or interests with respect to the
Debtor and its assets.
I. INTRODUCTION
------------
The Debtor provides this Disclosure Statement to all its known
creditors and other parties in interest in order to disclose information
deemed by the Debtor to be material, important and necessary for its creditors
to arrive at a reasonably informed decision in exercising their rights to vote
for acceptance of the Plan now on file with the United States Bankruptcy Court
for the District of Maryland (the "Bankruptcy Court"). A copy of the Plan
accompanies the Disclosure Statement.
By Order of the Bankruptcy Court dated __________________, 1998, this
Disclosure Statement has been approved as containing "adequate information"
for parties in interest and creditors of the Debtor in accordance with 11
U.S.C. Section 1125(b) of the Code. Pursuant to 11 U.S.C. Section 1125(a)(1),
"adequate information" is defined as:
. . . information of a kind, and in sufficient detail, as far as
is reasonably practical in light of the nature and history of the
debtor and the condition of the debtor's books and records, that
would enable a hypothetical reasonable investor typical of
holders of claims or interests of the relevant class to make an
informed judgment about the plan, but adequate information need
not include such information about any other possible or proposed
plan.
11 U.S.C. Section 1125(a)(1).
Approval by the Bankruptcy Court, however, does not constitute a
recommendation or endorsement by the Bankruptcy Court either for or against
the Plan. Further, approval by the Bankruptcy Court is not a guaranty of the
accuracy or completeness of the information contained herein.
A. DEFINITIONS
The terms and definitions set forth in Article I of the Plan are also
applicable to, and are used in, this Disclosure Statement unless expressly
stated otherwise in this Disclosure Statement. You therefore are urged to
refer to the Plan when reviewing this Disclosure Statement.
B. DISCLAIMERS
NO REPRESENTATION CONCERNING THE DEBTOR, THE VALUE OF ITS PROPERTY, OR
THE PLAN, ARE AUTHORIZED BY THE DEBTOR UNLESS SET FORTH IN THIS DISCLOSURE
STATEMENT. ACCORDINGLY, NO REPRESENTATIONS OR INDUCEMENTS MADE TO SECURE
ACCEPTANCE OF THE PLAN, OTHER THAN THOSE CONTAINED IN THIS DISCLOSURE
STATEMENT, SHOULD BE RELIED UPON IN EXERCISING THE RIGHT TO VOTE OR NOT TO
VOTE ON THE ACCEPTANCE OF THE PLAN AND ANY SUCH REPRESENTATION OR INDUCEMENT
SHOULD BE REPORTED IMMEDIATELY TO THE DEBTOR'S COUNSEL.
THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS NOT BEEN
SUBJECT TO A CERTIFIED AUDIT. NO REPRESENTATION IS MADE THAT FINANCIAL
SYNOPSES ANNEXED HERETO OR RELIED UPON HEREIN ARE PREPARED IN ACCORDANCE WITH
GAAP. THE RECORDS KEPT BY THE DEBTOR ARE NOT WARRANTED OR REPRESENTED TO BE
WITHOUT INACCURACY, ALTHOUGH GREAT EFFORT HAS BEEN MADE TO BE ACCURATE.
MOREOVER, THIS DISCLOSURE STATEMENT SHOULD NOT BE DEEMED CONCLUSIVE ADVICE ON
THE TAX AND OTHER LEGAL EFFECTS OF THE PLAN ON HOLDERS OF CLAIMS AND
INTERESTS.
THE DEBTOR BELIEVES THAT THE PLAN PROVIDES THE GREATEST AND EARLIEST
POSSIBLE RECOVERY TO ITS CREDITORS. THE DEBTOR THEREFORE BELIEVES THAT
ACCEPTANCE OF THE PLAN IS IN THE BEST INTEREST OF ALL CREDITORS.
EXCEPT AS SET FORTH IN THIS DISCLOSURE STATEMENT, THE BANKRUPTCY COURT
HAS AUTHORIZED NO REPRESENTATIONS CONCERNING THE DEBTOR OR THE VALUE OF ITS
ASSETS. IN VOTING ON THE PLAN, YOU SHOULD NOT RELY ON ANY REPRESENTATIONS OR
INDUCEMENTS MADE TO SECURE ACCEPTANCE OR REJECTION OF THE PLAN BY CREDITORS OF
THE DEBTOR WHICH ARE OTHER THAN AS CONTAINED IN THIS DISCLOSURE STATEMENT.
ANY REPRESENTATIONS OR INDUCEMENTS MADE TO SECURE YOUR ACCEPTANCE OR REJECTION
WHICH ARE OTHER THAN AS CONTAINED IN THIS DISCLOSURE STATEMENT AND THE PLAN
SHOULD BE REPORTED TO COUNSEL FOR THE DEBTOR WHO, IN TURN, MAY PROVIDE SUCH
INFORMATION TO THE BANKRUPTCY COURT FOR SUCH ACTION AS MAY BE DEEMED
APPROPRIATE.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE AS OF
THE DATE HEREOF UNLESS ANOTHER TIME IS SPECIFIED, AND DISSEMINATION OF THIS
DISCLOSURE STATEMENT DOES NOT IMPLY THAT THERE HAS BEEN NO CHANGE IN THE FACTS
SET FORTH HEREIN SINCE THE DATE THE DISCLOSURE STATEMENT WAS COMPILED.
THE PLAN AND DISCLOSURE STATEMENT ARE COMPLEX INSOFAR AS THEY
CONSTITUTE A LEGALLY BINDING COMMITMENT BETWEEN CREDITORS AND THE DEBTOR.
ACCORDINGLY, CREDITORS AND PARTIES-IN-INTEREST ARE URGED TO SEEK LEGAL COUNSEL
IF UNSURE OF THE EFFECT OF THE PLAN AND DISCLOSURE STATEMENT.
The description of the Plan in this Disclosure Statement is a summary
only, and creditors and other parties in interest are urged to review this
entire Disclosure Statement and its Exhibits, the detailed description of the
Plan contained herein, and the Plan itself which is annexed hereto for a full
understanding of the Plan's provisions.
C. SCHEDULED HEARING
The Bankruptcy Court has scheduled a hearing to consider confirmation
of the Plan for ____________________, 1998 at _________, at the United States
Bankruptcy Court for the District of Maryland, Greenbelt Division, located at
6500 Cherrywood Lane, Maryland 20770. This hearing may be adjourned from time
to time without further notice other than by announcement in the Bankruptcy
Court on the scheduled date of such hearing. At that hearing, the Bankruptcy
Court will consider whether the Plan satisfies the various requirements of the
Code, including whether the Plan is feasible and whether it is in the best
interest of the creditors. The Bankruptcy Court will then receive and
consider a ballot report prepared by the Debtor concerning the votes for
acceptance or rejection of the Plan by the parties in interest and creditors
entitled to vote.
D. RECOMMENDATION OF THE DEBTOR
The Debtor believes that the Plan provides the greatest and earliest
possible recoveries to all creditors, that the acceptance of the Plan is in
the best interest of all creditors and recommends that they vote to accept the
Plan.
II. VOTING INSTRUCTIONS AND CONFIRMATION OF PLAN
--------------------------------------------
A. MANNER OF VOTING ON PLAN
Before voting, this Disclosure Statement as well as the Plan should be
reviewed in their entirety. You should use only the ballots sent to you with
this Disclosure Statement to cast your vote for or against the Plan.
YOU SHOULD COMPLETE, DATE AND SIGN YOUR BALLOT AND FILE IT IN PERSON OR
BY MAIL WITH JAMES M. GREENAN, ESQUIRE, GREENAN, WALKER, TRAINOR & BILLMAN,
6411 IVY LANE, SUITE 706, GREENBELT, MARYLAND 20770, ATTORNEYS FOR THE DEBTOR.
ALL BALLOTS MUST BE RECEIVED BY 5:00 P.M. ON ______________________, 1998.
ONLY THOSE VOTES THAT ACTUALLY ACCEPT OR REJECT THE PLAN MAY BE COUNTED.
B. CLAIM HOLDERS ENTITLED TO VOTE
Subject to the exceptions provided below, any claim holder whose claim
is impaired under the Plan is entitled to vote if either (1) its claim has
been scheduled by the Debtor and such claim is not scheduled as disputed,
contingent or unliquidated, or (2) such claim holder has filed a proof of
claim with respect to a disputed claim.
A holder of a disputed claim is not entitled to vote on the Plan unless
the Bankruptcy Court, upon motion of the creditor whose claim has been
objected to, temporarily allows the claim in an estimated amount which it
deems proper for the purpose of voting to accept or reject the Plan. Any such
motion must be heard and determined by the Bankruptcy Court prior to the date
established by the Bankruptcy Court as the final date to vote on the Amended
Plan. In addition, a vote may be disregarded if the Bankruptcy Court
determines that the acceptance or rejection of the Plan by the creditor is not
solicited or procured in good faith or in accordance with the provisions of
the Code.
C. VOTE REQUIRED FOR CLASS ACCEPTANCE
The Code, in 11 U.S.C. Section 1126(c) and (d), defines acceptance of a
Plan of Liquidation by a class of claims as the acceptance by holders of at
least two-thirds (2/3) in amount and more one-half (1/2) in number of the
allowed claims or by at least two-thirds (2/3) in the amount of Equity
Interest of such class that has actually voted to accept or reject a Proposed
Plan.
D. CRAMDOWN
The Code allows confirmation of a plan even if it is not accepted by
all impaired classes of claims if at least one (1) impaired class has voted to
accept the plan. This provision, commonly known as the "cramdown" provision,
is set forth in 11 U.S.C. Section 1129(b).
If any impaired class of claims does not accept the Plan, the
Bankruptcy Court may nevertheless confirm the Plan at the request of the Plan
proponent, if, as to each impaired class which has not accepted the Plan, the
Plan does not "discriminate unfairly" and is "fair and equitable." The phrase
"fair and equitable" has different meanings for secured and unsecured claims
and classes for interests.
If one or more classes of impaired claims under the Plan rejects the
Plan, the Debtor reserves the right to request the Bankruptcy Court to
determine at the confirmation hearing whether the Plan is fair and equitable
and does not discriminate unfairly against any rejecting impaired class of
claims so as to allow the confirmation despite the vote to reject the Plan.
The Debtor also reserves the right to amend the Plan at that time in
such manner as to permit confirmation over the vote of the rejecting impaired
class.
III. BACKGROUND AND PRE-PETITION OPERATIONS
--------------------------------------
A. HISTORY AND EVENTS LEADING UP TO THE CHAPTER 11 FILING
The Debtor was originally formed in 1979 and incorporated in the State
of Maryland as Applied Research Corporation ("the original ARC"), on April l,
1981.
On December 29, 1987, Dollar Ventures, Inc., a Colorado Corporation,
acquired 100% of the outstanding shares of the original ARC, in exchange for
5,000,000 shares of Dollar Ventures, Inc.'s common stock. As a result of this
acquisition, Dollar Ventures, Inc. changed its corporate name to Applied
Research Corporation ("ARC - Colorado"), and the original ARC changed its
corporate name to that of the Debtor's, Applied Research of Maryland, Inc. The
original ARC filed articles of amendment in the state of Maryland changing its
name from Applied Research Corporation to Applied Research of Maryland, Inc.
Dollar Ventures filed articles of amendment in the state of Colorado changing
its name from Dollar Ventures, Inc. to Applied Research Corporation. The
Debtor is a wholly owned subsidiary of ARC Colorado.
During 1992, the President and C.E.O. of ARC - Colorado, Dr. Surundra
Anand ("Dr. Anand"), became concerned about the concentration of its business
being entirely in the government sector. During this time, the two largest
prime contracts with NASA were up for recompetition and the Hughes subcontract
had not yet been awarded. Accordingly, had the Debtor lost either or both of
the NASA prime contracts, it would have had a devastating effect on the
Debtor's revenues and long term profitability. As a result, the President set
out to diversify the business base away from government. In 1992, he started
ARSoftware and in 1994 he started ARInternet.
Although ARSoftware and ARInternet were attempts to diversify away from
the predominantly government business, neither ARC - Colorado nor the Debtor
had sufficient capital to fund these start up ventures. The problem was that
ARC - Colorado in particular, had no cash to invest in either ARSoftware or
ARInternet, so all of the start up expenses were funded by the Debtor.
Over the course of the first 38 months, the Debtor loaned $1.120
Million to ARSoftware. During the first ten months of the fiscal year ended
May 31 1996, the Debtor loaned another $85,000 in ARSoftware. During the
fiscal year ended May, 31, 1995, the Debtor loaned $261,000 in start up and
other expenses of ARInternet. During the first ten months of the fiscal year
ended May 31, 1996, the Debtor loaned an additional $141,000 in ARInternet.
No expenses for either ARSoftware or ARInternet have been funded by the
Debtor since the filing of the Bankruptcy. As of this date, ARSoftware has
still not achieved cash flow breakeven, and ARC-Colorado is contemplating
closing ARSoftware. As of this date, ARInternet is achieving cash flow
breakeven.
The cash drain of loaning $1.381 Million as of May 31, 1995, exhausted
all of the Debtor's available resources and capital. During the first ten
months of the fiscal year ended May 31, 1996, the Debtor loaned an additional
$227,000, which exacerbated its problems. In addition, because the Debtor's
costs were in excess of certain reimbursable limits set on some of its
contracts, the Debtor was also losing money. These events caused the Debtor to
fall in the arrears with the payments due to the 401(k) plan ("the 401(k)
Plan") and its federal tax withholdings with the Internal Revenue Service (the
"IRS").
During November, 1995, the IRS filed a lien against the Debtor for the
unpaid taxes. This caused the Debtor's lender to stop funding under its
receivables financing agreement. On December 1, 1995, the Debtor replaced its
lending institution with a local receivables financing institution and agreed
to make month installment of $75,000 towards its back taxes. However, as a
result of refinancing its lenders, the Debtor was forced to pay approximately
$385,000 in loans that were not financed by the Debtor's new lender. Although
the Debtor made its monthly installment payments to the IRS, it fell behind
with remitting current taxes due. As a result, on April 1, 1996, the IRS
issued Levy Notices to ARM's bank, financing company and the majority of its
customers. On April 2, 1996, the IRS attempted to close the business. As a
result, the Debtor was forced to file for protection under Chapter 11 of the
United States Bankruptcy Code on April 2, 1996.
IV. POST-PETITION OPERATIONS
------------------------
A. POST-PETITION OPERATION OF THE DEBTOR
Since April 2, 1996, the Debtor's has been operating as Debtor in
Possession. The IRS and the Company's receivables lending institution agreed
to allow the use of cash and receivables so that the business could continue
to operate while management sought a buyer for the business, and concluded the
sale.
B. THE SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE DEBTOR
Subsequent to the Petition Date, the Debtor entered into a Consolidated
Asset Purchase with Fidelity Technologies Corporation dated July 30, 1996 (the
"Fidelity Contract"). On October 4, 1996, the Bankruptcy Court entered an
Order approving the sale to Fidelity. Despite approval from the Bankruptcy
Court, the parties to the Fidelity Contract were unable to consummate the sale
due to the inability of the parties to procure a novation of contracts being
sold to Fidelity from the United States Government. The Fidelity Contract
provided that the novation of the contracts was a condition precedent to
closing. Closing was to occur no later than November 30, 1996. The parties
agreed to extend the closing date to January 31, 1997, but the U.S. Government
failed to novate the contracts and Fidelity terminated the Fidelity Contract.
Despite the termination of the Fidelity Contract, the Debtor felt
confident that it could procure a purchaser for its assets, and enter into a
purchase and sale agreement that would benefit the bankruptcy estate and all
parties in interests. In that regard, on or about, March 3, 1997, the Debtor
entered into a new Asset Purchase Agreement with Space Applications
Corporation ("SAC") for the sale of substantially all of the Debtor's assets
(the "Asset Purchase Agreement"). The Asset Purchase Agreement was approved
by the Bankruptcy Court on May 30, 1997. The sale was closed on approximately
June 23, 1997.
The Asset Purchase Agreement effectively sold substantially all of the
Debtor's assets, and was necessary to maximize the return to creditors of the
bankruptcy estate. With the exception of certain assets explicitly excluded
from the Asset Purchase Agreement, the Debtor sold to SAC, pursuant to the
Asset Purchase Agreement, all of the Debtor's rights, title and interest in
and to properties, assets and rights of any kind, whether tangible or
intangible, real or personal, owned by the Debtor or in which the Debtor has
any interest, including without limitation the following:
1. All Contract Rights (including, without limitation all Project
Contracts) as defined in the Agreement.
2. All Inventory as defined in the Asset Purchase Agreement.
3. All Books and Records as defined in the Asset Purchase Agreement.
4. All Fixtures and Equipment as defined in the Asset Purchase
Agreement.
5. All Proprietary Rights as defined in the Asset Purchase Agreement.
6. To the extent transferrable all Permits as defined in the Asset
Purchase Agreement.
7. All unbilled Accounts Receivable, as defined in the Asset Purchase
Agreement, as of January 31, 1997 (other than those relating to
award fees on Contract No. 1271).
8. Accounts Receivable, as defined in the Asset Purchase Agreement,
relating to award fees on Contract No. 1271 that were unbilled as of
January 31, 1997 and are billed prior to the closing date, to the
extent, and only to the extent that such amount exceeds Twenty-Five
Thousand Dollars ($25,000.00).
9. All Accounts Receivable (billed and unbilled) relating to the Last
Payroll.
10. All Accounts Receivable that are unbilled as of the Closing
Date.
11. All items of real or personal property specified in Exhibit B,
which is attached to the Asset Purchase Agreement.
The above assets were purchased pursuant to the Asset Purchase
Agreement, and shall hereinafter be referred to collectively as the "Purchased
Assets."
The following assets are excluded from the Asset Purchase Agreement and
were not transferred by the Debtor and shall hereinafter be collectively
referred to collectively as (the "Excluded Assets"):
A. The Seller's franchise, charter and status as a corporation,
its minute books, stock transfer records and similar records relating to the
Seller's organization, existence or capitalization, and the capital stock of
the Seller;
B. Claims and causes of action arising under Sections 547, 548,
549 and 550 of the Bankruptcy Code including without litigation claims and
causes of action for preferences, fraudulent transfer, fraudulent conveyances,
illegal or improper dividends (collectively, "Avoidance Claims");
C. Accounts Receivable of the Seller that are billed, fixed,
matured and liquidated as of the Closing Date (other than (i) Accounts
Receivable arising on account of the Last Payroll and (ii) Accounts Receivable
that were unbilled on January 31, 1997 except up to $25,000 of award fees on
Contract No. 1271);
D. Intercompany Receivables;
E. The Sellers' rights to occupy real property pursuant to leases
of real property other than leases specifically identified in writing by the
Buyer after delivery of the final Disclosure Schedule and any leasehold
improvements made pursuant thereto to the extent that the Seller has no right
to remove such leasehold improvements or that such removal would be
impractible;
F. Any proceeds from the refund of unearned insurance premiums, if
any;
G. The Seller's cash on hand or in banks other than cash in the
Purchased Receivables Proceeds Account; and
H. Any other property or asset that the Buyer identified in
writing as an Excluded Asset at or prior to the Closing.
The purchase price for the Purchased Assets consisted of payments and
assumption of specified liabilities in an amount totaling One Million Seven
Hundred Fifty Thousand Dollars ($1,750,000.00) (the "Purchase Price").
C. SETTLEMENT AGREEMENT BETWEEN THE DEBTOR AND ARSOFTWARE AND ARINTERNET
As stated above, the Debtor loaned approximately $1.6 Million Dollars
to ARSoftware and ARInternet. As neither company has attempted to repay this
debt, the Debtor maintains a cause of action against ARSoftware and
ARInternet, and their officers and directors. To date, however, ARInternet
has achieved only a marginal profit level of operations on a cash basis.
Further, ARSoftware has been operating at a loss. Copies of the financial
records of ARSoftware and ARInternet are available for inspection or copying
at the office of Debtor's counsel. Given the financial state of these
companies, as well as the high costs of litigation, the Debtor believes that
it would be in the best interests of the creditors and parties in interest to
enter into a settlement agreement whereby ARSoftware and ARInternet shall pay
to the Debtor One Hundred and Fifty Thousand Dollars ($150,000.00) over the
period of three (3) years (the "Intercompany Settlement Agreement").
Specifically, the terms of the Intercompany Settlement Agreement are as
follows:
1. ARSoftware and ARInternet shall execute a promissory note obligating
ARSoftware and ARInternet to pay to the Debtor One Hundred and Fifty
Thousand Dollars ($150,000.00) over the period of three (3) years at
a rate of Four Thousand One Hundred and Sixty-Seven Dollars
($4,167.00) per month (the "Settlement Amount"). ARSoftware and
ARInternet agree to execute any and all documents, and perform any
other actions, necessary for the Debtor to maintain a perfected
security interest in the agreed upon collateral. The amount to be
paid by ARSoftware and ARInternet shall not be subject to interest,
however, in the event of a default interest shall accrue at a rate
of twelve percent (12%) per annum. Further, in the event that
payments are not timely made a late fee equal to five percent (5%)
of the monthly amount shall be incurred.
2. If for any fiscal year the cash flow of ARSoftware and ARInternet
exceeds its operating expenses and any debt service including the
debt service required under the Intercompany Settlement Agreement,
then one-half (1/2) of the surplus of the Net Cash Flow shall be
paid to the Bankruptcy Estate.
Net Cash Flow is defined as that sum remaining after the payment of
operating expenses, including debt service, on a consistent
historical basis. Net Cash Flow shall be supported by a Statement
of Cash Flow prepared in accordance with GAAP. The fiscal year-end
for ARSoftware and ARInternet is May 31, and the fiscal year ending
May 31, 1997 shall be the base line. Commencing on September 1, 1998
and each year thereafter, if appropriate, the monthly payment shall
be increased by one-twelfth (1/12) of the net surplus, the total of
which shall equal one-half (1/2) of the Net Cash Flow. For each
fiscal year where there is a net surplus the payments shall continue
for twelve (12) consecutive months. The Statement of Cash Flow and
supporting documents shall be delivered to the Debtor's estate
commencing August 31, 1998 and on the 31st day of August each year
thereafter until the promissory note is paid in full.
In calculating Net Cash Flow, future general administrative expenses
should not exceed as a percentage of sales the greater of those
years ended May 31, 1997 and May 31, 1998.
3. Both ARSoftware and ARInternet will be jointly and severally liable
for the settlement amount. The obligations of ARSoftware and
ARInternet will be secured by all of their assets, including
equipment, fixtures, accounts receivable, copy rights and
intangibles.
4. In the event the stock or assets ARSoftware and/or ARInternet are
sold during the three (3) year payout period, the net proceeds of
any such sale, after payment of all costs of sale and payment to any
outstanding creditors of the sold entity including the Intercompany
Settlement Note, shall be split equally between the Debtor and the
shareholders of the sold entity. Those monies due shall be paid to
the Debtor's estate at closing.
5. Dr. Anand shall guaranty the obligations of ARSoftware and
ARInternet under the Intercompany Settlement Agreement.
The Intercompany Settlement Agreement is subject to approval of the
Bankruptcy Court. Copies of the Intercompany Settlement Agreement, Promissory
Note, Security Agreement and Guaranty are available for inspection and copying
at the office of Debtor's counsel. The obligation of ARSoftware and
ARInternet shall be deemed substantially consummated upon delivery of the
executed Settlement Agreement and the first payment to the Debtor.
The proceeds generated from the Intercompany Settlement Agreement will
be used to pay the Priority Tax Claims of the State of Maryland, the State of
California, and Washington, D.C. The remaining proceeds from the Intercompany
Settlement Agreement, after payment of Administrative Expense Claimants, if
any, shall be paid to the Internal Revenue Service to the extent it still has
a claim. The balance of any proceeds, if any, will be paid to Class 4
Unsecured Claims. The Internal Revenue Service has consented to the
distribution of the proceeds of the Intercompany Settlement Agreement as
stated herein.
D. THE DEBTOR'S 401(K) PLAN
The Department of Labor on behalf of the Debtor's 401(k) pension plan
investigated the claims made against the pension plan against the Debtor and
others. The Department of Labor has initialized a substitution of trustees
for this Plan. The Debtor intends to cooperate fully with the Department of
Labor in terminating the pension plan.
Dr. Anand currently is negotiating a settlement agreement with the
United States Department of Labor regarding the administration (and
liquidation and distribution when appropriate) of the assets of the 401(k)
pension plan, and his role as pension plan administrator and plan trustee.
The United States Department of Labor has indicated that it will not pursue
the Debtor, or any other employee of the Debtor other than Dr. Anand, for any
liability with regard to the 401(k) pension plan. The Debtor anticipates that
any recovery by the Department of Labor will benefit only the 401(k) Plan, and
not benefit the Bankruptcy Estate of the Debtor.
V. MONTHLY OPERATING REPORTS
-------------------------
At the time of this Disclosure Statement, the Debtor has been in
Chapter 11 since April of 1996. Copies of the Debtor's Monthly Operating
Reports have been filed with the Bankruptcy Court and, upon request, can be
obtained from the undersigned counsel for the Debtor.
VI. DESCRIPTION OF THE PLAN
-----------------------
A. GENERAL OVERVIEW OF THE PLAN
The Plan defines and classifies "Claims" and "Equity Interests"
separately in accordance with the Code and provides different treatment for
different classes of Claims or Equity Interests. As described more fully
below, the Plan generally provides, separately by Class, either that the
Claims are unimpaired or that the holders of the Claims will receive payments
as designated by the terms of the Plan. The treatment provided for Allowed
Claims under the Plan is in full settlement and satisfaction of all such
claims.
The objective of the Plan is to maximize the return to the creditors in
a way that is fair and equitable to all interested parties. The Debtor
believes that the Plan, as proposed, is fair and equitable, and that each
class of creditors will receive at least what it would realize if the Debtor
were liquidated under Chapter 7 of the Code.
This Plan is a liquidating Plan under 11 U.S.C. Section 1129(a)(11) and
is materially premised upon Cash Distributions from the Claims Distribution
Fund to Classes of Claims in accordance with the priorities and terms
identified in the provisions of this Plan.
Except as otherwise specifically provided in this Plan, upon the
Confirmation Date, title to all remaining property of the Debtor's Chapter 11
estate, including, but not limited to, monies contained in the Claims
Distribution Fund shall vest in the Debtor in accordance with 11 U.S.C.
Section 1141(a), (b), and (c), free and clear of all liens, claims or other
interests in such property.
Unless otherwise ordered by the Bankruptcy Court, all Cash
Distributions contemplated by the Plan other than those covered in the Asset
Purchase Agreement and Order Granting the Sale of substantially All of the
Assets Free and Clear of Liens and Encumbrances, shall only occur on or
subsequent to the Effective Date. All Cash Distributions under the Plan shall
be paid in the manner generally set forth in this Plan. Upon the Effective
Date, James M. Greenan, and Greenan, Walker, Trainor & Billman shall act as
disbursing agent in respect of all Cash Distributions required under the Plan.
The Plan provides for the liquidation of all of the Debtor's remaining assets
and distribution to creditors, as described below, of the liquidation proceeds
and existing cash balances, according to the priorities established by the
Bankruptcy Code and applicable non-bankruptcy law.
THE PLAN IS COMPLEX AND REPRESENTS A PROPOSED LEGALLY BINDING AGREEMENT
BY THE DEBTOR. AN INTELLIGENT JUDGMENT CONCERNING THE PLAN CANNOT BE MADE
WITHOUT UNDERSTANDING IT IN FULL. A COPY OF THE PLAN HAS BEEN FILED WITH THE
BANKRUPTCY COURT, AND ACCOMPANIES THIS DISCLOSURE STATEMENT.
B. TREATMENT OF CLAIMS
For purposes of the Plan, Claims and Interests are classified as
follows:
"CLASS 1 CLAIM" shall consist of the Secured Claim of the Internal
Revenue Service. The facts concerning the Claim and treatment are addressed
below.
"CLASS 2 CLAIM" shall consist of the Secured Claim of Commerce
Funding Corp. The facts concerning the Claim and treatment are addressed
below.
"CLASS 3 CLAIMS" shall consist of all Claims entitled to Priority
Status under Sections 507(a)(3), (a)(4), and (a)(6) and 1129(a)(9)(B) of the
Bankruptcy Code.
"CLASS 4 CLAIMS" shall consist of all Allowed Unsecured Claims.
"CLASS 5 INTERESTS" shall consist of all Equity Interests in the
Debtor.
The Debtor has not designated any Class of Claims under Sections
507(a)(1), 507(a)(2) or 507(a)(8) pursuant to Section 1123(a)(1) of the
Bankruptcy Code. The Plan contemplates that all Allowed Administrative Expense
Claims shall be accorded treatment and payment as provided for by the
Bankruptcy Code and as otherwise addressed by this Plan.
CLASS 1 CLAIM IS IMPAIRED. The prior sale of the assets, pursuant to
the terms of the Asset Purchase Agreement, transferred substantially all of
the assets of the Debtor free and clear of all liens without any preservation
of the asserted lien of Class 1. The Claim of the Internal Revenue Service
shall be deemed fully satisfied by the treatment afforded by the Asset
Purchase Agreement. Accordingly, the Claim of the Internal Revenue Service
will receive no treatment as an Allowed Secured Claim under the Plan.
THE CLASS 2 CLAIM IS NOT IMPAIRED. The prior sale of the assets,
pursuant to the terms of the Asset Purchase Agreement, transferred the
substantially all of the assets of the Debtor free and clear of all liens
without any preservation of the asserted lien of Class 2. Commerce Funding
Corp. has been paid in full pursuant to the terms of the Asset Purchase
Agreement and its loan documents. Accordingly, the Secured Claim of Commerce
Funding Corp. will receive no treatment as an Allowed Secured Claim under the
Plan.
THE CLASS 3 CLAIMS ARE IMPAIRED. Priority Claims in this Class are
Claims entitled to priority in accordance with 11 U.S.C. Section 507(a) other
than those designated in 11 U.S.C. Section 1123(a)(1)("Priority Claims"). In
full and complete satisfaction and release of the Class 3 Claims, and unless
otherwise agreed by the Claimant and the Debtor, the holders of Class 3
Claims, which are Allowed Claims entitled to priority pursuant to 11 U.S.C.
Sections 507(a)(3), (a)(4) and (a)(6), shall be paid pursuant to the Asset
Purchase Agreement. All claims by the Employees of the Debtor for wages,
salaries, or commissions, including vacation, severance, sick leave, 401K
benefits, and expenses shall be deemed fully satisfied by the treatment
afforded the Employees in the Asset Purchase Agreement. Accordingly, the
Employees of the Debtor will receive no additional treatment as Priority
Claimants under the Plan because those claims have been waived. Approximately
One Hundred Forty-Five Thousand Dollars ($145,000.00) of claims due the
Employees will remain as Class 4 Unsecured Claims.
THE CLASS 4 CLAIMS ARE IMPAIRED. If, and to the extent funds become
available, all Allowed Unsecured Claims shall receive periodic Cash
Distributions from the liquidation of Excluded Assets after disbursement to
all Administrative Expense Claims, Priority Claims and Classes 1 through 3, to
the extent Revenues remain available, commencing on the Effective Date, and
continuing thereafter to the extent additional Revenues are received by the
Debtor through and including the date of final administration of this Case.
Class 4 Claims will be paid after payment in full to all Administrative
Expense Claims, Priority Claims, Class 1 Claims, Class 2 Claims, and Class 3
Claims.
The Debtor and its affiliates have committed to an Intercompany
Settlement Agreement whereby in the event that ARInternet and ARSoftware
either experience improved cash flow or are sold for a sum in excess of its
debt, such events may enhance the return to Class 4 Claimants. The Debtor,
however, does not anticipate that the Class 4 Claimants will receive any
monetary distribution under the Plan. The Debtor estimates that it will
receive a total of $598,194.00 from its further liquidation, but no additional
funds will be available for distribution to the Class 4 Claimants until
approximately $856,276.00 has been received as there are Priority Claims that
will remain unpaid in the approximate amount of $258,082.00.
THE CLASS 5 INTERESTS ARE IMPAIRED. Class 5 Interests will be treated
under either of two (2) alternatives. First, if the Intercompany Settlement
Agreement and the Plan are approved as proposed, then the stock in the Debtor
will be retained by its parent corporation. The Debtor anticipates that this
will improve the possibility of the cash flow payments to Class 4 Claimants
under the Intercompany Settlement Agreement.
Alternatively, if the Intercompany Settlement Agreement is not
approved, and the treatment of Class 5 as described above is not approved,
then the Class 5 Interests will be terminated on the Confirmation Date and the
Class 5 Claimants will retain no interest in the Debtor thereafter.
THE ADMINISTRATIVE EXPENSE CLAIMS. Administrative Expense Claims are
Claims against the Debtor for any costs or expenses of the Chapter 11 case
allowable under 11 U.S.C. Section 503(b), including all actual and necessary
costs and expenses incurred to preserve the Debtor's estate, as well as the
operations of the Debtor's business, including compensation or reimbursement
of expenses to the extent allowed under the Code. In this case, the Debtor-
In-Possession and its affiliates have agreed, pursuant to the Intercompany
Settlement Agreement, that net proceeds for a Sale or improved cash flow if
achieved, enhance the divided to Class Four Creditors. Administrative Expense
Claims consist primarily of fees owed to Professionals.
Unless otherwise agreed by the Professionals, Administrative Expense
Claims of Professionals retained pursuant to Court Order shall be paid, in
cash, the full amount of their Allowed Claim as follows: (1) unpaid fees and
expenses, if any, which were approved prior to the Effective Date shall be
paid on the Effective Date, and (2) fees and expenses which are allowed after
the Effective Date shall be paid when allowed. All reasonable post-
confirmation Professional fees and expenses shall be paid within thirty (30)
days from receipt of a bill. The Debtor believes that the Professional fees
in this case, which are subject to approval by this Court, are approximately
$494,000.00.
The Administrative Expense Claims shall be paid from the liquidation of
the Excluded Assets, the funds designated for the repayment of this debt
pursuant to the terms of the Asset Purchase Agreement, and to the extent
necessary, the proceeds of the Intercompany Settlement Agreement with
ARSoftware and ARInternet. In the event that Administrative Expense Claims
must be paid from the proceeds of the Intercompany Settlement Agreement, such
claims will be satisfied prior to any distribution to the Priority Tax
Claimants.
The treatment of the claims of the Employees of the Debtor for wages,
salaries, unused vacation pay, 401K benefits, and expenses in the Asset
Purchase Agreement shall be in full and complete satisfaction all of their
claims against the Debtor. Accordingly, the Employees will receive no
treatment as an Administrative Expense Claim Holder under the Plan as those
claims have been waived.
THE PRIORITY CLAIMS PURSUANT TO SECTIONS 507(A)(1), 507(A)(2) OR
507(A)(8) OF THE BANKRUPTCY CODE. In full and complete satisfaction, and
release of the Interests of the Priority Tax Claims entitled to priority
status under 11 U.S.C. Section 507(a)(8), the Priority Tax Claimants shall
receive payment from the liquidation of the Excluded Assets and proceeds from
the Intercompany Settlement Agreement with ARSoftware and ARInternet to the
extent any proceeds remain after payment of the Administrative Expense Claims.
The Claims of the State of Maryland, the State of California, and
Washington D.C. (the "State Tax Claimants"), are for withholding taxes and
unemployment taxes. The Debtor estimates that the claim of the State of
Maryland is in the approximate amount of $163,479.00, that the claim of
Washington D.C. is in the amount of $1,447.00, and the claim of the State of
California is in the amount of $916.00. In full and complete satisfaction and
release of the claims of the State Tax Claimants, the State Tax Claimants
shall receive a "pro rata" distribution from the proceeds of the Intercompany
Settlement Agreement after payment to the Administrative Expense Claimants, if
necessary. The payment of the State claims as provided herein shall
constitute a full and complete release of claims against any officer,
director, or responsible person of the debtor.
The treatment of the claim of the Internal Revenue Service pursuant to
the terms of the Asset Purchase Agreement shall be in full and complete
satisfaction of all of its claims against the Debtor. Accordingly, the
Internal Revenue Service will receive treatment as a Priority Claim Holder
under the Plan only in the event that there are remaining proceeds after
payment to Administrative Expense Claimants and the State Tax Claimants. To
the extent that the Priority Tax Claim of the Internal Revenue Service exceeds
the payment received from the Asset Purchase Agreement and the remaining
proceeds from the Intercompany Settlement Agreement, if any, the Internal
Revenue Service has waived its right to such claim.
Any Class of Claims entitled to timely elect treatment pursuant to
Section llll (b)(2) of the Bankruptcy Code shall receive treatment as required
by law. Further, nothing in this Plan shall be deemed to preclude any Class
of Claims entitled to elect treatment pursuant to Section 1111 (b)(2) of the
Bankruptcy Code from timely making such election.
This Plan is a liquidating plan under Section 1129(a)(11) of the
Bankruptcy Code and is materially premised upon Cash Distributions from the
Claims Distribution Fund to Classes of Claims in accordance with the
priorities and terms identified in Articles III and IV of the Plan.
VII. IMPLEMENTATION
--------------
The Debtor shall pay claims from the proceeds derived from the Asset
Purchase Agreement and the collection of the assets not otherwise covered by
the Asset Purchase Agreement.
VIII. LIQUIDATION UNDER CHAPTER 7 OF THE BANKRUPTCY CODE
--------------------------------------------------
In order for the Bankruptcy Court to confirm the Plan, it must make a
finding that each Class of Creditors will receive at least as much under the
Plan as they would if this case were converted to a case under Chapter 7 of
the Code, and the assets were liquidated by a Chapter 7 Trustee. Under
Chapter 7 of the Bankruptcy Code, the Debtor would be forced to cease all
operations, and a Trustee would be appointed to liquidate the assets of the
Debtor and to distribute the proceeds of liquidation in accordance with the
priorities established by the Code. Under Chapter 7 of the Bankruptcy Code,
the Debtor would be forced to sustain significant administrative expenses in
the nature of Chapter 7 trustee fees imposed by 11 U.S.C. Section 326, and
administrative expenses necessary for the Chapter 7 trustee and his or her
counsel to become familiar with the instant case. As the Debtor believes that
it can wind down the operations of the business in an orderly fashion and
provide additional funds to the estate over and above that which creditors
would receive in a Chapter 7 case, the Debtor believes that a conversion to
Chapter 7 would impose an unnecessary and costly surcharge on this estate.
Pursuant to the Asset Purchase Agreement, the Debtor has sold
substantially all of its assets. In that regard, the only assets remaining
are as follows:
(1) Cash on Hand: $ 316,945.00
(2) Uncollected Receivables from
Government Contracts $ 108,632.00
(3) Proceeds from Settlement Agreement
with ARSoftware and ARInternet $ 150,000.00
(4) Balance of Purchase Price from
Asset Purchase Agreement $ 22,617.00
TOTAL: $ 598,194.00
Whether the Debtor is liquidated pursuant to Chapter 7 of the Code or
the Plan, the General Unsecured Creditors will receive no distribution as a
result of the significant Secured Claims and Priority Tax Claims in this Case.
Under the proposed Plan, however, the payout to the Priority Tax Claims and
Secured Creditors has been maximized because the Debtor was able to procure a
purchaser of substantially of all of its assets while remaining a viable
operation. This is especially true as the Debtor's assets consisted primarily
of accounts receivable and on going contracts. In the event that the Debtor
was forced to cease operations, the Debtor would have defaulted on the
contracts thereby negatively impacting their value. Further, the
collectability of the accounts receivable would have diminished considerably.
As the sale has been approved by the Bankruptcy Court, and subsequently was
completed, the Debtor need only collect and disburse the proceeds of the sale
pursuant to the terms and provisions of the Asset Purchase Agreement, the
remaining uncollected accounts receivable, proceeds from the Intercompany
Settlement Agreement and the Plan. The Debtor, therefore, believes that it is
in the best interest of the creditors to accept the Plan.
IX. EXECUTORY CONTRACTS AND UNEXPIRED LEASES
----------------------------------------
The Debtor has the right, subject to Bankruptcy Court approval, under
11 U.S.C. Section 365, to assume or reject any executory contracts or
unexpired leases entered into before the filing of the Petition. Any damage
Claim resulting from a rejection is treated as a General Unsecured Claim and
included in the appropriate Class to the extent such Claim is allowed by the
Bankruptcy Court.
Any and all executory contracts and unexpired leases within the meaning
of Section 365(a) of the Bankruptcy Code which have not been assumed or as to
which the Debtor has not applied to the Court for authority to assume within
the Ninety (90) Days after the Effective Date or which have not been assumed
pursuant to the terms of this Plan, shall be deemed to have been rejected by
the Debtor as of the Confirmation Date.
All Claims, if any, arising from the rejection of unexpired leases or
executory contracts shall be filed not later than thirty (30) days after the
Confirmation Date. Any such Claims not filed within the required time shall
be disallowed. All such Claims, to the extent allowed, shall be treated as
General Unsecured Claims under Class Four of the Plan.
X. TAX CONSEQUENCES
----------------
THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW IS
LIMITED TO THE GENERAL TAX CONSEQUENCES AFFECTING CREDITORS AS A RESULT OF THE
DISCHARGE OF INDEBTEDNESS WITHOUT PAYMENT UNDER THE PLAN. BECAUSE THE TAX
CONSEQUENCES TO EACH CREDITOR CAN VARY DEPENDING UPON SUCH CREDITOR'S
PARTICULAR CIRCUMSTANCES, ALL CREDITORS AND OTHER PERSONS AFFECTED BY THE PLAN
SHOULD CONSULT THEIR OWN TAX ADVISOR FOR A COMPLETE ANALYSIS OF THE TAX
CONSEQUENCES RESULTING FROM CONFIRMATION OF THIS PLAN.
BECAUSE OF CONTINUAL CHANGES BY THE CONGRESS, THE TREASURY DEPARTMENT,
AND THE COURTS WITH RESPECT TO THE ADMINISTRATION AND INTERPRETATION OF THE
TAX LAWS, NO ASSURANCES CAN BE GIVEN THAT THE FOLLOWING INTERPRETATIONS WILL
NOT BE CHALLENGED BY THE INTERNAL REVENUE SERVICE, OR, IF CHALLENGED, THAT
SUCH INTERPRETATIONS WILL BE SUSTAINED.
NO STATEMENT IN THIS DISCLOSURE STATEMENT SHOULD BE CONSTRUED AS LEGAL
OR TAX ADVICE, THE DEBTOR AND ITS COUNSEL DO NOT ASSUME ANY RESPONSIBILITY OR
LIABILITY FOR THE TAX CONSEQUENCES A CREDITOR OR EQUITY SECURITY HOLDER MAY
INCUR AS A RESULT OF THE TREATMENT AFFORDED THEIR CLAIM OR INTEREST UNDER THE
PLAN.
The principal income tax consequences for a creditor of the Debtor
relates to the ability to deduct a portion of its claim against the Debtor in
the event that the creditor does not receive full payment of the Allowed
Amount of its Claim as contemplated under the Plan. Section 166 of the
Internal Revenue Code of 1986, as amended, ("IRC") (relating to the
deductibility of bad debts) generally provides as follows:
1. totally worthless business bad debt is deductible only in the
tax year in which it becomes worthless;
2. partially worthless business bad debt is deductible in an
amount not in excess of the part charged off on the taxpayer's books within
the taxable year, and
3. in the case of a taxpayer other than a corporation, a non-
business bad debt which becomes completely worthless during the taxable year
is deductible as a short-term capital loss and is subject to the limitations
imposed on the deductibility of such losses.
For purposes of IRC Section 166, a "non-business debt" means a debt
other than (I) one created or acquired in connection with the taxpayer-
creditor's trade or business or (ii) the loss from the worthlessness of which
was incurred during the operation of the taxpayer-creditor's trade or
business.
Pursuant to Treas. Reg. Section 1.166-2(c), as a general rule,
bankruptcy is generally an indication of the worthlessness of at least a part
of an unsecured and unpreferred debt. In bankruptcy cases, a debt may become
worthless before settlement in some instances; and in others, only when a
settlement in bankruptcy has been reached. In either case, the mere fact that
bankruptcy proceedings instigated against the debtor are terminated in a later
year, thereby confirming the conclusion that the debt is worthless, shall not
authorize the shifting of the deduction under IRC Section 166 to such year.
Pursuant to Treas. Reg. Section 1.166-1(d)(2)(ii), only the difference between
the amount received in distribution of assets of a bankrupt and the amount of
the claim may be deducted under IRC Section 166 as a bad debt.
Generally, taxpayers are entitled to a bad debt deduction with respect
to accounts receivable only if the taxpayer has recognized as income the
accounts receivable in the year in which the bad debt deduction is claimed or
a prior taxable year. Thus, bad debt deductions for worthless or partially
worthless accounts receivable are normally available only to accrual method
taxpayers. Likewise, worthless debts arising from unpaid wages, salaries,
fees, rents and similar items of taxable income are not allowed as a deduction
as a bad debt unless the income such items represent has been included in the
return of income for the year for which the deduction as a bad debt is claimed
or for a prior taxable year.
Further, the availability of the bad debt deduction under IRC Section
166 is not available for losses governed by IRC Section 165, including,
without limitation, losses incurred on a bond, debenture, note or certificate
or other evidence of indebtedness, issued by a corporation or by a government
or political subdivision thereof, with interest coupons or in registered form.
The deductibility of losses for debts evidenced by a "security", as defined in
IRC Section 165(g), is governed by IRC Section 165.
Business bad debts deductible under IRC Section 166 may generally be
deducted using either the specific charge-off method or, if certain stringent
requirements are met, the nonaccrual-experience method. Under the specific
charge-off method, specific business bad debts that become either partially or
totally worthless during the tax year may be deducted in the manner permitted
by IRC Section 166.
If a deduction is taken for a bad debt which is recovered in whole or
part in a later tax year, the taxpayer may have to include in gross income the
amount recovered, except, under limited circumstances, the amount of the
deduction that did not reduce taxes in the year deducted.
XI. EFFECTS OF PLAN CONFIRMATION
----------------------------
The provisions of a confirmed Plan are binding on all parties to the
Plan. In the event that the Bankruptcy Court denies confirmation of the Plan,
the Debtor may amend the Plan or the case may be dismissed or converted to one
under Chapter 7.
XII. GENERAL PROVISIONS
------------------
The settlement and compromise of claims impaired under the Plan shall
constitute a full satisfaction of such debts, obligations and liabilities.
XIII. RETENTION OF JURISDICTION
-------------------------
The Bankruptcy Court will retain and have exclusive jurisdiction over
the Reorganization Case to hear and determine Disputed Claims or Equity
Interests or actions brought by the Debtor pursuant to 11 U.S.C. Sections 541
through 551, 553 and 723, allow pre-confirmation and post-confirmation
compensation to certain professionals, resolve disputes, correct errors,
enforce the Plan, issue necessary orders, and determine other matters relating
to the Plan.
Further, this Court shall retain jurisdiction for certain purposes
including, but not limited to, the following:
(i) Determination and liquidation of all Claims or disputes arising
therefrom, and until all litigation to which the Debtor is a party is
terminated.
(ii) The classification of any creditor in the re-examination of its
Claim, which has been allowed for the purposes of voting, in the determination
of any objection to the creditor's Claim. The Debtor's failure to object to or
to examine any Claim for the purpose of voting shall not be deemed to be a
waiver of the Debtor's right to object or to re-examine the Claim and holder
in part.
(iii) Determination of all questions and disputes regarding titles to
the assets of the estate, and determination of all causes of actions,
controversies, disputes or conflicts, whether or not subject to action pending
as of the Confirmation Date between the Debtor an the other party, including,
but not limited to, any right of the Debtor to receive assets pursuant to the
provisions of Chapter 11 of the United States Bankruptcy Code.
(iv) The correction of any defects, the curing of any omission, or
the reconciliation of any inconsistencies in the Plan or the Order of
Confirmation as may be necessary to carry out the purpose and intent of the
Plan.
(v) The modification of the Plan after Confirmation pursuant to the
Bankruptcy Rules and Chapter 11 of the United States Bankruptcy Code.
(vi) The enforcement and interpretation of the terms and conditions
of the Plan.
(vii) The entry of any Order, including injunctions, necessary to
enforce the titles, rights an powers of the Debtor, and to oppose such
limitations, restrictions, terms and conditions of such titles, rights and
powers that the Court may deem necessary.
(viii) The entry of an Order including the termination of this case.
XIV. ANTICIPATED FUTURE OF THE DEBTOR
--------------------------------
As this Plan is a liquidation of the remaining affairs of the Debtor no
prospective management shall exist and no employees shall be maintained. The
Debtor will have no future operations as it is no longer a going concern. The
confirmation of this Plan will wind up the Debtor's remaining affairs. The
future operations in the nature of ordinary course of business operations are
not contemplated by the Plan.
XV. TERMINATION OF THE CREDITOR'S COMMITTEE
--------------------------------------
The appointment and tenure of the Creditor's Committee shall be
terminated as of the Effective Date, provided that there are no pending or
unresolved motions, appeals, objections, or other pleadings in which the
Creditor's Committee seeks affirmative relief. In the event that such a
pleading is pending, such pleading shall constitute an extension of the term
of the Creditor's Committee.
Respectfully submitted,
APPLIED RESEARCH OF MARYLAND
______________________________
BY:
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(At Greenbelt)
- - ------------------------------
In re: )
) Case No. 96-1-2425-DK
APPLIED RESEARCH OF ) Chapter 11
MARYLAND, INC. )
)
Debtor )
)
- - ------------------------------
ORDER CONFIRMING
DEBTOR'S PLAN OF REORGANIZATION
--------------------------------
The Debtor's Plan of Reorganization (the "Plan"), of March 4, 1998, filed
by Applied Inc., Debtor (hereinafter "Debtor" or the "Proponent"), pursuant to
Chapter 11 of the United States Bankruptcy Code having been transmitted to
creditors and equity security holders; and
It having been determined after hearing on notice that the requirements
for confirmation set forth in 11 U.S.C. Section 1129(a) have been satisfied;
it is this ___ day of July, 1998, by the United States Bankruptcy Court for
the District of Maryland, hereby
ORDERED, that the Plan, as modified pursuant to the Addendum to Order
Confirming Debtor's Plan of Reorganization, (the "Addendum") attached hereto
and made a part of this Order Confirming Debtor's Plan of Reorganization (the
"Order") be and is confirmed. A copy of the Addendum is attached hereto; and
it is further,
ORDERED, that all fees which are owed and unpaid by the Debtor-in
possession to the U.S. Trustee, pursuant to 28 U.S.C. Section 1930(a)(6),
including but not limited to those fees which are accrued for the quarter in
which the plan is confirmed, shall be paid in full, in cash, on or before the
Effective Date of the Plan and in no event later than thirty [30] days for
confirmation, and it is further,
ORDERED, that Proponent shall mail a copy of this Order and the Addendum
to all creditors and parties in interest pursuant to Bankruptcy Rule
2002(f)(8) and file herein a certificate to that effect within eight (8)
business days of the entry of this order.
Entered:
------------ -----------------------------------
Judge Duncan W. Keir
United States Bankruptcy Court
of the District of Maryland
Copies to:
James M. Greenan, Esquire
Greenan, Walker, Trainor & Billman
6411 Ivy Lane, Suite 706
Greenbelt, Maryland 20770
Julie A. Mack, Esquire
Office of the United States Trustee
6305 Ivy Lane, Suite 600
Greenbelt, Maryland 20770
Applied Research of Maryland, Inc.
Attn: Dennis H. O'Brien, C.P.A.
8201 Corporate Drive, Suite 1120
Landover, Maryland 20785
F. Thomas Rafferty, Esquire
Blum, Yumkas, Mailman, Gutman & Denick, P. A.
1200 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
Sylvia Brokos, Esquire
Comptroller of the Treasury
for the State of Maryland
Compliance Division - Room 410
301 West Preston Street
Baltimore, Maryland 21201
<PAGE>
James Wilkinson, Esquire
Tax Division, Dept of Justice
555 Fourth Street, N.W.
Room 6323
Washington, D.C. 20001
Internal Revenue Service
Special Procedures Branch
31 Hopkins Plaza
Room 1140
Baltimore, Maryland 21201
District of Columbia
Dept. of Finance and Revenue
P. O. Box 419
Washington, D.C. 20044
District of Columbia
Dept. of Finance and Revenue
P. O. Box 7792
Washington, D.C. 20044
District of Columbia Unemployment
P. O. Box 96664
Washington, D.C. 20001-2187
Maryland Unemployment Ins Fund
Office of Unemployment Ins.
P. O. Box 1729
Baltimore, Maryland 21203-7291
Prince George's County Govt.
c/o Carl A. Harris & Assoc.
P. O. Box 1168
Upper Marlboro, Maryland 20773
State of California
Employment Development Dept.
P. O. Box 826288
Sacramento, California 94230-6288
State of California
Employment Development Dept.
P. O. Box 826276
Sacramento, California 94230-6276
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(At Greenbelt)
- - ------------------------------
In re: )
) Case No. 96-1-2425-DK
APPLIED RESEARCH OF ) Chapter 11
MARYLAND, INC. )
)
Debtor )
)
- - ------------------------------
ADDENDUM TO ORDER CONFIRMING
DEBTOR'S PLAN OF REORGANIZATION
-------------------------------
Applied Research of Maryland, Inc., Debtor and Debtor-in-possession, in
the above-captioned bankruptcy case, by and through its attorneys, James M.
Greenan and Christopher L. Hamlin, hereby modifies its Debtor's Plan of
Reorganization, and states as follows:
Introduction
------------
Applied Research of Maryland, Inc., Debtor and Debtor-in-possession (the
"Debtor"), filed Debtor's Plan of Reorganization (hereinafter the "Plan") on
March 4, 1998. Debtor distributed the Plan for voting, pursuant to the
Court's Order Approving Disclosure Statement and Fixing Time for Filing
Acceptances or Rejections of Plan, Combined with Notice Thereof, dated April
29, 1998 (the "Order"), on May 7, 1998.
The Order provided, "inter alia," that the time permitted for filing
acceptances or rejections of the Plan ended on June 3, 1998. Through June 3,
1998, Debtor had received acceptances from each of the two (2) classes that
voted on the Plan. Both of these Classes (Class 3 and Class 4) are impaired.
Upon review of the Plan, and in response to both the Bankruptcy Court's
concerns regarding the treatment of certain tax claimants, and to certain
objections to confirmation of Debtor's Plan submitted by the Comptroller of
the Treasury for the State of Maryland, Debtor has determined that certain
modifications should be made to Article III of the Plan. Pursuant to the
foregoing, Debtor's Plan is amended as follows:
ARTICLE III (MODIFIED)
TREATMENT OF CLASSES OF CLAIMS AND INTERESTS
--------------------------------------------
3.1 CLASS 1 CLAIM IS IMPAIRED. The prior sale of the assets, pursuant
to the terms of the Asset Purchase Agreement, transferred substantially all of
the assets of the Debtor free and clear of all lines without any preservation
of the asserted lien of Class 1. The Claim of the Internal Revenue Service
shall be deemed fully satisfied by the treatment afforded by the Asset
Purchase Agreement. Accordingly, the Claim of the Internal Revenue Service
will receive no treatment as an Allowed Secured Claim under the Plan.
3.2 THE CLASS 2 CLAIM IS NOT IMPAIRED. The prior sale of the assets,
pursuant to the terms of the Asset Purchase Agreement, transferred
substantially all of the assets of the Debtor free and clear of all liens
without any preservation of the asserted lien of Class 2. Commercial Funding
Corp. has been paid in full pursuant to the terms of the Asset Purchase
Agreement and its loan documents. Accordingly, the Secured Claim of Commerce
Funding Corp will receive no treatment as an Allowed Secured Claim under the
Plan.
3.3 THE CLASS 3 CLAIMS ARE IMPAIRED. Priority Claims in this Class are
Claims entitled to priority in accordance with 11 U. S. C. Section 507(a)
other than those designated in 11 U.S.C. Section 1123(a)(1) ("Priority
Claims"). In full and complete satisfaction and releases of the Class 3
Claims, and unless otherwise agreed by the Claimant and the Debtor, the
holders of Class 3 Claims, which are Allowed Claims entitled to priority
pursuant to 11 U.S.C. Sections 507(a)(3), (a)(4), and (a)(6), shall be paid
pursuant to the Asset Purchase Agreement. All claims by the Employees of the
Debtor for wages, salaries, or commissions, including vacation, severance,
sick leave, 401 K benefits, and expenses shall be deemed fully satisfied by
the treatment afforded the Employees in the Asset Purchase Agreement.
Accordingly, the Employees of the Debtor will receive no additional treatment
as Priority Claimants under the Plan because those claims have been waived.
Approximately One Hundred Forty-Five Thousand Dollars ($145,000.00) of Claims
due the Employees will remain as Class 4 Unsecured Claims.
3.4 THE CLASS 4 CLAIMS ARE IMPAIRED. If, and to the extend funds become
available, all allowed Unsecured Claims shall receive per - 'Cash
Distributions from the liquidation of Excluded Assets after disbursement to
all Administrative Expense Claims, Priority Claims and Classes 1 through 3, to
the extent Revenues remain available, commencing on the Effective Date, and
continuing thereafter to the extent additional Revenues are received by the
Debtor through and including the date of final administration of this Case.
Class 4 Claims will be paid after payment in full to all Administrative
Expense Claims, Priority Claims, Class 1 Claims, Class 2 Claims, and Class 3
Claims.
3.5 THE CLASS 5 INTERESTS ARE IMPAIRED. Class 5 Interests will be
treated under either of two (2) alternatives. First, if the Intercompany
Settlement Agreement and the Plan are approved as proposed, then the stock in
the Debtor will be retained by its parent corporation. The Debtor anticipates
that this will improve the possibility of the cash flow payments to Class 4
Claimants under the Intercompany Settlement Agreement.
Alternatively, if the Intercompany Settlement Agreement is not approved,
and the treatment of Class 5 as described above is not approved, then the
Class 5 Interests will be terminated on the Confirmation Date and the Class 5
Claimants will retain no interest in the Debtor thereafter.
3.6 THE ADMINISTRATIVE EXPENSE CLAIMS. Administrative Expense Claims
are Claims against the Debtor for any costs or expenses of the Chapter 11 case
allowable under 11 U.S.C. Section 503(b), including all actual and necessary
costs and expenses incurred to preserve the Debtor's estate, as well as the
operations of the Debtor's business, including compensation or reimbursement
of expenses to the extent allowed under the Code. In this case, the Debtor-In-
Possession and its affiliates have agreed pursuant to the Intercompany
Settlement Agreement that net proceeds for a Sale or improved cash flow if
achieved, enhance the divided to Class Four Creditors. Administrative Expense
Claims consist primarily of fees owed to Professionals.
Unless otherwise agreed by the Professionals, Administrative Expense
Claims of Professionals retained pursuant to Court Order shall be paid, in
cash, the full amount of their Allowed Claim as follows: (1) unpaid fees and
expenses, if any, which were approved prior to the Effective Date shall be
paid on the Effective Date, and (2) fees and expenses which are allowed after
the Effective Date shall be paid when allowed. All reasonable post-
confirmation Professional fees and expenses shall be paid within thirty (30)
days from receipt of a bill. The Debtor believes that the Professional fees in
this case, which are subject to approval by this Court, are approximately
$493,000.00.
The Administrative Expense Claims shall be paid from the liquidation of
the Excluded Assets, the funds designated for the repayment of this debt
pursuant to the terms of the Asset Purchase Agreement, and to the extent
necessary, the proceeds of the Intercompany Settlement Agreement with
ARSoftware and ARInternet. In the event that Administrative Expense Claims
must be paid from the proceeds of the Intercompany Settlement Agreement, such
claims will be satisfied prior to any distribution to the Priority Tax
Claimants.
The treatment of the claims of the Employees of the Debtor for wages,
salaries, unused vacation pay, 401 K benefits, and expenses in the Asset
Purchase Agreement shall be in full and complete satisfaction all of their
claims against the Debtor. Accordingly, the Employees will receive no
treatment as an Administrative Expense Claim Holder under the Plan as those
claims have been waived.
3.7 THE PRIORITY CLAIMS PURSUANT TO Sections 507(A)(1), 507(A)(2) OR
507(A)(8) OF THE BANKRUPTCY CODE. The Priority Tax Claimants shall receive
payment from the liquidation of the Excluded Assets and proceeds from the
Intercompany Settlement Agreement with ARSoftware and ARInternet to the extent
any proceeds remain after payment of the Administrative Expense Claims.
The claims of the Comptroller of the Treasury for the State of Maryland
[the "Comptroller"], the State of California ["California"], and Washington,
D.C. [the "District"] [the Comptroller, California and the District are
collectively referred to herein as the "State Tax Claimants"], are for
withholding taxes and unemployment taxes. Debtor and the Comptroller have
agreed that the Comptroller's Priority Tax Claim is One Hundred Fifty-Five
Thousand Eighty-Seven Hundred Dollars ($155,087.00). Debtor further estimates
that the District's Priority Tax Claim is approximately One Thousand Four
Hundred Forty-Seven Dollars ($1,447.00) and California's Priority Tax Claim is
approximately Nine Hundred Sixteen Dollars ($916.00).
Debtor will pay the Priority Tax Claims of the District and California in
full, in the amount of $1,447.00 and $916.00, respectively, pursuant to the
"pro rata" distributions from the proceeds of the Intercompany Settlement
Agreement, after payment to the Administrative Expense Claimants, if
necessary. Debtor will pay the Priority Tax Claims of the District and
California within the three (3) year period permitted for distribution from
the proceeds of the Intercompany Settlement Agreement subject to payment of
the Administrative Expense Claimants, if necessary. Payment of the
aforementioned sums to the District and California shall constitute full and
complete satisfaction and release of the Priority Tax Claims of the District
and California against the Debtor.
Debtor will also pay the Priority Tax Claim of the Comptroller, on a "pro
rata" basis, from the distribution of the proceeds Intercompany Settlement
Agreement after payment to the Administrative Expense Claimants, if any. In
particular, Debtor will pay the Comptroller's Priority Tax Claim within the
three (3) year period permitted for distribution from the proceeds of the
Intercompany Settlement Agreement, subject to payment to the Administrative
Expense Claimants, if necessary.
The treatment of the claim of the Internal Revenue Service pursuant to
the terms of the Asset Purchase Agreement shall be in full and complete
satisfaction of all of its claims against the Debtor. Accordingly, the
Internal Revenue Service shall receive treatment as a Priority Claim Holder
under the Plan only in the event that there are remaining proceeds after
payment to Administrative Expense Claimants and the State Tax Claimants. To
the extent that the Priority Tax Claim of the Internal Revenue Service exceeds
the payment received from the Asset Purchase Agreement and the remaining
proceeds from the Intercompany Settlement Agreement, if any, the Internal
Revenue Service has waived its right to such claim.
3.8 Any Class of Claims entitled to timely elect treatment pursuant to
Section 1111(b)(2) of the Bankruptcy Code shall receive treatment as required
by law. Further, nothing in this Plan shall be deemed to preclude any Class of
Claims entitled to elect treatment pursuant to Section 1111 (b)(2) of the
Bankruptcy Code from timely making such election.
APPLIED RESEARCH OF MARYLAND, INC.
- - -----------------------------------
BY: S.P.S. Anand
TITLE: President
Date: July ___, 1998
Respectfully submitted,
GREENAN, WALKER, TRAINER & BILLMAN
---------------------------------------
James M. Greenan
Federal Bar No. 08623
Christopher L. Hamlin
Federal Bar No. 04597
6411 Ivy Lane, Suite 706
Greenbelt, Maryland 20770
(301) 982-1003
Attorneys for Applied Research
of Maryland, Inc., Debtor
<PAGE>
<PAGE>
CERTIFICATE OF SERVICE
----------------------
I HEREBY CERTIFY that on this ____ day of July, 1998, a copy of the
foregoing Order Confirming Debtor's Plan of Reorganization and Addendum to
Order Confirming Debtor's Plan of Reorganization, was mailed, by first class
mail, postage prepaid, to the following:
Julie A. Mack, Esquire
Office of the U.S. Trustee
6305 Ivy Lane, Suite 600
Greenbelt, Maryland 20770
Applied Research of Maryland, Inc.
Attn: Dennis H. O'Brien, C.P.A.
8201 Corporate Drive, Suite 1120
Landover, Maryland 20785
F. Thomas Rafferty, Esquire
Blum, Yumkas, Mailman, Gutman & Denick, P. A.
1200 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
Sylvia Brokos, Esquire
Comptroller of the Treasury
for the State of Maryland
Compliance Division - Room 410
301 West Preston Street
Baltimore, Maryland 21201
James Wilkinson, Esquire
Tax Division, Dept. of Justice
555 Fourth Street, N.W.
Room 6323
Washington, D.C. 20001
Internal Revenue Service
Special Procedures Branch
31 Hopkins Plaza
Room 1140
Baltimore, Maryland 21201
District of Columbia
Dept. of Finance and Revenue
P.O. of Finance and Revenue
P.O. Box 419
Washington, D.C. 20044
District of Columbia
Dept. of Finance and Revenue
P. O. Box 7792
Washington, D.C. 20044
District of Columbia Unemployment
P. O. Box 96664
Washington, D.C. 20001-2187
Maryland Unemployment Ins Fund
Office of Unemployment Ins.
P. O. Box 1729
Baltimore, Maryland 21203-7291
Prince George's County Govt.
c/o Carl A. Harris & Assoc.
P. O. Box 1168
Upper Marlboro, Maryland 20773
State of California
Employment Development Dept.
P. O. Box 826288
Sacramento, California 94230-6288
State of California
Employment Development Dept.
P.O. Box 826276
Sacramento, California 94230-6276
___________________________________
Christopher L. Hamlin
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 22-25 OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED MAY 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 46,965
<SECURITIES> 0
<RECEIVABLES> 165,105
<ALLOWANCES> 1,628
<INVENTORY> 0
<CURRENT-ASSETS> 260,116
<PP&E> 157,386
<DEPRECIATION> 131,892
<TOTAL-ASSETS> 573,110
<CURRENT-LIABILITIES> 1,700,346
<BONDS> 0
0
0
<COMMON> 3,155
<OTHER-SE> (2,270,920)
<TOTAL-LIABILITY-AND-EQUITY> 573,110
<SALES> 456,715
<TOTAL-REVENUES> 456,715
<CGS> 483,861
<TOTAL-COSTS> 483,861
<OTHER-EXPENSES> 12,157
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 857
<INCOME-PRETAX> (39,303)
<INCOME-TAX> 475,200
<INCOME-CONTINUING> 435,897
<DISCONTINUED> 755,123
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,191,020
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
