SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. ___)
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ x ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
APPLIED RESEARCH CORPORATION
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Neuman & Cobb, 1507 Pine Street, Boulder, Colorado 80302
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(Name of Person Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box)
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
--------
2) Aggregate number of securities to which transaction applies:
________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was
determined): ______
4) Proposed maximum aggregate value of transaction:
____________________
5) Total fee paid:
_____________________________________________________
[ ] Fee Paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
1) Amount Previously Paid: ____________________________________
2) Form, Schedule or Registration Statement No.: ______________
3) Filing Party: ______________________________________________
4) Date Filed: ________________________________________________
APPLIED RESEARCH CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 30, 1996
The Annual Meeting of Shareholders of Applied Research Corporation ("ARC"
or the "Company") will be held at the principal executive offices of the
Company, 8201 Corporate Drive, Suite 1120, Landover, Maryland 20785 on
October 30, 1996 at 10:00 o'clock a.m. for the purpose of considering and
voting upon the following:
1. To elect three (3) Directors to serve until the next Annual
Meeting of Shareholders or until their successors have been duly
elected and qualified.
2. To approve the execution by the Company of that certain Parent
Consent and Indemnification Agreement to be executed at Closing
by the Company in conjunction with the sale of substantially all
of the assets of the Company's wholly-owned subsidiary, Applied
Research of Maryland, Inc., a Maryland corporation, to Fidelity
Technologies Corporation, a Pennsylvania corporation.
3. Any other matters properly brought before said meeting or any
adjournment thereof.
Information relating to the above matters is set forth in the accompanying
Proxy Statement. Only holders of outstanding shares of ARC Common Stock
of record at the close of business on September 20, 1996 will be entitled
to vote at the meeting or any adjournment thereof.
A copy of the Company's Annual Report to Shareholders, including financial
statements for the year ended May 31, 1996 will be mailed to shareholders
concurrently with the mailing of the Proxy Statement.
Shareholders are cordially invited to attend the meeting in person.
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, IT WOULD BE
APPRECIATED IF YOU WOULD PROMPTLY FILL IN, SIGN AND DATE THE ENCLOSED
PROXY STATEMENT AND RETURN IT IN THE ENCLOSED STAMPED ENVELOPE. ANY PROXY
MAY BE REVOKED AT ANY TIME BEFORE IT IS VOTED BY WRITTEN NOTICE MAILED OR
DELIVERED TO THE SECRETARY, BY RECEIPT OF A PROXY PROPERLY SIGNED AND
DATED SUBSEQUENT TO AN EARLIER PROXY, AND BY REVOCATION OF A WRITTEN PROXY
BY REQUEST IN PERSON AT THE ANNUAL MEETING OF SHAREHOLDERS. IF NOT SO
REVOKED, THE SHARES REPRESENTED BY THE PROXY WILL BE VOTED IN ACCORDANCE
WITH YOUR INSTRUCTION ON THE PROXY FORM.
APPLIED RESEARCH CORPORATION
/s/ Dennis H. O'Brien
-------------------------------
Dennis H. O'Brien, Secretary
APPLIED RESEARCH CORPORATION
8201 Corporate Drive, Suite 1120
Landover, Maryland 20785
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
This Proxy Statement is furnished to the Shareholders of Applied
Research Corporation (respectively, the "Shareholders" and the "Company")
in connection with the solicitation by the Company of proxies to be used
at the Annual Meeting of Shareholders on October 30, 1996 (the "Meeting"),
at the time, place and for the purposes set forth in the accompanying
Notice of Annual Meeting of Shareholders and at any adjournment thereof.
When the accompanying proxy is properly executed and returned, the shares
of common stock it represents will be voted at the Meeting and, where a
choice has been specified on a proxy, will be voted in accordance with
such specification. If no choice is specified on a proxy, the shares it
represents will be voted FOR the election of three (3) Directors of the
Company, FOR the execution by the Company of that certain Parent Consent
and Indemnification Agreement to be executed at Closing by the Company in
conjunction with the sale of substantially all of the assets of the
Company's wholly-owned subsidiary, Applied Research of Maryland, Inc., a
Maryland corporation, to Fidelity Technologies Corporation, a Pennsylvania
corporation, and according to the judgment of the persons named in the
enclosed proxies as to any other action which may properly come before the
Meeting or any adjournment thereof.
ANY PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS VOTED BY WRITTEN
NOTICE MAILED OR DELIVERED TO THE SECRETARY, BY RECEIPT OF A PROXY
PROPERLY SIGNED AND DATED SUBSEQUENT TO AN EARLIER PROXY, AND BY
REVOCATION OF A WRITTEN PROXY BY REQUEST IN PERSON AT THE ANNUAL MEETING
OF SHAREHOLDERS. IF NOT SO REVOKED, THE SHARES REPRESENTED BY THE PROXY
WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS ON THE PROXY FORM.
This Statement is being mailed on or about October 3, 1996, to
Shareholders eligible to vote at the Meeting. Concurrently with the
mailing of this Statement, the Company is furnishing to Shareholders its
Annual Report for its fiscal year ended May 31, 1996, and a copy of that
certain Consolidated Asset Purchase Agreement dated July 30, 1996 by and
between Fidelity Technologies Corporation and Applied Research of
Maryland, Inc.
The Company is bearing all costs of soliciting proxies, and expressly
reserves the right to solicit proxies otherwise than by mail. The
solicitation of proxies by mail may be followed by telephone, telegraph or
other personal solicitations of certain Shareholders and brokers by one or
more of the Directors or by Officers or employees of the Company. The
Company may request banks and brokers or other similar agents or
fiduciaries for the voting instructions of beneficial owners and reimburse
the expenses incurred by such agents or fiduciaries in obtaining such
instructions. As of the date of this mailing, however, the Company has
not made any contracts or arrangements for such solicitations, hence it
cannot identify any parties or estimate the cost of such solicitation.
Only Shareholders of record as of the close of business on September
20, 1996 (the "Record Date"), will be entitled to vote at the Meeting.
Representation of a majority of the Company's shares of common stock
outstanding on such date, either in person or by proxy, constitutes a
quorum for the Meeting. When a quorum is present, the vote by the holders
of a majority of the shares represented at the Meeting shall decide the
proposals to be voted upon at the Meeting. As of September 28, 1996, the
Company had outstanding 6,811,083 shares of common stock ("shares"), with
each share being entitled to one vote.
i. SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS.
The following table sets forth, as of the date of this Proxy
Statement, and as adjusted for the sale of Option Stock, the stock
ownership of each person known by the Company to be the beneficial owner
of five (5%) percent or more of the Company's common stock, all Directors
and Executive Officers individually and all Directors and Officers of the
Company as a group. Each person has sole voting and investment power with
respect to the shares shown, except as noted.
NAME & ADDRESS SHARES BENEFICIALLY OWNED
-------------------------
OF BENEFICIAL OWNER NUMBER PERCENT(1)
------------------- ------ ----------
OFFICERS, DIRECTORS AND
PRINCIPAL SHAREHOLDERS
Dr. S.P.S. Anand(2) 4,601,451 65.8%
8201 Corporate Drive
Landover, MD 20785
Mrs. Manjit Anand(3) 4,601,451 65.8%
8201 Corporate Drive
Landover, MD 20785
Dennis H. O'Brien(4) 85,000 1.2%
8201 Corporate Drive
Landover, MD 20785
Dr. Andrew S. Endal(5) 48,000 0.7%
8201 Corporate Drive
Landover, MD 20785
All Directors and Officers
As a Group (four (4) Persons) 4,734,451 66.5%
- -------------------------
(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of September 27, 1996, or
within 60 days of such date, are treated as outstanding when
determining the percent of the class owned by such individual and
when determining the percent owned by the group.
(2) Includes 1,736,927 shares of Common Stock held of record by Manjit
Anand, Dr. Anand's wife, and 200 shares of Common Stock owned by each
of Dr. Anand's two (2) children. Also includes 36,000 shares of
Common Stock owned by Woodlore Investments, a controlled corporation
of Dr. Anand and his wife. Finally, includes Warrants exercisable to
purchase 184,000 shares of Common Stock at an exercise price of $.75
per share.
(3) Includes 2,644,124 shares of Common Stock and Warrants exercisable to
purchase an additional 184,000 shares of Common Stock at an exercise
price of $.75 per share, owned by Dr. Anand, Mrs. Anand's husband,
and 200 shares of Common Stock owned by each of Mrs. Anand's two (2)
children. Also includes 36,000 shares of Common Stock owned by
Woodlore Investments, a controlled corporation of Mrs. Anand and her
husband.
(4) Includes Incentive Stock Options ("ISO") exercisable to purchase
40,000 shares of Common Stock at an exercise price of $.25 per share
issued under the Company's 1994 Incentive Stock Option Plan. Also
includes ISOs exercisable to purchase 40,000 shares of Common Stock
at an exercise price of $.50 per share, issued under the Company's
1994 Incentive Stock Option Plan. Does not include ISOs exercisable
to purchase 40,000 shares of Common Stock at an exercise price of
$.75 per share, which become exercisable in 1997; or ISOs exercisable
to purchase 40,000 shares of Common Stock at an exercise price of
$1.00 per share, which become exercisable in 1998.
(5) Represents Non-Qualified Stock Options exercisable to purchase 48,000
shares of Common Stock at an exercise price of $.50 per share issued
under the Company's 1986 Incentive Stock Option Plan.
ii. DIRECTORS & EXECUTIVE OFFICERS.
ELECTION OF DIRECTORS.
The Directors have voted to nominate three (3) Directors for election
to hold office until the next Annual Meeting of Shareholders and until
their successors are elected and qualified. Each of the following
nominees has consented to be nominated to serve as a Director of the
corporation. Dr. S.P.S. Anand and Manjit K. Anand are currently Directors
of the Company. All of the nominees are currently Directors of the
Company.
The Company's Articles of Incorporation expressly prohibit cumulative
voting. Therefore, the holders of a majority of the Company's shares
could elect all of the Directors. It is expected that the proxies
received by the Directors' nominees will be voted, except to the extent
that authority is withheld on any proxy as to all or one or more
individuals, to elect as Directors the following nominees, whose principal
occupations during the past five (5) years, directorships and certain
other affiliations and information are set forth below:
Name Age Position
____ ___ ________
Dr. S.P.S. Anand 59 President, CEO and Chairman
of the Board
Manjit K. Anand 52 Treasurer and Director
Dennis H. O'Brien 45 Nominee
DR. S.P.S. ANAND. Dr. Anand founded the Company in 1978 and has
served as the Company's President, CEO and Chairman of the Board since
that time. Dr. Anand has over twenty-five years of experience in
Astronomy and Astrophysics and has written 37 technical publications. Dr.
Anand received his Ph.D in mathematics from Delhi University, India in
1964. Dr. Anand is responsible for the day-to-day operations of the
company, and provides significant impetus to the Company's marketing
efforts. Other than the Company, Dr. Anand has not held a directorship
with any company subject to the reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended
("Reporting Company").
MANJIT K. ANAND. Mrs. Anand is Dr. Anand's wife, and has been a
Director since December, 1987. She was also Secretary and Treasurer of
the Company from December, 1987, through September, 1994, at which time
she was replaced as Secretary of the Company by Dennis H. O'Brien.
Finally, Mrs. Anand has been Secretary/Treasurer of the Company's wholly-
owned subsidiary, Applied Research of Maryland, since 1981. Mrs. Anand
does not receive any compensation for services performed for or on behalf
of the Company. Mrs. Anand has operated a fashion business in Annapolis,
Maryland since 1976. Other than the Company, Mrs. Anand has never held a
directorship with a Reporting Company.
DENNIS H. O'BRIEN. Mr. O'Brien joined the Company at its Chief
Financial Officer in June, 1994. Mr. O'Brien was appointed Secretary in
September, 1994, a Director in November, 1994, and was appointed Vice
President in June, 1995. Effective June 24, 1996, Mr. O'Brien accepted
full-time employment with Trandes Corporation, a privately owned
government contractor. As a result, Mr. O'Brien currently serves the
Company on a part-time basis only. Prior to his employment with the
Company, Mr. O'Brien served as Chief Financial Officer of several private
and public companies. Mr. O'Brien has extensive turnaround experience
with both commercial and government companies. Mr. O'Brien received a
B.S. in Accounting from Penn State University, and is a Certified Public
Accountant. Mr. O'Brien is responsible for the finance and contracts
administration functions of the Company.
From 1989 through 1994, Mr. O'Brien was employed as a Vice-President
and Chief Financial Officer, by the NAHB Research Center, Inc., a wholly-
owned subsidiary of the National Association of Home Builders, which
conducts research and development of housing related issues and
technologies under contract, principally with the federal government.
From 1986 through 1989, Mr. O'Brien was employed as a Senior Vice-
President by Delta Data Systems Corp., a public company which sold TEMPEST
computer systems to the defense industry. Mr. O'Brien was also a Director
of Delta Data Systems Corp. from 1988 through 1989. Other than the
Company and Delta Data Systems Corp., Mr. O'Brien has not held a
directorship with any other Reporting Company.
Each Director will be elected to serve until the next Annual Meeting
of Shareholders in 1997 or until a successor is duly elected and
qualified.
As indicated above, Dr. S.P.S. Anand and Manjit K. Anand are husband
and wife. Other than the foregoing, however, there were no family
relationships among Directors or persons nominated or chosen by the
Company to become a Director, nor any arrangements or understandings
between any Director and any other person pursuant to which any Director
was elected as such.
During the fiscal year ended May 31, 1996, one (1) meeting of the
Board of Directors was held. The meeting was attended by one hundred
percent (100%) of the Board members. Directors received no cash
compensation for their services as such, however they were reimbursed
their expenses associated with attendance at meetings or otherwise
incurred in connection with the discharge of their duties as Directors of
the Company.
During the fiscal year ended May 31, 1996, the Company did not have
standing Audit, Compensation and Nominating Committees of the Board of
Directors, nor does the Company have plans to form any Audit, Compensation
or Nominating Committees of the Board of Directors in the near future.
EXECUTIVE OFFICERS
The Executive Officers of the Company include Dr. S.P.S. Anand and
Mrs. Anand, as well as the following individual whose age, principal
occupation during the past five (5) years, and certain other affiliations
and information are set forth below:
Name Age Position
____ ___ ________
Dr. Andrew S. Endal 46 Senior Vice-President,
Research & Development
Dennis H. O'Brien 45 Secretary, Vice-President
- --------------------
DR. ANDREW S. ENDAL. Dr. Endal has been with the Company since 1981.
Dr. Endal was made a Vice-President of the Company in October, 1986, and
became Senior Vice-President, in charge of research and development, in
January, 1987. Dr. Endal received his Ph.D in Astronomy from the
University of Florida, Gainesville, Florida, in 1974. Prior to accepting
employment with the Company, Dr. Endal held teaching positions at Kansas
State University and Louisiana State University. Dr. Endal has published
39 technical papers. Dr. Endal is presently responsible for overseeing
the technical aspects of the Company's Technical Services Division.
Any transactions between the Company and its officers, directors,
principal shareholders, or other affiliates have been and will be on terms
no less favorable to the Company than could be obtained from unaffiliated
third parties on an arms-length basis.
LEGAL PROCEEDINGS
As of April 2, 1996, the Company's wholly-owned subsidiary, Applied
Research of Maryland, Inc. ("ARM"), had not remitted federal payroll
withholdings totalling approximately $764,755 relating to the fourth
quarter of 1994, the second and fourth quarters of 1995 as well as the
first calendar quarter of 1996. ARM has accrued penalties and interest on
those delinquent amounts totalling approximately $328,700 through April 2,
1996. The IRS filed a lien against ARM on November 7, 1995.
On December 1, 1995, ARM entered into a new installment with the IRS
which required a $75,000 monthly payment to be made by the 15th of each
month starting with December, 1995, and continuing until the total
liability was paid. As part of this agreement, the IRS agreed to give
ARM's new lender ("CFC") a priority security interest with regards to its
loans against billed receivables. As a condition of the new installment
agreement, CFC was required to deduct the monthly payment from ARM's
borrowings against billed receivables and remit this directly to IRS. CFC
remitted the first four installment payments through March, 1996,
totalling $300,000. However, ARM did not remit approximately $472,500 of
federal payroll withholding taxes, and defaulted on the new installment
agreement. On April 1, 1996, the IRS issued levy notice to ARM's bank,
financing company and a majority of its customers. On April 2, 1996, the
IRS attempted to close ARM. As a result, ARM was forced to file for
protection under Chapter 11 of the U.S. Bankruptcy Code on April 2, 1996.
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 are stayed while the Debtor continues business operations
as Debtor-In-Possession. Additional claims (liabilities subject to
compromise) may arise subsequent to the filing date resulting from the
rejection of executory contracts, including leases, and from the
determination by the Court (or agreement of the parties in interest) of
allowed claims for contingencies and other disputed amounts.
While the Chapter 11 filing by ARM has stayed any legal proceedings
seeking to collect the unremitted federal payroll tax withholdings from
ARM, the automatic stay provisions of the Bankruptcy Code do not apply to
the Company and/its responsible officers or directors. Moreover, in the
event the Chapter 11 proceedings are dismissed or the foregoing claims are
not adequately resolved in accordance with applicable law, the protection
afforded by the automatic stay provisions of the Bankruptcy Code will no
longer apply to ARM, and it is probable that the IRS will recommence
collection activities. To date, the Company has not been informed of, nor
is it aware of, any intention of the IRS to assert any claims against the
Company relative ARM's unremitted federal payroll tax withholdings. The
IRS has, however, indicated that in the event IRS does not receive the
trust fund portion of the taxes owed by ARM (approximately $608,000) from
the proceeds of the sale of ARM's assets, the IRS may elect to recover the
unremitted withholdings from the responsible officers or directors of ARM,
namely Dr. S.P.S. Anand and Dennis H. O'Brien, who are also officers and
directors of the Company. The IRS has indicated that upon receipt of
$608,000, the IRS will release Dr. S.P.S. Anand and Mr. O'Brien from
further liability.
With the exception of the foregoing, neither the Company, its
subsidiaries, or their officers or directors is a party to any pending
legal proceeding, nor is the Company aware of any governmental authority
currently contemplating the initiation of an action or proceeding against
the Company.
Except as provided above,, during the past five (5) years, none of
the foregoing Directors, nominees or executive officers has:
(a) had any bankruptcy petition filed by or against any business of
which such person was a general partner or executive officer either
at the time of the bankruptcy or within two (2) years prior to that
time;
(b) been convicted in a criminal proceeding or subject to a pending
criminal proceeding;
(c) been subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities, futures, commodities or banking activities; and
(d) been found by a court of competent jurisdiction (in a civil
action), the Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law,
and the judgment has not been reversed, suspended or vacated.
EXECUTIVE COMPENSATION.
The following tables and discussion set forth information with
respect to all plan and non-plan compensation awarded to, earned by or
paid to the Chief Executive Officer ("CEO"), and the Company's four (4)
most highly compensated executive officers other than the CEO, for all
services rendered in all capacities to the Company and its subsidiaries
for each of the Company's last three (3) completed fiscal years; provided,
however, that no disclosure has been made for any executive officer, other
than the CEO, whose total annual salary and bonus does not exceed
$100,0000.
TABLE 1
SUMMARY COMPENSATION TABLE
Long Term Compensation
--------------------------------
Annual Compensation Awards Payouts
-------------------------- ------------------ ----------
Other All
Annual Restricted Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($) ($) ($) ($) SARs ($) ($)(4)
(1)(2)(3)
- -------------------------------------------------------------------------------------------------
Dr. S.P.S. Anand 1996 169,813 $ 56,289 $ 2,053
Chairman, President &
CEO 1995 168,554 7,289 2,546
1994 157,200 14,097 2,288
Dr. Andrew S Endal, 1996 151,436 4,000 1,391 1,976
Sr. Vice-President
1995 145,962 4,000 1,189 1,744
1994 137,000 4,000 1,024 1,703
Dr. Richard J Harms(5),1995128,279 974 2,575
Sr. Vice-President
1994 132,816 2,000 1,063 2,283
- ------------------------------
(1) All executive officers of the Company participate in the Company's group
health insurance plan. However, no executive officer received
perquisites and other personal benefits which, in the aggregate,
exceeded the lesser of either $50,000 or 10% of the total of annual
salary and bonus paid during the respective fiscal years.
(2) Includes spouse's beneficial interest in Key Man Life Insurance policy.
(3) During fiscal 1994, fiscal 1995 and fiscal 1996, the Company paid certain
expenses on behalf of Dr. Anand totalling $7,980, $22,200 and $24,500,
respectively. At the end of fiscal 1994, the Company paid to Dr. Anand,
as additional compensation, the sum of $11,971, which was used by Dr.
Anand, after making provisions for the payment of income taxes thereon,
to repay all amounts advanced by the Company to him during fiscal 1994.
During fiscal 1996, the Company paid to Dr. Anand, as additional
compensation, the sum of $49,000, which was used by Dr. Anand, after
making provisions for the payment of income taxes thereon, to repay
all amounts advanced by the Company to him during fiscal 1995 and 1996.
(4) Includes the Company's matching 401(k) contribution (Company matches 25%
of employees contribution).
(5) Effective April 8, 1995, Dr. Harms resigned as Senior Vice-President of
the Company. At this time, the Company does not plan to hire a
replacement for Dr. Harms.
1986 INCENTIVE STOCK OPTION PLAN
In 1986, the Board of Directors and the shareholders of the Company
adopted the Applied Research Corporation Stock Option Plan of 1986 (the
"1986 Plan"). Pursuant to the 1986 Plan, the Company's Board of Directors
was authorized to issue options for the purchase of up to 300,000 shares
of the Company's Common Stock to key employees of the Company. Options
granted under the 1986 Plan could be granted in the form of incentive
stock options ("ISO") as provided in Section 422 of the Internal Revenue
Code, or in the form of non-qualified stock options ("NQSO"). ISO's were
exercisable at prices which were equal to at least one hundred percent
(100%) of the fair market value of the Company's freely trading Common
Stock on the date of grant, and NQSO's were exercisable at prices which
were equal to at least eighty-five percent (85%) of the fair market value
of the Company's freely trading Common Stock on the date of grant. Only
key management and employees of the Company or the Company's Affiliates
and Consultants serving in a managerial, administrative, professional or
consulting position, were eligible to participate in the Plan.
The 1986 Plan was administered by the Compensation Committee of the
Board (the"Committee"), which determined eligible employees, the time and
number of options to be granted, and the periods for which such options
were granted. There were limitations on the number of options which could
be granted and the aggregate fair market value of the stock in any given
year. All options granted under the Plan could be made subject to vesting
by the Committee in its discretion.
As of May 31, 1996, no incentive stock options, and non-qualified
stock options to purchase 60,000 shares of Common Stock, having an average
exercise price of $.50 per share, were outstanding and unexercised under
the 1986 Plan.
1994 INCENTIVE STOCK OPTION PLAN
In 1994, the Board of Directors and the shareholders of the Company
adopted the Applied Research Corporation Stock Option Plan of 1994 (the
"1994 Plan"). Pursuant to the 1994 Plan, the Company's Board of Directors
was authorized to issue options for the purchase of up to 300,000 shares
of the Company's Common Stock to key employees of the Company. Options
granted under the 1994 Plan to eligible participants may take the form of
Incentive Stock Options ("ISOs") under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") or options which do not qualify as
ISOs (Non-Qualified Stock Options or "NQSOs"). As required by Section 422
of the Code, the aggregate fair market value (as defined in the Company
Stock Incentive Plan) of the Company's Common Stock (determined as of the
date of grant of the ISO) with respect to which ISOs granted to an
employee are exercisable for the first time in any calendar year may not
exceed $100,000. The foregoing limitation does not apply to NQSOs. The
exercise price of an ISO may not be less than 100% of the fair market
value of the shares of the Company's Common Stock (or 110% of the fair
market value if granted to a person who owns 10% or more of the Company's
outstanding shares) on the date of grant. The exercise price of a NQSO
may be set by the administrator of the 1994 Plan. The exercise price
under any option will be adjusted as provided in the 1994 Stock Incentive
Plan to reflect stock dividends, splits, other recapitalizations or
reclassifications or changes affecting the number or kind of outstanding
shares. Fair market value of the Company's Common Stock is defined in the
1994 Stock Incentive Plan as the closing sale price of the Common Stock on
the OTC Electronic Bulletin Board System or any securities exchange on
which the shares of Common Stock are then listed.
The 1994 Plan is administered by a committee made up of members of
the Company's Board of Directors (the"Committee"), which determines
eligible employees, the time and number of options to be granted, and the
periods for which such options are granted. There are limitations on the
number of options which can be granted and the aggregate fair market value
of the stock in any given year. All options granted under the Plan can be
made subject to vesting by the Committee in its discretion.
As of May 31, 1996, ISOs exercisable to purchase 160,000 shares of
Common Stock of the Company having an average exercise price of $.625 per
share and no NQSOs, were outstanding and unexercised under the 1994 Plan.
The following table sets forth certain information concerning the
exercise of incentive stock options during the last completed fiscal year
by each of the named executive officers and the fiscal year-end value of
unexercised options on an aggregated basis:
TABLE 2
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)(1)
------------- -----------------
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
- -------------------- --------------- -------------- ------------- -----------
Dr. S.P. S. Anand -0- -0- 0/0 0/0
Dr. Andrew S. Endal -0- -0- 48,000/0 0/0(2)
- ---------------------
(1) The value of unexercised options is determined by calculating the
difference between the fair market value of the securities underlying
the options at fiscal year end and the exercise price of the options.
(2) Dr. Endal's options are exercisable at $.50 per share. The fair market
value of the securities underlying Dr. Endal's options at fiscal year
end was $.1875 per share based upon the average of the closing bid and
asked prices of the Common Stock as quoted on the OTC Electronic Bulletin
Board. Accordingly, at fiscal year end, Dr. Endal's options were not
in-the-money.
TRANSACTIONS WITH MANAGEMENT AND OTHERS.
On January 22, 1990, the Company's President, Dr. S.P.S. Anand, and
his wife obtained an equity line-of-credit in the amount of $230,000 which
was secured by their personal real estate holdings. The proceeds of the
equity line-of-credit were used to pay off certain outstanding obligations
of the Company. In November, 1993, the Company converted a $230,000 note
payable held by Dr. Anand and his wife, and related to the line-of-credit
into 920,000 shares of the Company's Common Stock and Common Stock
Purchase Warrants exercisable to acquire up to an additional 184,000
shares of Common Stock. The Warrants are exercisable for a period of
three (3) years at an exercise price of $.75 per share. The shares of
Common Stock and Common Stock issuable upon exercise of the Warrants were
subsequently registered for sale by the Company. The Company's
Registration Statement on Form S-3 registering the foregoing securities
was declared effective by the Securities and Exchange Commission on July
1, 1994.
During fiscal 1994, 1995 and 1996, the Company paid certain expenses
on behalf of Dr. Anand totalling $7,980, $22,200 and $24,500,
respectively. At the end of fiscal 1994, the Company paid to Dr. Anand,
as additional compensation, the sum of $11,971, which was used by Dr.
Anand, after making provisions for the payment of income taxes thereon, to
repay all amounts advanced by the Company to him during fiscal 1994.
During fiscal 1996, the Company paid to Dr. Anand, as additional
compensation, the sum of $49,000, which was used by Dr. Anand, after
making provisions for the payment of income taxes thereon, to repay all
amounts advanced by the Company to him during fiscal 1995 and fiscal 1996.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Under the Securities Laws of the United States, the Company's
Directors, its Executive (and certain other) Officers, and any persons
holding more than ten percent (10%) of the Company's common stock
(collectively the "Reporting Persons") are required to report their
ownership of the Company's common stock and any changes in that ownership
to the Securities and Exchange Commission ("Commission"). Specific due
dates for these reports have been established and the Company is required
to report in this Proxy Statement any failure to file by these dates
during fiscal 1996. All of these filing requirements were satisfied by
its Officers and Directors and ten percent holders, except the following:
Dr. S.P.S. Anand failed to file with the Commission, on a timely basis,
one report relating to one transaction involving the Common Stock of the
Company. Additionally, Dr. S.P.S. Anand, Mrs. Manjit Anand, Dr. Andrew S.
Endal and Dennis H. O'Brien, each failed to file on a timely basis an
Annual Statement of Beneficial Ownership of Securities on Form 5. In
making these statements, the Company has relied on the representation of
its Directors and Officers or copies of the reports that they have filed
with the Commission.
3. SALE OF ASSETS
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT, AND THE ATTACHMENTS HERETO, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION APPEARING
ELSEWHERE HEREIN, INCLUDING THE CONSOLIDATED ASSET PURCHASE AGREEMENT AND
THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB, BOTH OF WHICH ARE ATTACHED
HERETO AND INCORPORATED HEREIN BY THIS REFERENCE. SHAREHOLDERS SHOULD
EXAMINE CAREFULLY THIS PROXY STATEMENT, THE CONSOLIDATED ASSET PURCHASE
AGREEMENT AND THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB IN THEIR
ENTIRETY.
HISTORY OF THE COMPANY
The Company 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 Applied Research Corporation, a Maryland
corporation, common stock in exchange for 5,000,000 shares of Dollar
Ventures, Inc. common stock. Following the acquisition, Applied Research
Corporation (the original Maryland corporation) changed its name to
Applied Research of Maryland, Inc. ("ARM" or the "Company"), and Dollar
Ventures, Inc. changed its name to Applied Research Corporation ("ARC").
In addition to ARM, the Company is the sole or principal shareholder of
two other corporations, ARSoftware Corporation and ARInternet Corporation.
ARSoftware Corporation ("ARS"), a Maryland corporation and wholly
owned subsidiary of the Company 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 subsidiary of the Company was formed in November 1994, to
diversify the business base of ARC by developing niche markets in the
computer online services industry. The objective of ARInternet is to
become the place to go on the Internet for information useful to those in
search of scientific knowledge.
BACKGROUND OF THE TRANSACTION
ARM is the principal business of ARC. ARM's activities are divided
into three divisions: Technical Services Division, Instruments Division
and ARInstruments Division.
Technical Services Division
---------------------------
The Technical Services Division provides scientific software
design and development, mathematical analysis, laboratory experiment
design and implementation, and scientific data analysis to support
research programs in the earth and space sciences, optics, electronics,
and chemistry. Most of these support services are performed on-site at
U.S. Government ("Government") laboratories (NASA/Goddard Space Flight
Center, the Naval Research Laboratory, and the U.S. Naval Observatory).
In addition, during 1993, the Company began work on a subcontract with
Hughes Applied Information Systems, Inc. ("Hughes") where the work is
performed on-site at a Hughes location.
Instruments Division
--------------------
The Instruments Division designs and fabricates specialized
hardware used to carryout spaceborne scientific observations. Primary
emphasis is in the development of ultraviolet to near infrared imaging and
spectrographic instruments for use in astrophysical and atmospheric
research. The Instruments Division has expanded into the manufacture of
rocket and spacecraft attitude-control sensors. The Company's classified
contracts are also carried out in the Instruments Division.
ARInstruments Division
----------------------
During its many years of performing under government contracts,
the Company has developed expertise in custom design and fabrication work.
In addition, members of the Company's technical staff have investigated
and researched other government and commercial applications for existing
technologies. The Company formed its ARInstruments Division
("ARInstruments") in fiscal 1993 to penetrate the government and
commercial instrumentation markets, and specifically segregate these
activities from other government contract operations in the design,
fabrication, and distribution of instrumentation products. During fiscal
1994, ARInstruments had begun research and development efforts related to
product development and initiated two patent applications. These patents
were granted during fiscal 1995.
On April 2, 1996, ARM filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy laws. Prior to the filing of
the Chapter 11 petition, management of the Debtor had been attempting to
sell the assets of ARM. Subsequent to the filing, the Debtor entered into
an agreement to sell a majority of ARM's assets. At a Bankruptcy Court
hearing on July 30, 1996, this agreement was subjected to counter offers,
and another company agreed to purchase a majority of ARM's assets for $2.1
Million. Completion of this sale is subject to approval by the Debtor's
principal customers of the transfer of certain contract rights and
obligations, which is expected to take approximately 60 to 90 days to
complete. Completion of the sale is also contingent upon obtaining
approval by a majority of the Company's shareholders of the execution by
the Company of an agreement pursuant to which, among other things, the
Company consents to the sale of substantially all of the assets of ARM,
and agrees to indemnify the purchaser from and against damages resulting
from the sale.
The following is a chronology of the events leading up to ARM filing
for protection under Chapter 11 under the United States Bankruptcy laws,
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.
IMPACT ON CASH FLOW DUE TO THE LOSSES FROM OPERATIONS/CONTINUED
INVESTMENT IN ARS/ARINTERNET.
Because of the continued losses incurred by ARM, ARS and
ARInternet (through November 1995, ARC incurred losses of approximately
$(422,000)) as well as the cash drain on ARM by ARS and ARInternet during
fiscal 1996 (through November 1995, ARM funded approximately $157,800 of
ARS and ARInternet expenses, while an additional $46,800 was expended from
December 1, 1995 through April 2, 1996), ARM continued to fall behind on
remitting its federal withholding taxes throughout the first half of
fiscal 1996. Through November 1995, ARM owed the IRS approximately
$675,600 in unpaid federal withholding taxes plus an additional $200,000
in interest and penalties.
DELINQUENT FEDERAL WITHHOLDING TAXES/FILING OF LIENS BY THE IRS.
During September, 1995, ARM made a $50,000 payment to the IRS
for delinquent payroll taxes. The IRS had demanded a $250,000 payment be
made on October 27, 1995, and when the Company was unable to meet this
demand, the IRS filed a lien against ARM on November 7, 1995.
As a result of the IRS lien, ARM defaulted on its loan agreement
with its primary lender ("PrinCap") pursuant to a provision requiring it
to remit all federal payroll withholding taxes as they became due. Upon
the filing of the IRS lien, the lender issued a letter of default to ARM
on November 14, 1995, under which no additional funding was granted and
all residuals received by the lender were applied to reduce the loan
balances outstanding.
On November 17, 1995, ARM entered into an agreement with a new
lender ("CFC"), and on December 4, 1995, CFC paid off the remaining
outstanding PrinCap loan balance of $651,491, plus $18,288 of accrued
interest and other charges. The agreement with CFC allows ARM to borrow
90% against billed receivables on all assigned contracts. Since the new
financing agreement did not allow ARM to borrow against unbilled
receivables, ARM was required to pay off the $250,000 unbilled loan
advance and the approximate $35,000 equipment loan due to PrinCap at the
time of closing the new loan. To accommodate this, CFC allowed ARM a one-
time advance of approximately 97% against eligible billed receivables.
On December 1, 1995, the Company entered into a new installment
agreement with the IRS which required a $75,000 monthly payment to be made
starting with December, 1995, and continuing until the liability was paid.
As a condition of this installment agreement, CFC was required to deduct
the monthly payment from the Company's borrowings against billed
receivables and remit this directly to the IRS. The IRS agreed to give
CFC a priority security interest with regards to its loans against billed
receivables. The IRS and CFC initially operated under an interim
subordination agreement while the Company applied for a formal
subordination from the IRS. On January 30, 1996, the IRS issued a
Certificate of Subordination. Through April 1, 1996, CFC had remitted the
first four payments totalling $300,000. However, during the period from
November 14, 1995 to March 25, 1996, ARM only made one tax deposit of
$69,000. During this period ARM failed to remit approximately $472,500 of
current federal withholding tax deposits as was required under the
December 1, 1995, installment agreement.
Starting in October 1995, management of the Company started
pursuing the possible sale of ARM. The Company enlisted a broker which
made contacts with several companies who appeared to be interested. Three
companies expressed interest in acquiring essentially all of the operating
assets of ARM (principally the government contracts). Discussions were
ongoing with these parties from late December 1995 through March 1996.
During this period, no offers acceptable to the Company were made. In
late March 1996, management was pursuing discussions with a potential
buyer and as a condition of the negotiations, had a meeting with the IRS
to discuss the amount owed the IRS as well as a potential settlement of
the outstanding liability, which as of April 1, 1996, was approximately
$1,155,000.
FILING OF CHAPTER 11 PETITION BY ARM.
Because ARM was in default of 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, ARM was forced to file for protection under Chapter 11 of the
United States Bankruptcy Code on April 2, 1996.
On April 5, 1996, ARM received an emergency hearing with the
Bankruptcy Court to determine its request to pay its employees their pre-
petition wages as well as continue to operate the business. Prior to the
emergency hearing, ARM reached an agreement with the IRS and CFC to allow
ARM to continue to operate and borrow money from CFC against its billed
receivables. Under this agreement, ARM agreed to pay $15,000 a month
starting April, 1996, towards its arrearage with the IRS. The April
payment consisted of the $13,600 of cash seized by the IRS on April 1,
1996. Future monthly payments will be made directly to the IRS by CFC
from borrowings made by ARM. ARM was also required to remit to the IRS
collections on certain billed receivables that were outstanding as of
April 2, 1996 (the final vouchers on 14 old contracts, which totaled
approximately $136,700). In addition, as part of the agreement with the
IRS and as required by the Bankruptcy Court, ARM was required to remit its
post-petition taxes when due and provide proof of such payments to the IRS
and the Bankruptcy Court on a timely basis. The Bankruptcy Court approved
the agreements with the IRS and CFC, and approved ARM's operating budget
for 15 days through April 21, 1996. These agreements have continued to be
renewed by the Bankruptcy Court.
SALE OF ARM'S GOVERNMENT CONTRACTS.
ARM informed the Bankruptcy Court and the IRS that it had and
would continue to pursue the sale of the ARM's business. To that end, ARM
placed an ad in several newspapers, including THE WALL STREET JOURNAL.
ARM received approximately 34 inquires to these ads. During May and June
1996, the Company sent information about ARM to 18 Companies and held
serious discussions with 7 Companies concerning the sale of ARM's assets.
On June 24, 1996, ARM accepted a contract for the sale of
certain of ARM's assets for approximately $1.5 Million. The sale was
subject to Bankruptcy Court approval, which was scheduled for July 26,
1996. This hearing was subsequently moved to July 30, 1996. On July 30,
1996, the hearing was conducted. At the hearing, a total of four
qualified bidders attended, and after extensive biding, an offer was
accepted for $2.1 Million. The following is a list of the purchased and
excluded assets:
PURCHASED ASSETS EXCLUDED ASSETS
- - All contract rights (including - ARM's charter and status as a
project contracts), corporation, its minute book,
- - All inventory, stock transfer records, and
- - All books and records, similar records relating to
- - All furniture, fixtures, and ARM's organization, existence or
equipment, capitalization, and the capital
- - All proprietary rights stock of ARM,
(patents, etc.) - Billed accounts receivable as of
- - All unbilled accounts receivable closing.
as of the closing date. - Intercompany receivables,
- ARM's rights to occupy real
property pursuant to leases of real
property and any leasehold
improvements made thereto,
- Any other property identified by the
Purchaser prior to the closing
During August 1996, management and ARM's bankruptcy attorney
negotiated with Fidelity Technologies Corporation, a Pennsylvania
corporation ("Fidelity") the Consolidated Asset Purchase Agreement which
was signed on August 30, 1996 (the "Asset Purchase Agreement"), a copy of
which is attached hereto as Appendix B, and incorporated herein by this
reference. A court order documenting the bidding procedure as well as the
contract is expected to be submitted to the Bankruptcy Court for approval
during the week ended September 13, 1996. The sale is subject to the
successful novation of ARM's government contracts. This is expected to
take approximately 60 to 90 days from contract execution.
Additionally, under the terms of the Asset Purchase Agreement, at
Closing, the Company is required to execute and enter into an agreement
pursuant to which: (i) the Company consents to the transactions
contemplated by the Asset Purchase Agreement, (ii) the Company certifies
that the representations and warranties set forth in the Asset Purchase
Agreement are true and correct, (iii) the Company agrees to indemnify,
defend and hold harmless Fidelity and Fidelity's agents, affiliates,
predecessors, successors and assigns, against and in respect of any and
all damages that any of them shall incur or suffer, which arise, result
from or relate to any claim by, through or on behalf of any existing,
future or former shareholder or creditor of the Company relating to the
subject matter of the foregoing certifications or ARM's entering into or
performing under the Asset Purchase Agreement, and (iv) the Company agrees
and covenants not to compete with Fidelity on the same terms and
conditions set forth in the Asset Purchase Agreement with respect to ARM
(the "Parent Consent and Indemnification Agreement"). Execution by the
Company of the Parent Consent and Indemnification Agreement must be
authorized by a majority of the shareholders of the Company at a
shareholders meeting conducted in accordance with applicable law.
If execution by the Company of the Parent Consent and Indemnification
Agreement is not approved by a majority of the Company's shareholders,
absent an amendment to the Asset Purchase Agreement with Fidelity removing
the requirement that execution of the Parent Consent and Indemnification
Agreement be approved by a majority of the Company's shareholders,
consummation of the transactions contemplated by the Asset Purchase
Agreement will not occur. However, since the Company's officers and
directors collectively own 4,322,451 or 63.5% of the issued and
outstanding shares of the Company's Common Stock, and said individuals
have indicated that they intend to vote such shares in favor of the Sale,
it appears that the Company's execution of the Parent Consent and
Indemnification Agreement will be approved by a majority of the Company's
Shareholders.
POSSIBLE POSITIVE AND NEGATIVE EFFECTS OF THE SALE
During the current fiscal year ARM constituted 94% of ARC's total
revenue. The sale currently contemplated will sell essentially all of
ARM's operations to the Purchaser and eliminate all of ARM's revenues.
Therefore, ARS and ARInternet will be the only remaining operating
entities. ARS is still not operating at cash flow break even, so it is
doubtful that it can survive without a substantial infusion of cash or a
significant increase in revenues, neither of which can be guaranteed.
Management is considering several options for ARS, including ceasing its
operations. ARInternet on the other hand, has steadily increased its
revenues and as of May 31, 1996, had approximately 1,000 subscribers and
had essentially reached break even 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 assurances of this.
The sale of ARM, if completed, will dramatically change the Company's
balance sheet and statement of operations (SEE UNAUDITED PRO FORMA
CONDENSED FINANCIAL INFORMATION). Through the bankruptcy proceeding, all
of ARM's debts which total $3.7 million at May 31, 1996, will be either
liquidated or discharged. This will decrease the Company's interest and
penalties costs that it had been incurring. If ARS and ARInternet's
revenues can be increased to produce net profits and a positive cash flow,
the Company may in fact benefit from the sale of ARM. However, unless and
until this occurs, the Company may not have sufficient capital to achieve
its current business plan, which raises substantial doubt as to the
Company's ability to continue as a going concern after the sale of ARM is
completed.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has approved the execution by
the Company, at Closing, of the Parent Consent and Indemnification
Agreement and directed that execution of the Parent Consent and
Indemnification Agreement by the Company, at Closing, be submitted to the
vote of the Company's shareholders with the recommendation that execution
be approved. The principal factor taken into consideration by the Board
in approving execution of the Parent Consent and Indemnification Agreement
and in recommending that the Shareholders approve the transaction was the
Board's belief that absent consummation of the transactions contemplated
by the Asset Purchase Agreement, ARM will be unable to continue operations
as a going concern. The Board also concluded, based on the Company's
discussions with other prospective purchasers, and the bidding process in
the Bankruptcy Court, that the purchase price offered by Fidelity was a
fair price and the best offer available.
A vote in favor of execution by the Company, at Closing, of the
Parent Consent and Indemnification Agreement will have the effect of
authorizing consummation of the transactions described in the Asset
Purchase Agreement, including the sale of substantially all of the assets
of the Company's wholly-owned subsidiary, Applied Research of Maryland,
Inc., a Maryland corporation, to Fidelity Technologies Corporation, a
Pennsylvania corporation. A vote in favor of execution of the Parent
Consent and Indemnification Agreement will also have the effect of
authorizing the Company to indemnify, defend and hold harmless Fidelity
and Fidelity's agents, affiliates, predecessors, successors and assigns,
against and in respect of any and all Damages (as that term is defined in
the Asset Purchase Agreement) that any of them shall incur or suffer,
which arise, result from or relate to any claim by, through or on behalf
of any existing, future or former shareholder or creditor of the Company
relating to the subject matter of the certifications contained in the
Parent Consent and Indemnification Agreement or ARM's entering into or
performing under the Asset Purchase Agreement. Finally, a vote in favor
of execution of the Parent Consent and Indemnification Agreement will have
the effect of authorizing the Company to covenant and agree not to compete
with Fidelity on the same terms and conditions set forth in the Asset
Purchase Agreement with respect to ARM.
A vote against execution of the Parent Consent and Indemnification
Agreement will have the effect of denying authorization of consummation of
the transactions described in the Asset Purchase Agreement, including the
sale of substantially all of the assets of the Company's wholly-owned
subsidiary, Applied Research of Maryland, Inc., a Maryland corporation, to
Fidelity Technologies Corporation, a Pennsylvania corporation. A vote
against execution of the Parent Consent and Indemnification Agreement will
also have the effect of denying authorization of the Company to indemnify,
defend and hold harmless Fidelity and Fidelity's agents, affiliates,
predecessors, successors and assigns, against and in respect of any and
all Damages (as that term is defined in the Asset Purchase Agreement) that
any of them shall incur or suffer, which arise, result from or relate to
any claim by, through or on behalf of any existing, future or former
shareholder or creditor of the Company relating to the subject matter of
the certifications contained in the Parent Consent and Indemnification
Agreement or ARM's entering into or performing under the Asset Purchase
Agreement. Finally, a vote against execution of the Parent Consent and
Indemnification Agreement will have the effect of denying authorization of
the Company to covenant and agree not to compete with Fidelity on the same
terms and conditions set forth in the Asset Purchase Agreement with
respect to ARM.
FOR THE REASONS SET FORTH ABOVE, THE BOARD OF DIRECTORS RECOMMENDS A
VOTE FOR THE AUTHORIZATION AND APPROVAL OF THE EXECUTION BY THE COMPANY,
AT CLOSING, OF THE PARENT CONSENT AND INDEMNIFICATION AGREEMENT.
ACCOUNTING TREATMENT
The sale of ARM's assets as contemplated by the Asset Purchase
Agreement, when consummated, will be recorded and reported by the Company
as the "disposal of a business segment" in accordance with AICPA
Accounting Principles Board Opinion No. 30.
DISSENTERS' RIGHTS
Although pursuant to the terms of the Asset Purchase Agreement,
execution by the Company, at Closing, of the Parent Consent and
Indemnification Agreement must be authorized by a majority of the
shareholders of the Company at a shareholders meeting conducted in
accordance with applicable law, holders of Common Stock of the Company do
not have dissenters' or similar rights under the Colorado Business
Corporation Act.
THE ASSET PURCHASE AGREEMENT
THE FOLLOWING IS A SUMMARY OF CERTAIN PROVISIONS OF THE ASSET
PURCHASE AGREEMENT, A COPY OF WHICH (EXCLUDING SCHEDULES AND EXHIBITS
THERETO) IS ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT AND IS
INCORPORATED HEREIN BY THIS REFERENCE. THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE ASSET PURCHASE AGREEMENT. UNLESS OTHERWISE
INDICATED, THE CAPITALIZED TERMS SET FORTH BELOW SHALL HAVE THE MEANINGS
ASCRIBED TO THEM IN THE ASSET PURCHASE AGREEMENT.
GENERAL
As a result of the Company's persistent inability to generate
income from its operations, and its resulting problems with the IRS, in
October 1995, management of the Company started pursuing the possible sale
of ARM. On June 24, 1996, ARM accepted a contract for the sale of certain
of ARM's assets for approximately $1.5 Million. However, as a result of
ARM's filing for protection under Chapter 11 of the Bankruptcy Code in
April, 1996, the sale was subject to Bankruptcy Court approval. On July
30, 1996, a hearing on the matter was conducted, at which other
prospective buyers were allowed to submit competing bids. At the hearing,
a total of four qualified bidders attended, and after extensive biding, an
offer submitted by Fidelity Technologies Corporation ("Fidelity") was
accepted. During August 1996, management and ARM's bankruptcy attorney
negotiated with Fidelity the terms and conditions of the Asset Purchase
Agreement which was signed on August 30, 1996.
PURCHASE PRICE
Pursuant to the terms of the Asset Purchase Agreement, Fidelity
has agreed to make payments, and to assume specified liabilities, in an
amount totaling up to Two Million One Hundred Thousand and No/100 dollars
($2,100,000.00). The Purchase Price shall consist of the following items:
A. A deposit (the "Deposit") in the amount of Fifty Thousand and
No/100 dollars ($50,000.00) paid to an escrow agent upon
execution of the Asset Purchase Agreement and held in an
interest-bearing deposit account. The Deposit will be released
and paid to the Internal Revenue Service ("IRS") at Closing with
any accrued interest being applied to the Designated Payment due
at Closing;
B. A payment at Closing by Fidelity to ARM for the IRS in the
amount of Five Hundred Forty-Nine Thousand and No/100 dollars
($549,000.00) (the "Designated Payment"), provided, however,
that Fidelity will receive $15,000 credit toward such payment
based upon the August 1, 1996, payment by ARM to the IRS and
will receive additional credit for all other $15,000 monthly
payments by ARM to the IRS, which payments will continue to be
paid by ARM to the IRS until Closing;
C. A payment at Closing in the amount of Six Hundred Seventy-Six
Thousand and No/100 dollars ($676,000.00) by Fidelity to ARM's
401(k) plan (the "Initial Plan Payment");
D. An assumption of liabilities of ARM to its employees for
liabilities of ARM to its employees for accrued and unpaid
vacation liabilities ("Vacation Liability") in an amount not to
exceed Three Hundred Twenty-Five Thousand and No/100 dollars
($325,000), to be paid or provided for by Fidelity to such
employees in such manner as may be agreed by Fidelity and each
affected employee; provided that Fidelity will not be required
to pay or provide for Vacation Liability within less than one
year following the Closing Date; and further provided that
Fidelity will not require that Vacation Liability be paid or
provided for across a period greater than two (2) years
following the Closing Date (the "Assumed Vacation Liability");
E. Payment to ARM in the amount of Three Hundred Seventy-Eight
Thousand and No/100 dollars ($378,000.00), to be paid, without
interest, as follows: $76,000.00 will be paid no later than the
first anniversary of the Closing Date; $76,000.00 will be paid
to ARM for the IRS no later than the second anniversary of the
Closing Date; $52,000.00 will be paid to ARM and $24,000.00 will
be paid to ARM for the IRS no later than the third anniversary
of the Closing Date; $100,000.00 will be paid no later than the
fourth anniversary of the Closing Date; and $50,000 will be paid
no later than the fifth anniversary of the Closing Date (the
"Deferred Payments");
F. Payment to the Seller of the aggregate amount of Seventy-Two
Thousand and No/100 dollars ($72,000.00) for the IRS, $36,000.00
of which is pursuant and subject to the Non-Compete Agreement
with Dr. Anand and $36,000.00 of which is pursuant to the Non-
Compete covenants of ARM in Section 10.0 of the Asset Purchase
Agreement (the "Assigned Non-Compete Payments") to be paid,
without interest, as follows: $24,000.00 will be paid no later
than the first anniversary of the Closing Date; $24,000.00 will
be paid no later than the second anniversary of the Closing
Date; and $24,000.00 will be paid no later than the third
anniversary of the Closing Date.
G. Fidelity will reimburse ARM's employees for their pre-petition
travel expenses in an aggregate amount not to exceed Fifty
Thousand and No/100 dollars ($50,000.00) for all such employees.
PURCHASED ASSETS
Pursuant to the terms of the Asset Purchase Agreement, the
Purchased Assets shall be all of ARM's right, title and interest in and to
properties, assets and rights of any kind, whether tangible or intangible,
real or personal, owned by ARM or in which ARM has any interest (other
than Excluded Assets), including, without limitation, the following:
A. All Contract Rights (including, without limitation, all Project
Contracts);
B. All Inventory;
C. All Books and Records;
D. All Fixtures and Equipment;
E. All Proprietary Rights;
F. All Permits, to the extent transferable;
G. All Accounts Receivable that are unbilled as of the Closing
Date;
H. All Accounts Receivable (billed and unbilled) relating to the
Last Payroll;
I. All Accounts Receivable billed after July 30, 1996, relating to
expired Contracts that are awaiting closeout;
J. Life Insurance Policy of United of Omaha in the amount of $1
million as Key-Man Life Insurance on Dr. S.P.S. Anand, in which
ARM is the 100% beneficiary; and
K. All items of real or personal property specified in Exhibit "B"
to the Asset Purchase Agreement.
EXCLUDED ASSETS
Pursuant to the terms of the Asset Purchase Agreement, the
Excluded Assets shall be the following items, which are not to be acquired
by Fidelity under the Asset Purchase Agreement:
A. ARM's franchise, charter and status as a corporation, its minute
books, stock transfer records and similar records relating to
ARM's organization, existence or capitalization, and the capital
stock of ARM;
B. Claims and causes of action arising under Sections 547, 548, 549
and 550 of the Bankruptcy Code including, without limitation,
claims and causes of action for preferences, fraudulent
transfers, fraudulent conveyances, illegal or improper dividends
(collectively "Avoidance Claims");
C. Accounts Receivable of ARM that are billed, fixed, matured and
liquidated as of the Closing Date (other than Accounts
Receivable arising on account of the Last Payroll and Accounts
Receivable that were unbilled on July 30, 1996, and that relate
to expired Contracts that are awaiting closeout);
D. Intercompany Receivables;
E. ARM's rights to occupy real property pursuant to leases of real
property other than leases specifically identified in writing by
Fidelity, after delivery of the final Disclosure Schedule, and
any leasehold improvements made pursuant thereto to the extent
that ARM has no right to remove such leasehold improvements or
that such removal would be impracticable;
F. Any proceeds from the refund of unearned insurance premiums, if
any, relating to ARM's workers' compensation insurance policies;
and
G. Any other property or asset that Fidelity identifies in writing
as Excluded Asset at or prior to the Closing.
REPRESENTATIONS AND WARRANTIES; COVENANTS
The Asset Purchase Agreement contains representations and
warranties with respect to ARM and the Purchased Assets which are
generally typical in a transaction of this type. ARM has represented and
warranted, among other things, that ARM has good and marketable title to
the Purchased Assets free of any Encumbrances, except liens which are
specified in the Disclosure Schedule and which are to be discharged
pursuant to the Order at or prior to the Closing. ARM has also
covenanted, among other things, to grant to Fidelity access to its
operations and records during the period prior to the Closing, to conduct
its business prior to the Closing only in the ordinary course and to use
its best efforts to preserve and maintain good relationships with its
clients, customers, vendors and Employees.
CONDITIONS PRECEDENT
In addition to approval of the execution by the Company, at
Closing, of the Parent Consent and Indemnification Agreement by the
Company's shareholders and approval by ARM's principal customers of the
transfer of certain contract rights and obligations, an order from the
Bankruptcy Court must be obtained: (i) approving the form and content of
the Asset Purchase Agreement, (ii) authorizing ARM to enter into each and
every transaction contemplated by the Asset Purchase Agreement, (iii)
authorizing ARM to convey to Fidelity the Purchased Assets free and clear
of all Encumbrances of all parties and entities, (iv) approving the
assumption by, and assignment to, Fidelity of any Contract that is an
executory contract and is a Purchased Asset, (v) determining that the
consideration given by Fidelity under the Asset Purchase Agreement
represents the fair market value of the Purchase Assets, and (vi)
determining that the Asset Purchase Agreement is in the best interest of
ARM and its Affiliates, including, without limitation, the Company and its
shareholders. Additionally, consummation of the Sale is subject to
certain other conditions, including the accuracy of the representations
and warranties of ARM and Fidelity set forth in the Asset Purchase
Agreement, the absence of any material adverse change in the Purchased
Assets, and obtaining the consent, approval and/or waiver from third
parties, governmental authorities and other Parties necessary to permit
ARM to transfer the Purchased Assets to Fidelity as contemplated by the
Asset Purchase Agreement.
PARENT CONSENT AND INDEMNIFICATION AGREEMENT
--------------------------------------------
Additionally, as a condition precedent to consummation of
the Asset Purchase Agreement, the Company is required to execute, at
Closing, and enter into an agreement pursuant to which: (i) the Company
consents to the transactions contemplated by the Asset Purchase Agreement,
(ii) the Company certifies that the representations and warranties set
forth in the Asset Purchase Agreement are true and correct, (iii) the
Company agrees to indemnify, defend and hold harmless Fidelity and
Fidelity's agents, affiliates, predecessors, successors and assigns,
against and in respect of any and all damages that any of them shall incur
or suffer, which arise, result from or relate to any claim by, through or
on behalf of any existing, future or former shareholder or creditor of the
Company relating to the subject matter of the foregoing certifications or
ARM's entering into or performing under the Asset Purchase Agreement, and
(iv) the Company agrees and covenants not to compete with Fidelity on the
same terms and conditions set forth in the Asset Purchase Agreement with
respect to ARM. Execution of the foregoing agreement must be authorized
by a majority of the shareholders of the Company at a shareholders meeting
conducted in accordance with applicable law.
CONSULTING AND NON-COMPETE AGREEMENT
------------------------------------
Under the terms of the Asset Purchase Agreement, and as a
condition precedent to Closing, Fidelity and Dr. Anand, President of the
Company and ARM, must have agreed to and executed and delivered a
Consulting Agreement and a Non-Compete Agreement in form and substance
acceptable to Purchaser. The foregoing agreements shall provide for the
engagement of Dr. Anand by Fidelity as a consultant and for prohibitions
against competition by Dr. Anand for three years.
INDEMNIFICATION
ARM and Fidelity have each agreed to indemnify the other (and
the officers, directors, stockholders, employees and agents of the other,
and their respective successors and assigns) from, against and in respect
of any and all losses, liabilities, deficiencies, penalties, fines, costs,
damages and expenses that may be suffered or incurred by any of them
arising from any breach of any representation, warranty, covenant or
agreement made in the Asset Purchase Agreement or contained in any
certificate executed and delivered in connection with the Asset Purchase
Agreement, or incident to the enforcement of the provisions of the Asset
Purchase Agreement. Additionally, ARM has agreed to indemnify Fidelity
against any losses suffered or incurred by Fidelity from any liability or
obligation of ARM which has not been assumed by Fidelity pursuant to the
express provisions of the Asset Purchase Agreement. Finally, pursuant to
the terms of the Asset Purchase Agreement and as part of the Parent
Consent and Indemnification Agreement, the Company must agree to
indemnify, defend and hold harmless Fidelity and Fidelity's agents,
affiliates, predecessors, successors and assigns, against and in respect
of any and all damages that any of them shall incur or suffer, which
arise, result from or relate to any claim by, through or on behalf of any
existing, future or former shareholder or creditor of the Company relating
to the subject matter of the certifications contained in the Parent
Consent and Indemnification Agreement or ARM's entering into or performing
under the Asset Purchase Agreement.
TERMINATION
Either ARM or Fidelity may terminate the Asset Purchase
Agreement upon the occurrence of a material breach by the other party that
is not cured within a reasonable time after notice of the breach;
provided, however, that a party may not terminate the Asset Purchase
Agreement solely on the grounds of a material breach by the other party if
the terminating party is itself in material breach of the Asset Purchase
Agreement at the time.
USE OF PROCEEDS AND CONDITION OF THE COMPANY AFTER THE SALE
In the event the sale referenced above is completed, ARM (the
"Debtor") will file a Plan of Reorganization, which will, among other
things, specify how much of the outstanding pre-petition liabilities will
be paid and over what period of time. It is expected that a Plan of
Reorganization will be filed with the Bankruptcy Court within 30 days of
completing the sale. This Plan is expected to take several months to
receive Bankruptcy Court approval. It is also expected that between the
monies generated from the sale of ARM's contracts rights plus the
collection of the outstanding accounts receivables (which are not part of
the sale), there will not be sufficient monies to liquidate all of ARM's
pre-petition liabilities. Furthermore, it appears that the unsecured
creditors (accounts payable) will receive little or nothing towards their
pre-petition claims. Specifically, it appears that the following will be
paid in full as a result of the Plan of Reorganization: (1) the secured
claim of CFC, ARM's pre-petition and post-petition lender, (2) the amounts
owed to the employees for accrued vacation (up to $325,000), the amount
owed to the 401(k) Plan as of April 2, 1996, of approximately $676,000, as
well as their pre-petition claims for unreimbursed travel expenses of
approximately $50,000, and, (3) the principal portion of the tax amounts
owed to both the IRS and the various state authorities. In addition, it
appears that the various taxing authorities will receive a portion of the
pre-petition penalties and interest, but not the full amount. Although
these are the current expectations, there can be no assurances that these
amounts will be paid until the Plan of Reorganization is submitted and
confirmed by the Bankruptcy Court.
During the current fiscal year ARM constituted 94% of ARC's total
revenue. As a result, the sale of ARM, if completed, will dramatically
change the Company's balance sheet and statement of operations (SEE
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION).
Specifically, through the bankruptcy proceeding, all of ARM's debts
which total $3.7 million at May 31, 1996, will be either liquidated or
discharged. However, notwithstanding the foregoing, giving retroactive
effect to May 31, 1996, to the transactions contemplated by the Asset
Purchase Agreement, the Company will still have a working capital deficit
of $(1,777,285) on total current assets of $41,803, and total current
liabilities of $1,819,088. Approximately $1.58 million of the Company's
total current liabilities represent amounts owed by ARS and ARInternet to
ARM.
ARS is still not operating at cash flow break even, so it is doubtful
that it can survive without a substantial infusion of cash or a
significant increase in revenues, neither of which can be guaranteed.
Management is considering several options for ARS, including ceasing its
operations. ARInternet on the other hand, has steadily increased its
revenues and as of May 31, 1996, had approximately 1,000 subscribers and
had essentially reached break even 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 assurances of this. (SEE NOTES TO PRO-FORMA STATEMENTS --
NOTE 5.) This amount has not been eliminated from the pro-forma
statements in the assumption that this amount, or a portion thereof, will
either be forgiven as part of the Bankruptcy proceeding or paid form the
collection of the inter-Company accounts receivable. However, in the
event that there are no payments made on the inter-Company receivables,
ARM will be at lest $400,000 short of liquidating all of its pre-petition
debts (including penalties and interest).
The transactions currently contemplated by the Asset Purchase
Agreement will result in the sale of substantially all of ARM's
operations, and, as a result, eliminate all of ARM's revenues. Therefore,
ARS and ARInternet will be the only remaining operating entities. Prior
to filing for protection under the Bankruptcy Code, ARM had been forced to
continue to fund ARS's and ARInternet's operations. During the current
fiscal year (through April 2, 1996), ARM funded approximately $204,600 of
ARS and ARInternet expenses. From the period from April 2, 1996 on,
because of the bankruptcy proceedings, ARM ceased all such advances and
ARS and ARInternet were forced to fund their own operations.
Giving retroactive effect to May 31, 1996, to the transactions
contemplated by the Asset Purchase Agreement, the Company's revenues will
decrease from $8,957,464 to $563,596, and operating expenses will decrease
from $1,526,910 to $736,583. Based on the foregoing, the Company's net
loss will decrease from $(657,056) to $(622,281).
The Company has a noncancelable operating lease covering 12,633 sq.
ft. of office and lab facilities which expires in September, 1998. The
lease is subject to standard real estate escalation factors and building
operating expense pass-throughs. Of the total 12,633 sq. ft. covered by
the lease, ARM occupies 10,072 sq. ft., or approximately 80%. The annual
rent during the year ended May 31, 1996 on the ARM space was $156,877.
This amount will not be eliminated as a result of the Bankruptcy
proceedings because the lease is held by the Company and not ARM.
Additionally, because the lease obligations are not among the liability to
be assumed by Fidelity, the Company's remaining operating expenses
following consummation of the Sale will continue to include the Company's
continuing lease obligations. To this end, approximately $157,000 of the
Company's pro-forma loss related to the continuing lease obligation for
the space related to ARM. Additionally, future minimum lease payments on
the lease for the fiscal 1997, 1998 and 1999 for the space related to ARM
total, in the aggregate, $378,700. Management of ARC has enlisted the
services of a real estate broker to find a tenant to take over this space
when ARM's operations are sold. The landlord has also been apprised of
the ARM sale and is attempting to find an alternate tenant, but is under
no obligation to release ARC from its obligation under the lease.
Other significant components contributing to the Company's continuing
net loss following consummation at the sale include $89,000 in
compensation paid in the form of Company stock to individuals for
consulting services which are not expected to recur and $50,000 of
estimated expenses which were incurred in connection with maintaining the
Company's status as a public Company. (SEE NOTES TO PRO-FORMA STATEMENTS
- -- NOTE 5.)
Based on the foregoing, unless and until ARS' and ARInternet's
revenues can be increased to produce net profits and a positive cash flow,
the Company may not have sufficient capital to achieve its current
business plan, which raises substantial doubt as to the Company's ability
to continue as a going concern after the sale of ARM is completed.
THE PURCHASER
The Purchaser, Fidelity Technologies Corporation, is a Reading,
Pennsylvania, based high-tech electronic manufacturing and services
company. Fidelity started business in 1988 with three employees and has
twice been named to the Inc. 500 List of Fasted Growing Privately Held
Companies. Fidelity has also received the Entrepreneur of the Year Award
for Central Pennsylvania on two occasions, and has competed for this
coveted award at the national level. Fidelity maintains its principal
offices at 2501 Kutztown Road, Reading, Pennsylvania 19605.
THE COMPANY
A complete description of the Company is contained in the Company's
Annual Report of Form 10-KSB, a copy of which is attached hereto as
Appendix A, and incorporated herein by this reference.
REGULATORY APPROVALS
Pursuant to the Bankruptcy Code, consummation of the transactions
contemplated by Asset Purchase Agreement requires approval by the
Bankruptcy Court. To this end, a court order documenting the bidding
procedure as well as the Asset Purchase Agreement has been submitted to
the Bankruptcy Court for approval. The Court Order and the Asset Purchase
Agreement are expected to be submitted for approval by the Bankruptcy
Court during the week ended October 4, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and Analysis of Financial Condition and
Results of Operations is contained in the Company's Annual Report of Form
10-KSB, a copy of which is attached hereto as Appendix A, and incorporated
herein by this reference.
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information and
explanatory notes set forth the principal pro forma effect of consummation
of the sale of the Purchased Assets and the other transactions
contemplated by the Asset Purchase Agreement on the Company's historical
consolidated financial results. The pro forma condensed consolidated
financial information assumes that the Closing had taken place as of May
31, 1996.
The estimated financial effects of the sale of the Purchase Assets
and the other transactions contemplated by the Asset Purchase Agreement
presented in the pro forma condensed financial information are not
necessarily indicative of either the financial position or the results of
operations of the Company had the sale occurred on the dates described,
nor are they necessarily indicative of the results of future operations.
Additionally, the pro forma condensed consolidated balance sheet as of May
31, 1996 does not reflect the results of operations or any changes in
asset values since that date. The pro forma condensed financial
information should be read in conjunction with historical consolidated
financial statements of the Company, including the notes thereto,
appearing in the Company Annual Report on Form 10-KSB attached hereto as
Appendix A and incorporated herein by this reference.
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
PRO-FORMA BALANCE SHEET
MAY 31, 1996
----------------------------------------------
1996 Adjustments/ 1996
(Audited) Eliminations Pro-Forma
--------- ------------ ---------
ASSETS
- ------
CURRENT ASSETS
Cash $ 78,689 $ (62,878) $ 15,811
Accounts receivable, net 1,524,685 (1,500,777) 23,908
Inventory, at cost 1,492 - 1,492
Other current assets 21,093 (20,501) 592
---------- ------------ ----------
TOTAL CURRENT ASSETS 1,625,959 (1,584,156) 41,803
PROPERTY AND EQUIPMENT, AT COST
Furniture and equipment 167,405 (147,013) 20,392
Computer equipment 462,206 (355,100) 107,106
Laboratory equipment 121,426 (121,426) -
Leasehold improvements 22,322 (22,122) 200
---------- ------------ ----------
773,359 (645,661) 127,698
Less accumulated depreciation
and amortization 640,589 (580,425) 60,164
---------- ------------ ----------
NET PROPERTY AND EQUIPMENT 132,770 (65,236) 67,534
INTANGIBLE ASSETS, NET
OF AMORTIZATION 32,276 (22,951) 9,325
OTHER ASSETS 6,615 (6,615) -
---------- ------------ ----------
TOTAL ASSETS $1,797,620 $(1,678,958) $ 118,662
========== ============ ==========
See accompanying notes to the pro-forma statements
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
PRO-FORMA BALANCE SHEET - Continued
MAY 31, 1996
------------------------------------------------
1996 Adjustments/ 1996
(Audited) Eliminations Pro-Forma
--------- ------------ ---------
LIABILITIES
- -----------
CURRENT LIABILITIES
Liabilities not subject to compromise:
Notes payable, current maturities$ 689,563 $ (689,563) $ -
Notes payable to officers and directors,
current maturities 4,000 - 4,000
Accounts payable, trade 162,314 (14,018) 148,296
Inter company advances payable to
bankruptcy estate (Note 2) - 1,582,842 1,582,842
Accrued salaries and benefits 176,574 (137,505) 39,069
Accrued payroll taxes and withholdings57,143 (43,174) 13,969
Other accrued liabilities 77,665 (74,388) 3,277
Billings in excess of costs and
anticipated profits 9,999 (9,999) -
Deferred revenue 27,635 - 27,635
Income taxes payable 1,411 (1,411) -
Provision for contract losses 60,000 (60,000) -
---------- ------------ ----------
Total liabilities not
subject to compromise 1,266,304 552,784 1,819,088
---------- ------------ ----------
Liabilities subject to compromise:
Accounts payable 403,812 (403,812) -
Accrued salaries and benefits 861,151 (861,151) -
Accrued payroll taxes and withholdings930,794 (930,794) -
Accrued interest and penalties 437,708 (437,708) -
---------- ------------ ----------
Total liabilities
subject to compromise 2,633,465 (2,633,465) -
---------- ------------ ----------
TOTAL CURRENT LIABILITIES 3,899,769 (2,080,681) 1,819,088
NOTES PAYABLE, NET OF
CURRENT MATURITIES - - -
---------- ------------ ----------
TOTAL LIABILITIES 3,899,769 (2,080,681) 1,819,088
---------- ------------ ----------
STOCKHOLDERS' DEFICIT
- ---------------------
Preferred stock, $.10 par value, 40,000,000 shares
authorized, none issued - - -
Common stock, $.0005 par value, 60,000,000
shares authorized, 6,811,083 shares issued
and 6,311,083 shares outstanding in 19963,155 - 3,155
Capital in excess of par value 1,140,529 - 1,140,529
Accumulated deficit (3,245,833) 401,723 (2,844,110)
---------- ------------ ----------
TOTAL STOCKHOLDERS' DEFICIT (2,102,149) 401,723 (1,700,426)
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $1,797,620 $(1,678,958) $ 118,662
========== ============ ==========
See accompanying notes to the pro-forma statements
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
PRO-FORMA STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1996
---------------------------------------------
1996 Adjustments/ 1996
(Audited) Eliminations Pro-Forma
--------- ------------ ---------
Revenue $8,957,464 $(8,393,868) $563,596
Operating costs and expenses:
Direct cost of services 5,467,113 (5,207,341) 259,772
Indirect operating costs (Note 3) 1,934,199 (1,839,705) 94,494
General & administrative
expenses (Notes 3 and 4) 1,526,910 (790,327) 736,583
---------- ------------ ----------
Total operating costs and expenses 8,928,222 (7,837,373) 1,094,849
---------- ------------ ----------
Operating income (loss) 29,242 (556,495) (527,253)
Other expense:
Interest expense, net 379,173 (379,085) 88
Consulting expense associated
with stock awards 89,063 - 89,063
Penalties 162,778 (159,067) 3,711
Other, net 26,521 (24,355) 2,166
---------- ------------ ----------
Total other expense 657,535 (562,507) 95,028
---------- ------------ ----------
Loss before reorganization items
and income taxes (628,293) 6,012 (622,281)
Reorganization items:
Professional fees (28,763) 28,763 -
---------- ------------ ----------
Loss before income taxes (657,056) 34,775 (622,281)
Income taxes - - -
---------- ------------ ----------
Net loss $ (657,056) $ 34,775 $ (622,281)
========== ============ ==========
See accompanying notes to the pro-forma statements
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO PRO-FORMA STATEMENTS
MAY 31, 1996
1. General Information/Assumptions
-------------------------------
Applied Research Corporation ("ARC" or the "Company") 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.
On April 2, 1995, ARM filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code. On June 24, 1996, the Company
accepted a contract for the sale of certain of ARM's assets for
approximately $1.5 Million. The sale was subject to Bankruptcy Court
approval, which was scheduled for July 26, 1996. This hearing was
subsequently moved to July 30, 1996. On July 30, 1996, the hearing was
conducted. At the hearing, a total of four qualified bidders attended,
and after extensive biding, an offer was accepted for $2.1 Million.
These pro-forma statements are shown to give the reader a indication of
what the Company's consolidated financial statements would have been had
the sale of Applied Research of Maryland, Inc. ("ARM"), the Company's
wholly-owned subsidiary, been completed on June 1, 1995. The pro-forma
balance sheet as of May 31, 1996, and the pro-forma statement of
operations for the year ended May 31, 1996, have been prepared by the
Company and are unaudited. The pro-forma results from operations for the
year ended May 31, 1996, are not necessarily indicative of the anticipated
operating results after the sale of ARM.
Most of the information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these pro-
forma statements be read in conjunction with the financial statements and
notes thereto included in the Company's annual report on Form 10-KSB for
the fiscal year ended May 31, 1996.
The general assumptions used to prepare the pro-forma statements were:
- - All of the May 31, 1996, ARM assets and liabilities were eliminated,
except for the inter company amounts owed to ARM by ARS and
ARInternet (see note 2).
- - All of the ARM revenue and expenses for the year ended May 31, 1996,
were eliminated, except for the public company related expenses and
the portion of the lease paid by ARM (see notes 3 and 4).
2. Collection of the Inter-Company Amounts owed to ARM.
---------------------------------------------------
As of April 2, 1996, ARS owed ARM approximately $1.18 Million and
ARInternet owed ARM $0.4 Million. These amounts resulted from ARM paying
ARS's and ARInternet's operating expenses during their start-up phases and
providing continued funding thereafter to fund operations. Since these
amounts are owed to ARM, the ultimate collection of these advances will be
supervised and controlled by the Bankruptcy Court. This amount has not
been eliminated from the pro-forma statements in the assumption that this
amount or a portion thereof, will either be forgiven as part of the
Bankruptcy proceeding or paid from the collection of the inter-Company
accounts receivable. However, in the event that there are no payments
made on the inter company receivables, ARM will be at least $400,000 short
of liquidating all of its pre-petition debts (including penalties and
interest).
As of May 31, 1996, ARS has still not achieved breakeven operations. As
of September 20, 1996, ARS has only one full-time employee and its sales
are minimal. Therefore payment of any of the amount its owes ARM is
extremely doubtful. On the other hand, ARInternet has essentially
achieved breakeven operations as of May 31, 1996. Therefore, it can
reasonably be expected that ARInternet will be required to repay some
amount to liquidate its debt to ARM. The ultimate amount will be
determined by the Bankruptcy Court.
3. Impact on ARC after the Sale of ARM is Completed.
------------------------------------------------
During the current fiscal year ARM constituted 94% of ARC's total revenue.
The sale currently contemplated will sell essentially all of ARM's
operations to the Purchaser and eliminate all of ARM's revenues.
Therefore, ARS and ARInternet will be the only remaining operating
entities. Up until the bankruptcy filing, ARM had been forced to continue
to fund ARS's and ARInternet's operations. During the current fiscal year
(through April 2, 1996), ARM funded approximately $204,600 of ARS and
ARInternet expenses. From the period from April 2, 1996 on, because of
the bankruptcy proceedings, ARM ceased all such advances and ARS and
ARInternet were forced to fund their own operations. ARS is still not
operating at cash flow breakeven, so it is doubtful that it can survive
without an infusion of cash or a substantial increase in revenues.
Management is considering several options for ARS, including ceasing its
operations. ARInternet on the other hand, has steadily increased its
revenues and as of May 31, 1996, had approximately 1,000 subscribers and
had essentially reached breakeven operations. Management believes that
ARInternet's revenues and business will continue to grow and that
ARInternet will ultimately be a successful business on its own, however
there can be no assurances of this.
The space currently occupied by ARM is not covered by the Bankruptcy
proceeding, since the lease is held by ARC (see Note 4). In addition, ARC
will continue to incur expenses to maintain its status as a public
company. Although these expenses will be less because of having less
revenues and expenses, they will have to be borne by the remaining
companies. For the purpose of these pro-forma statements, it has been
assumed that $50,000 of expenses previously paid by ARM would have to be
borne by the remaining companies and therefore, were not eliminated.
4. Lease Commitment
----------------
The Company has a noncancelable operating lease covering 12,633 sq. ft. of
office and lab facilities which expire in September 1998. The lease is
subject to standard real estate escalation factors and building operating
expense pass-throughs.
Of the total 12,633 sq. ft. covered by the lease, ARM occupied 10,072 sq.
ft., or approximately 80%. The annual rent during the year ended May 31,
1996 on the ARM space was $156,877. This amount was not eliminated in the
pro-forma statement of operations since the lease is held by ARC and not
covered by the bankruptcy proceeding. Management of ARC has enlisted the
services of a real estate broker to find a tenant to take over this space
when ARM's operation are sold. The landlord has also been apprised of the
ARM sale and is attempting to find an alternate tenant, but is under no
obligation to release ARC of its obligation under the lease.
Future minimum operating lease payments on the noncancelable office lease
related specifically to ARM are as follows:
Fiscal Year
-----------
1997 $ 162,300
1998 162,300
1999 54,100
---------
$ 378,700
=========
Until the sale is completed, ARM will continue to occupy this space and
pay the rent. The sale which is subject to Bankruptcy Court and
Shareholder approvals, is not expected to be close until November or
December 1996. This will decrease the above lease obligation by
approximately $81,200 to $94,700.
5. Going Concern and Management's Plans
------------------------------------
The pro-forma financial statements indicate a consolidated loss of
$(622,281) after elimination of the operations of ARM. This loss, the
history of losses within ARS and ARInternet, and the elimination of the
major funding source (ARM) for the operations of ARS and ARInternet raise
substantial doubt about the Company's ability to continue as a going
concern.
The consolidated loss of $(622,000) and management's plan for continuing
operations is discussed below:
- - Approximately $157,000 of the pro-forma loss related to the
continuing lease obligation for the space related to ARM. Management
has been working vigorously to find a tenant to sublet this space,
and hopes that upon the sale of ARM, it will have found a tenant to
sublease this space, therefore eliminating this expense and
liability.
- - An additional $89,000 of the loss relates to stock compensation paid
for consulting services, which are not expected to recur.
- - The loss includes $50,000 of estimated expenses in connection with
maintaining the Company as a public company, which were formally
borne by ARM. These expenses are expected to continue unless and
until a decision is made to take the Company private. It is not
management's intention to do so at this time.
- - Approximately $204,000 of the loss relates to ARInternet, which
essentially had achieved breakeven operations as of May 31, 1996.
Management believes that ARInternet will continue to grow and
generate profits and cashflow sufficient to maintain its operations.
- - Lastly, approximately $122,000 of the loss is attributable to ARS.
As of September 20, 1996, ARS had only one (1) full-time employee and
sales are minimal. It is still not operating at cashflow breakeven,
so it is doubtful that it can survive without an infusion of cash or
a substantial increase in revenues. Management is considering
several options for ARS, including ceasing its operations.
FEDERAL INCOME TAX CONSEQUENCES
FEDERAL INCOME TAX CONSEQUENCES TO SHAREHOLDERS
The sale of the Purchased Assets by ARM will not have any
Federal income tax consequences to shareholders of the Company.
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY
For Federal income tax purposes, the sale of the Purchase Assets
by ARM will be accounted for by ARC as the "disposal of a business
segment" under the provisions of AICPA Accounting Principles Board Opinion
No. 30. ARM's results of operations through the date of sale will be
treated as discontinued operations by ARC. Likewise, andy gain or loss
from the sale will be recorded as gain or loss from discontinued
operations.
FINANCIAL STATEMENTS
Financial Statements for the Company including Consolidated Balance
Sheets as of May 31, 1996 and May 31, 1995, Consolidated Statements of
Operations for the Years Ended May 31, 1996 and May 31, 1995, Consolidated
Statements of Changes in Stockholders' Deficit for the Years Ended May 31,
1996 and May 31, 1995, Consolidated Statements of Cash Flows for the Years
Ended May 31, 1996 and May 31, 1995, and the Notes thereto, are contained
in the Company's Annual Report of Form 10-KSB, a copy of which is attached
hereto as Appendix A, and incorporated herein by this reference.
4. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Friedman & Fuller, P.C. served as the Company's principal accountant
for the fiscal year ended May 31, 1996 and is expected to be retained as
the Company's principal accountant for the fiscal year ending May 31,
1997. Representatives of Friedman & Fuller, P.C., are not expected to be
present at the Annual Meeting of Shareholders or to be available to
respond to appropriate questions. However, should representatives of
Friedman & Fuller, P.C. attend the Annual Meeting of Shareholders, said
representatives will have an opportunity to make a statement if they so
desire, and would be available to respond to appropriate questions.
OTHER MATTERS
The Company's management is not aware of other matters which may come
before the Meeting. The Directors' designees or other persons named in
the accompanying form of proxy will vote said proxy in accordance with
their judgment if any other matter does properly come before the Meeting.
A majority of those votes present at the Meeting cast in favor of any such
matter will result in the passage of such matter.
A copy of Form 10-KSB for the fiscal year ended May 31, 1996, the
annual report filed by the Company with the Securities and Exchange
Commission, being furnished contemporaneously herewith.
APPLIED RESEARCH CORPORATION
By: /s/ Dennis H. O'Brien
-------------------------
Dennis H. O'Brien, Secretary
1997 ANNUAL MEETING
No definitive date for the Annual Meeting of Shareholders in
1997 has been established. Qualifying shareholders may submit proposals
that are consistent with the Company's Bylaws and federal securities laws
to the Company for inclusion in the Company's proxy material relating to
the 1997 Annual Meeting. The Company must receive such proposals at its
business address (set forth at the beginning of this Proxy Statement) no
later than May 31, 1997.
APPLIED RESEARCH CORPORATION
PROXY SOLICITED ON BEHALF OF THE COMPANY
The undersigned hereby constitutes and appoints Dr. S.P.S. Anand or
Dennis H. O'Brien (SEE NOTE BELOW) or either of them acting in the absence
of the other, with full power of substitution the true and lawful
attorneys or attorney and proxies of the undersigned to attend the Annual
Meeting of the Shareholders of Applied Research Corporation (the
"Company") to be held at the principal executive offices of the Company,
8201 Corporate Drive, Suite 1120, Landover, Maryland 20785, on October
30, 1996 at 10:00 o'clock a.m., or any adjournment or adjournments
thereof, and vote all the shares of the Company standing in the name of
the undersigned with all the powers the undersigned would possess if
present at said meeting.
ITEM 1. FOR WITHHOLD AUTHORITY
----- -----
To elect all of the nominees listed below:
Dr. S.P.S. Anand, Manjit K. Anand and Dennis H. O'Brien
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name below)
------------------------------------------------------
ITEM 2. To approve the execution by the Company of that certain Parent
Consent and Indemnification Agreement to be executed at Closing
by the Company in conjunction with the sale of substantially all
of the assets of the Company's wholly-owned subsidiary, Applied
Research of Maryland, Inc., a Maryland corporation, to Fidelity
Technologies Corporation, a Pennsylvania corporation.
FOR AGAINST ABSTAIN
----- ----- -----
ITEM 3. Upon such other matters as may properly come before the meeting.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR ITEM 1, ITEM 2
AND ITEM 3 AND IN THE DISCRETION OF THE PERSON HOLDING THE PROXY FOR ANY
OTHER BUSINESS.
(NOTE: Should you desire to appoint a proxy other than the management
designees named above, strike out the names of management designees and
insert the name of your proxy in the space provided above. Should you do
this, give this proxy card to the person you appoint instead of returning
the proxy card to the Company.)
(PLEASE DATE, SIGN AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED
ENVELOPE.)
Receipt is acknowledged of Notice of Annual Meeting and Proxy Statement
for the meeting.
Date , 1996
---------------
----------------------------------
Name (please type or print)
----------------------------------
Signature
----------------------------------
Signature, if held jointly
Please sign exactly as name appears to the left. When shares are held by
joint tenants, both should sign. When signing as executor, administrator,
attorney, trustee, or guardian, please give full title as such. If a
corporation, please sign in full corporation name by President or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
APPENDIX TO
PROXY STATEMENT
CONSOLIDATED ASSET PURCHASE AGREEMENT
THIS CONSOLIDATED ASSET PURCHASE AGREEMENT (this "Agreement") is made
as of the 30th day of July, 1996, by and between FIDELITY TECHNOLOGIES
CORPORATION, a Pennsylvania corporation ("Purchaser" or "Buyer") and
APPLIED RESEARCH OF MARYLAND, INC., a Maryland corporation also doing
business as Applied Research Corporation ("Seller").
RECITALS
R.1 Seller is a high technology company specializing in research and
development, design and fabrication of sensors and instrumentation,
technical support services and software development. Seller operates its
business at 8201 Corporate Drive, Suite 1120, Landover, Maryland 20785.
R.2 Seller is a wholly owned subsidiary of Applied Research
Corporation, Colorado corporation ("Parent"). Dr. S.P.S. Anand
("Dr. Anand") is the President and Chairman of the Boards of Directors of
both Seller and Parent.
R.3 On April 2, 1996 (the "Petition Date"), Seller filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District
of Maryland, Greenbelt Division (the "Bankruptcy Court"), as case number
96-1-2425DK (the "Bankruptcy Case").
R.4 Purchaser desires to purchase, and Seller desires to sell, the
assets of Seller identified herein.
NOW, THEREFORE, for and in consideration of the mutual promises and
other good and valuable consideration contained herein, the adequacy and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
1.1 DEFINED TERMS. As used herein, the terms below shall have the
following meanings:
"Accounts Receivable" shall mean all accounts, claims, chooses
in action or other right to receive money or other property or
consideration from any person or entity, whether such fight, claim,
account, right or chose in action is disputed or undisputed, fixed or
contingent, matured or unmatured, liquidated or unliquidated, evidenced by
an instrument or other writing or unwritten, including, without
limitation: all of Seller's present and future accounts, contract rights
(other than Contract Rights), receivables, promissory notes and other
instruments, chattel paper, all present and future tax refunds of Seller
and all present and future rights of Seller to refunds or returns of
prepaid expenses, including, unearned insurance premiums; all present and
future judgments, orders, awards and decrees in favor of Seller and causes
of action in favor of Seller; all present and future claims, rights of
indemnification and other rights of Seller under or in connection with any
contracts or agreements to which Seller is or becomes a party or third
party beneficiary, including letters of credit (and the proceeds thereof
issued or assigned for the benefit of Seller; all goods previously or
hereafter returned, repossessed or stopped in transit, the sale, lease or
other disposition of which contributed to the creation of any account,
instrument or chattel paper of Seller; all present and future rights of
Seller as an unpaid seller of goods, including rights of stoppage in
transit and reclamation; all rights which Seller may now or at any time
hereafter have, by law or agreement, against any account debtor or other
obligor of Seller, and all rights, liens and security interests which
Seller may now or at any time hereafter have, by law or agreement, against
any property of any account debtor or other obligor of Seller, all present
and future interests and rights of Seller, including rights to the payment
of money, under or in connection with all present and future leases and
subleases of real or personal property to which Seller is a party, as
lessor, sublessor, lessee or sublessee; all other present and future
contingent and noncontingent rights of Seller to the payment of money for
any reason whatsoever whether arising, in contract, tort or otherwise; all
deposit accounts now or hereafter maintained or established by, for or on
behalf of Seller with any bank or other person and all balances of funds
now or hereafter on deposit in all such accounts, including, without
limitations all checking accounts, collection accounts, lockbox accounts,
disbursement accounts and concentration accounts.
"Affiliate" shall mean any person that is an affiliate (as such
term is used in Section 101 of the Bankruptcy Code) of Seller, including,
without limitation, Parent, ARS and ARInternet.
"ARInternet" shall mean ARInternet Corporation, a Maryland
corporation.
"ARS" shall mean ARSoftware Corporation, a Maryland corporation.
"Balance Sheet" shall mean the statement of assets and
liabilities of the Seller previously provided to Purchaser and dated as of
April 2, 1996.
"Balance Sheet Date" shall mean the date as of which the Balance
Sheet is effective, that is, April 2, 1996.
"Bankruptcy Code" shall mean Title 11 of the United States Code,
as amended from time to time.
"Books and Records" shall mean all records pertaining to the
Purchased Assets, including without limitation records pertaining, to
customers, suppliers, lessors and employees of the Seller.
"Business Day" shall mean any day that is not a weekend or legal
holiday as defined in Rule 9006 of the Bankruptcy Rules.
"Closing" shall mean the closing of the transactions
contemplated hereby, as set forth in Section 3.1, below.
"Closing Date" shall mean the tenth (10th) Business Day
following the date on which all of the conditions to Purchaser's
obligations to close, as set forth in Article VIII, below, have been, and
remain, satisfied or have been waived in writing by Purchaser, or such
other date following entry of the Order on which the Seller and the
Purchaser may agree.
"Consulting Agreement and Non-Compete Agreement" shall mean
certain agreements between Purchaser and Dr. Anand providing engagement of
Dr. Anand by Purchaser as a consultant and for prohibitions against
competition by Dr. Anand for three years, in the forms and in substance
reasonably acceptable to Purchaser. The terms and conditions of the
Consulting Agreement and the Non-Compete Agreement shall be disclosed in
accordance with the Bankruptcy Code and the Bankruptcy Rules.
"Contract" shall mean any of the agreements, contracts, leases
or commitments described in the Disclosure Schedule.
"Contract Rights" shall mean all of Seller's rights and
obligations under the Contracts.
"Court" shall mean the United States Bankruptcy Court for the
District of Maryland.
"Direct Employees" shall mean all employees of Seller whose
salary and benefits are chargeable in majority part to one or more Project
Contract as a direct, reimbursable expense.
"Disclosure Schedule" shall mean a schedule executed and
delivered by Seller to Purchaser of even date herewith, which sets forth
the exceptions to the representations and warranties contained in
Article IV hereof and certain other information called for by Article IV
hereof and other provisions of this Agreement. The final Disclosure
Schedule delivered by Seller to Purchaser (which shall be designated by
Seller as the Final Disclosure Schedule) shall be incorporated into and
made a part of this Agreement.
"Employee" shall mean any employee or consultant engaged or
employed by Seller as of the date hereof or following the date hereof
until Closing, 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.
"Encumbrance" shall mean any claim, lien, pledge, option,
charge, easement, security interest, right-of-way, encumbrance or other
right of third parties.
"Excluded Assets" shall mean the following items, which are not
to be acquired by Purchaser under this Agreement.
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 limitation
claims and causes of action for preferences, fraudulent transfers,
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 Accounts
Receivable arising on account of the Last Payroll and Accounts Receivable
that were unbilled on July 30, 1996, and that relate to expired Contracts
that are awaiting closeout);
D. Intercompany Receivables;
E. The Seller's 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 impracticable;
F. Any proceeds from the refund of unearned insurance
premiums, if any, relating to Seller's workers' compensation insurance
policies; and
G. Any other property or asset that the Buyer identified in
writing as an Excluded Asset at or prior to the Closing.
"Final Order" shall mean an order of the Bankruptcy Court or any
appellate court that has not been reversed, modified, amended or stayed
with respect to which the time to appeal or seek certiorari has expired,
and with respect to which no appeal or request for certiorari is pending.
"Fixtures and Equipment" shall mean all of the furniture,
fixtures, furnishings, machinery and equipment owned by Seller as of the
date hereof, plus all additions, replacements or deletions following the
date hereof until Closing, including, without limitation all equipment of
Seller of every type and description, now owned and hereafter acquired and
wherever located, including, without limitation, all machinery, vehicles
and other rolling stock, furniture, tools, dies, leasehold improvements,
fixtures, computers, computer peripherals, computer systems and related
furniture, and materials and supplies relating to any of the foregoing;
all present and future documents of title relating to any of the
foregoing; all present and future rights, claims and causes of action of
Seller in connection with purchases of (or contracts for the purchase of),
or warranties relating to, or letters of credit (and the proceeds thereof
issued or assigned for the benefit of Seller relating to, or damages to,
goods held or to be held by Seller as equipment; all present and future
warranties, manuals and other written materials (and packaging thereof or
relating thereto) relating to any of the foregoing; and all present and
future general intangibles of Seller in any way relating to any of the
foregoing, including, without limitation, all Intellectual Property
associated with, used or useable in connection with, or necessary for the
manufacture, operation, sale or lease of, any of the foregoing.
"Hired Employee" shall mean any Employee (including Project
Managers) to whom Purchaser offers employment or engagement commencing
upon the consummation of the transactions contemplated by this Agreement,
and who accepts such employment or engagement and, if requested by
Purchaser, enters into an employment, consulting or other engagement
agreement. Employment shall be offered to all Direct Employees upon
substantially the same terms and conditions as currently exists with
Seller; provided, however, that Purchaser shall have no obligation to
provide credit to any Hired employee on account of services rendered,
benefits accrued, or seniority achieved prior to Closing; and further
provided that Purchaser shall have no obligation to offer benefits to any
Hired Employee that are greater or different that the benefits that
Purchaser generally provides with respect to its employees of similar,
education, experience, salary and job responsibilities.
"Indemnification Agreement" shall mean this Agreement, in which
Dr. Anand hereby agrees to indemnify, defend and hold harmless Purchaser
and Purchaser's agents, affiliates, predecessors, successors and assigns,
against and in respect of any and all Damages that any of them shall incur
or suffer, which arise, result from or relate to any breach of, or failure
by Seller to perform, any of their respective representations, warranties,
covenants or agreements in this Agreement, or in any schedule,
certificate, exhibit or other instrument furnished or to be furnished by
Seller under or pursuant to this Agreement. The liability of Dr. Anand
under this Indemnification Agreement shall expire unless action hereunder
is commenced against him on or before the first business day following the
first anniversary of the first to occur of the Closing or the termination
of this Agreement.
"Intellectual Property" shall mean all of Seller's right, title
and interest, whether now or existing or hereafter arising or acquired, in
and to (a) all domestic and foreign copyrights, copyright registrations
and copyright applications, whether or not registered or filed with any
governmental or other authority, (b) all United States and foreign
patents, and all pending and abandoned United States and foreign patent
applications, including, without limitation, the inventions and
improvements described or claimed therein, together with any reissues,
divisions, continuations, certificates of re-examination, extensions and
continuations-in-part thereof, and (c) all domestic and foreign
trademarks, trademark registrations, trademark applications, service marks
and trade names, whether or not registered or filed with any governmental
or other authority; all present and future licenses and license agreements
of Seller, and all rights of Seller under or in connection therewith,
whether Seller is licensee or licensor thereunder, including, without
limitation, any present or future franchise agreements under which Seller
is franchisee or franchisor, all goodwill of Seller; all present and
future trade secrets of Seller; all other present and future intellectual
property of Seller; all income, royalties, damages and payments now or
hereafter due and/or payable to Seller under or with respect to any of the
foregoing, including, without limitation, rights to sue, damages and
payments for past, present or future infringements thereof, and all rights
corresponding to any of the foregoing throughout the world.
"Intercompany Receivables" shall mean any Account Receivable
that is matured, fixed and liquidated as of the date hereof owed to Seller
by any Affiliate.
"Inventory" shall mean all of all inventory of Seller of every
type and description, now owned and hereafter acquired and wherever
located, including, without limitation, raw materials, work in process,
finished goods, goods returned or repossessed, and goods held for
demonstration, marketing or similar purposes; all present and future
materials and supplies of Seller used, useable or consumed in the course
of Seller's business, whether relating to the manufacture, assembly,
installation repair, packaging, packing or shipment of goods by Seller, or
relating to advertising or any other aspect of Seller's business; all
present and future property of Seller in, on or with which any of the
foregoing is stored or maintained; all present and future warranties,
manuals and other written materials (and packaging thereof or relating -
thereto) relating to any of the foregoing; all present and future
documents of title relating to any of the foregoing; and all present and
future rights of Seller in connection with goods consigned to or by
Seller; all present and future rights of Seller as an unpaid seller of
goods, including rights of stoppage in transit and reclamation, all
present and future rights, claims and causes of action of Seller in
connection with purchases of (or contracts for the purchase of), or
warranties relating to, or letters of credit (and the proceeds thereof)
issued or assigned for the benefit of Seller relating to, or damages to,
goods held or to be held by Seller as inventory; and all present and
future general intangibles of Seller in any way relating to any of the
foregoing, including, without limitation, all Intellectual Property
associated with, used or useable in connection with, or necessary for the
manufacture, operation, sale or lease of, any of the foregoing.
"Last Payroll" shall mean Seller's last payroll not to exceed
fourteen (14) days prior to Closing; but only to the extent that such
Payroll is for services rendered during the period covered by such payroll
for existing employees.
"Non-Direct Personnel" shall mean all Personnel whose salary and
benefits are not chargeable in whole to one or more Project Contract as a
direct, reimbursable expense.
"Parent Consent and Indemnification Agreement" shall mean an
instrument in form and substance acceptable to Purchaser and its counsel:
(1) certifying that Parent consents to the transactions contemplated by
this Agreement; (2) certifying that the representations and warranties set
forth in this Agreement are true and correct; (3) and providing that
Parent agrees to indemnify, defend and hold harmless Purchaser and
Purchaser's agents, affiliates, predecessors, successors and assigns,
against and in respect of any and all Damages that any of them shall incur
or suffer, which arise, result from or relate to any claim by, through or
on behalf of any existing, future or former shareholder or creditor of
Parent relating to the subject matter of the foregoing certifications or
Seller's entering into or performing under this Agreement; and
(4) agreeing and covenanting not to compete with Purchaser on the same
terms and conditions set forth herein with respect to Seller. The Parent
Consent and Indemnification Agreement must be authorized by a majority of
the disinterested directors of Parent, and approved by the shareholders of
Parent at a shareholders' meeting conducted in accordance with applicable
Law. Seller and Parent shall be solely responsible for complying with all
Laws (including without limitation all corporate and securities laws,
rules and regulations) as may be applicable in obtaining Parent Consent
and Indemnification Agreement.
"Parent Opinion" shall mean one or more legal opinions of
Parent's general corporate counsel, in a form and in substance
satisfactory to Purchaser and its counsel, which shall contain the opinion
of Parent's counsel that: (a) Parent is duly organized; (b) Parent is
authorized to enter into and perform the Parent Consent and
Indemnification Agreement; (c) the Parent Consent and Indemnification
Agreement does not conflict with or violate any law, rule, regulation,
order, contract, covenant or agreement governing Parent; (d) the Parent
Consent and Indemnification Agreement is enforceable; and (e) all
necessary consents and approvals for the Parent Consent and
Indemnification Agreement have been obtained.
"Permits" shall mean all of Seller's licenses, permits and other
governmental authorizations required to operate the Seller's business in
the manner presently conducted and in the manner as any Contract may
require Seller's business to be conducted.
"Personnel" shall mean all officers, employees and agents of the
Seller.
"Plan" shall mean the 401(k) plan of Seller dated December 11,
1991.
"Plan Trustees" shall mean the trustees under the Plan.
"Professionals" shall mean all attorneys, accountants,
appraisers, auctioneers or other professional persons engaged by or on
behalf of the Seller.
"Project Contracts" shall mean those Contracts specified in
Exhibit "A" hereto.
"Project Managers" shall mean those Employees who have
management responsibility with respect to one or more projects of Seller.
"Proprietary Rights" shall mean all of Seller's Intellectual
Property, trade secrets, designs, plans, specifications, customer fists
and other proprietary rights.
"Purchase Price" shall mean payments and assumption of specified
liabilities in an amount totaling up to Two Million One Hundred Thousand
and No/100 dollars ($2,100,000.00). The Purchase Price shall consist of
the following items:
A. A deposit (the "Deposit") in the amount of Fifty Thousand
and No/100 dollars ($50,000.00) paid to the Escrow Agent
upon execution of this Agreement and held in an
interest-bearing deposit account. The Deposit shall be
released and paid to the Internal Revenue Service ("IRS")
at Closing with any accrued interest being applied to the
Designated Payment due at Closing;
B. A payment at Closing by Purchaser to the Seller for the IRS
in the amount of Five Hundred Forty-Nine Thousand and
No/100 dollars ($549,000.00) (the "Designated Payment"),
provided, however, that Purchaser shall receive $15,000
credit toward such payment based upon the August 1, 1996,
payment by Seller to the IRS and shall receive additional
credit for all other $15,000 monthly payments by Seller to
the IRS, which payments shall continue to be paid by Seller
to the IRS until Closing;
C. A payment at Closing in the amount of Six Hundred
Seventy-Six Thousand and No/100 dollars ($676,000.00) by
Purchaser to the Plan (the "Initial Plan Payment");
D. -INTENTIONALLY LEFT BLANK-
E. An assumption of liabilities of Seller to its employees for
liabilities of Seller to its employees for accrued and
unpaid vacation liabilities ("Vacation Liability") in an
amount not to exceed Three Hundred Twenty Five Thousand and
No/100 dollars ($325,000.00), to be paid or provided for by
Purchaser to such employees in such manner as may be agreed
by Purchaser and each affected employee; provided that
Purchaser shall not be required to pay or provide for
Vacation Liability within less than one year following the
Closing Date; and further provided that Purchaser shall not
require that Vacation Liability be paid or provided for
across a period greater that two years following the
Closing Date (the "Assumed Vacation Liability");
F. Payment to the Seller in the amount of Three Hundred
Seventy-Eight Thousand and no/100 dollars ($378,000.00), to
be paid, without interest, as follows: $76,000.00 shall be
paid no later than the first anniversary of the Closing
Date; $76,000.00 shall be paid to the Seller for the IRS no
later than the second anniversary of the Closing Date;
$52,000 shall be paid to the Seller and $24,000 shall be
paid to the Seller for the IRS no later than the third
anniversary of the Closing Date; $100,000 shall be paid no
later than the fourth anniversary of the Closing Date; and
$50,000 shall be paid no later than the fifth anniversary
of the Closing Date (the "Deferred Payments");
G. Payment to the Seller of the aggregate amount of
Seventy-Two Thousand and no/100 dollars ($72,000.00) for
the IRS, $36,000 of which is pursuant and subject to the
Non-Compete Agreement with Dr. Anand and $36,000 of which
is pursuant to the Non-Compete covenants of Seller in
Section 10.1 of this Agreement (the "Assigned Non-Compete
Payments") to be paid, without interest, as follows:
$24,000 shall be paid no later than the first anniversary
of the Closing Date; $24,000 shall be paid no later than
the second anniversary of the Closing Date; and $24,000
shall be paid no later than the third anniversary of the
Closing Date.
H. Purchaser shall reimburse Seller's employees for their
prepetition travel expenses in an aggregate amount not to
exceed Fifty Thousand and No/100 dollars ($50,000.00) for
all such employees; and
"Purchased Assets" shall mean all of Seller's right, title and
interest in and to properties, assets and rights of any kind, whether
tangible or intangible, real or personal, owned by Seller or in which
Seller has any interest (other than Excluded Assets), including without
limitation, the following:
A. all Contract Rights (including, without limitation all
Project Contracts);
B. all Inventory;
C. all Books and Records;
D. all Fixtures and Equipment;
E. all Proprietary Rights;
F. to the extent transferable, all Permits;
G. all Accounts Receivable that are unbilled as of the Closing
Date;
H. all Accounts Receivable (billed and unbilled) relating to
the Last Payroll;
I. all Accounts Receivable billed after July 30, 1996,
relating to expired Contracts that are awaiting closeout;
J. Life Insurance Policy of United of Omaha in the amount of
$1,000,000 as Key-Man Life Insurance on Dr. S.P.S. Anand,
in which Seller is the 100% beneficiary; and
K. all items of real or personal property specified in
Exhibit "B" hereto.
"Seller" shall mean Applied Research of Maryland, Inc., a
Maryland corporation.
"Seller Opinion" shall mean one or more legal opinions of
Seller's bankruptcy counsel and general corporate counsel, in a form and
in substance satisfactory to Purchaser and its counsel, which shall
contain the opinion of Seller's counsel that: (a) Seller is duly
organized as represented and warranted in Section 4.1; (b) Seller is
authorized to enter into and perform this Agreement as represented and
warranted in Section 4.2; (c) this Agreement does not conflict with or
violate any law, rule, regulation, order, contract, covenant or agreement
governing Seller as represented and warranted in Section 4.6; (d) this
Agreement is enforceable as represented and warranted in Section 4.2;
(e) all necessary consents and approvals have been obtained as represented
and warranted in Sections 4.7, 6.8 and 8.18 of this Agreement; (f) notice
as is required under this Agreement and under the Bankruptcy Code, the
Bankruptcy Rules, the Local Rules, and other applicable Law has been given
to all creditors and parties in interest; and (g) the Order is a Final
Order.
1.2 Other Defined Terms. The following terms shall have the
meanings defined for such terms in the Sections of this Agreement set
forth below:
TERM SECTION
---- -------
Actions Section 4.9
Bankruptcy Case Recital 3
Bankruptcy Court Recital 3
Bankruptcy Rules Section 6.8
Benefit Arrangement Section 4.15
Employee Benefit Plan Section 4.15
ERISA Affiliate Section 4.15
ERISA Section 4.15
Law or laws Section 4.11
Local Rules Section 6.8
Losses Section 10.2
Motion Section 6.5
Order Section 7.4
Parent Recital 2
Transfer Taxes Section 2.3
ARTICLE II
PURCHASE AND SALE OF ASSETS
2.1 TRANSFER OF ASSETS.
On the Closing Date:
A. Effective as of the Closing, Seller will sell, convey,
transfer, assign and deliver to Purchaser, the Purchased Assets, free and
clear of all Encumbrances, and Purchaser will acquire from Seller the
Purchased Assets.
B. Purchaser shall not assume or acquire any obligation or
liability of Seller except, effective as of the Closing, the following:
(i) all obligations and liabilities accruing, arising out
of, or relating to events or occurrences happening after the Closing under
Contracts identified on the Disclosure Schedule as being assumed by
Purchaser (but in any case, not including any obligation or liability for
any breach occurring prior to the Closing); and
(ii) the Assumed Vacation Liability (not to exceed
$325,000.00 in the aggregate);
(iii) Seller's Last Payroll; and
(iv) all obligations specifically undertaken by Purchaser
pursuant to the other provisions of this Agreement.
2.2 PURCHASE PRICE.
On the Closing Date, Purchaser shall make the following payments
and deliveries of documents, and shall assume the designated liabilities
in consideration for the sale, transfer, assignment, conveyance and
delivery of the Purchased Assets:
(a) the Deposit and the Designated Payment shall be paid to the
Seller for the IRS, at Purchaser's option, by wire transfer of immediately
available funds or by cashier's or certified check;
(b) the Initial Plan Payment shall be paid to the Plan, at
Purchaser's option, by wire transfer of immediately available funds or by
cashier's or certified check;
(c) the Employee Expense Liability (not to exceed $50,000.00 in
the aggregate) shall be paid pro rata to employees of the Seller holding
allowed claims for employee expenses;
(d) (1) Purchaser shall make the Deferred Payments and the
Assigned Non-Compete Payments on or before the designated anniversaries of
the Closing Date;
(2) To secure payment of the Deferred Payments and the
Assigned Non-Compete Payments, Purchaser shall execute and deliver to
Seller at Closing, documents reasonably sufficient to provide Seller with
a junior lien on all of Purchaser's existing fixed assets, including
Purchaser's property, plant, fixtures, and equipment, but not including
additional assets acquired by Purchaser after Closing, except to the
extent they constitute replacements, improvements, and accessions to
Purchaser's existing fixed assets; such liens shall be evidenced by a
promissory note to Seller, security agreement, deeds of trust, mortgages,
financing statements, and other usual and customary financing instruments,
and shall be junior to the liens securing the existing loans and loan
commitments to Purchaser from its bank or its governmental agency,
existing or future loans from any purchase money security interest lender,
extensions or renewals of existing loans or loan commitments, and any
future loans from any lender or lenders, used to refinance or replace any
of the foregoing;
(3) The documents evidencing Seller's liens shall set
forth and, if recorded, shall be recorded in a manner that reflects the
junior lien status described in subsection (d)(2), above; Seller shall, at
any time after the date hereof upon the request of Purchaser, promptly
execute such additional documents and replacement financing statements as
are reasonably necessary to reflect the lien priority described in
subsection (d)(2), above; and
(e) the Assumed Vacation Liability shall be assumed by
Purchaser, and shall be paid or provided for in the manner set forth in
agreements as may be reached by and between Purchaser and each Employee.
Purchaser shall not be required to pay or provide for Assumed Vacation
Liability within less than one year following the Closing Date, and
Purchaser shall not require that Assumed Vacation Liability be paid or
provided for across a period greater that two years following the Closing
Date.
To the extent that Seller is liable as of the Closing Date to any
governmental agency or taxing authority whose consent or action is
required for the transfer of any Permit, Purchaser, at its election, may
pay or provide for payment of amounts due to such agency or authority and
may deduct amounts paid or required to be paid to such agency or authority
from the Designated Payment. For the purpose of the foregoing sentence,
the Seller shall be considered liable if the taxing authority or
governmental agency has a right to payment that constitutes a "claim"
against Seller within the meaning of Section 101(5) of the Bankruptcy
Code. Notwithstanding subsection (b) of this Section 2.2, in the event
that a claim is allowed against Seller in favor of any current or former
employee of Seller as a priority claim under Sections 507(a)(3) or
507(a)(4) of the Bankruptcy Code, then the portion of the Initial Plan
Payment that is equal to the amount of such allowed priority claims shall
be paid to Seller, and not to the Plan, and the remaining portion of the
Initial Plan Payment shall be paid to the Plan. All payments to the Plan
shall be made directly to T. Rowe Price as the administrator of the Plan,
or to the successor administrator of the Plan.
2.3 CLOSING COSTS; TRANSFER TAXES.
The parties shall endeavor to obtain exemptions under
Section 1146 of the Bankruptcy Code and otherwise from documentary
transfer taxes and any other sales, use or other taxes imposed by reason
of the transfers of the Purchased Assets provided hereunder ("Transfer
Taxes"). To the extent that payment of a Transfer Tax is not subject to
an exemption, Purchaser shall be responsible for the payment of any such
Transfer Tax (provided, however, that Seller shall be responsible for the
payment of any Transfer Tax or other tax accruing or arising prior to the
Closing).
2.4 PURCHASE PRICE ALLOCATIONS.
At Closing, Seller and Purchaser shall agree in writing to an
allocation of the Purchase Price and shall execute, and thereafter file on
a timely basis with their respective federal income tax returns, the
initial asset acquisition statement and any supplemental statements on
Internal Revenue Service Form 8594 required by Temporary Treasury
Regulation Section 1.1060-1T.
2.5 WAIVERS AND RELEASES OF CERTAIN CLAIMS.
At Purchaser's request, at Closing, and thereafter from time to
time, Seller shall waive and release any and all claims, known and
unknown, they, or any of them, have or may have, as of the Closing Date,
including without limitation Avoidance Claims, against all Hired
Employees. Such release shall be a general release and shall be in a form
that is reasonably satisfactory to Purchaser and its counsel.
ARTICLE III
CLOSING
3.1 CLOSING.
The Closing of the transactions contemplated herein (the
"Closing") shall take place at or about the hour of 11:00 a.m. on the
Closing Date at the offices of Greenan, Walker, Trainor & Billman,
6411 Ivy Lane, Seventh Floor, Greenbelt, Maryland 20770, unless the
parties hereto agree otherwise.
3.2 CONVEYANCES AT CLOSING.
A. INSTRUMENTS AND POSSESSION. To effect the transfer
referred to in Section 2.1 of this Agreement, Seller will, on the Closing
Date, execute and deliver to Purchaser:
(i) one or more bills of sale substantially in the form
attached hereto as Exhibit "C," conveying in the aggregate all of Seller's
owned personal property included in the Purchased Assets;
(ii) assignments or novations of all Contract Rights
included in the Purchased Assets (including, without limitation Project
Contracts);
(iii) assignment of all Proprietary Rights in recordable
form to the extent necessary to assign such rights or to perfect the
assignment of such rights;
(iv) such other instruments as shall be reasonably
requested by Purchaser to vest in Purchaser title in and to the Purchased
Assets in accordance with the provisions of this Agreement;
(v) all Books and Records included in the Purchased
Assets; and
(vi) physical possession of all tangible personal property
included in the Purchased Assets.
B. FORM OF INSTRUMENTS. All of the foregoing instruments
shall be in form and substance, and shall be executed and delivered in a
manner, reasonably satisfactory to Purchaser.
3.3 OTHER DELIVERIES AT CLOSING.
In addition to the foregoing matters, at the Closing:
A. Purchaser and Seller shall deliver officers' certificates
confirming the accuracy of the representations and warranties set forth in
Articles IV and V;
B. Purchaser and the Seller shall deliver the certificates and
other matters described in Articles VII and VIII;
C. Purchaser and Dr. Anand shall execute and deliver the
Consulting and Non-Compete Agreement and the Indemnification Agreement;
D. Seller shall deliver a copy of the Order, certified by the
Bankruptcy Court and evidence that the Order has become a Final Order
(unless Purchaser in writing waives the finality requirement);
E. Seller shall deliver the Seller Opinion and the Parent
Opinion;
F. Seller shall deliver a schedule of accrued vacation time
and allowances with respect to each of its employees; and
G. Seller shall deliver the Parent Consent and Indemnification
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Except as set forth on the Disclosure Schedule, Seller hereby
represents and warrants to Purchaser as follows:
4.1 ORGANIZATION OF SELLER.
Seller is duly organized, validly existing and in good standing
under the laws of the State of Maryland, has full corporate power and
authority to conduct its business as it is presently being conducted and
to own and lease its properties and assets. Seller is duly qualified to
do business as a foreign corporation and is in good standing in each
jurisdiction in which such qualification is necessary under the applicable
law as a result of the conduct of its business or the ownership of its
properties and where the failure to be so qualified would have a material
adverse effect on the business or financial condition of Seller. Each
jurisdiction in which Seller is qualified to do business as a foreign
corporation is listed on the Disclosure Schedule.
4.2 AUTHORIZATION.
Seller has all necessary corporate power and authority and has
taken all corporate action necessary to enter into this Agreement, to
consummate the transactions contemplated hereby and to perform its
obligations hereunder. This Agreement has been duly executed and
delivered by Seller and, subject to approval by the Court, is a legal,
valid and binding obligation of Seller enforceable against Seller in
accordance with its terms.
4.3 ABSENCE OF CERTAIN CHANGES OR EVENTS.
Since the Balance Sheet Date, there has not been any:
(a) (i) except for normal periodic increases in the ordinary
course of business consistent with past practice, increase in the
compensation payable or to become payable by Seller to any of its
Personnel, (ii) bonus, incentive compensation, service award or other like
benefit granted, made or accrued, contingently or otherwise, for or to the
credit of any of any Non-Direct Personnel, (iii) employee welfare,
pension, retirement, profit-sharing or similar payment or arrangement made
or agreed to by Seller for any Personnel except pursuant to the existing
plans and arrangements described in the Disclosure Schedule or (iv) new
employment agreement to which Seller is a party with any new Non-Direct
Employee;
(b) sale, assignment or transfer of any of the assets of
Seller, other than in the ordinary course of business;
(c) cancellation of any indebtedness or waiver of any rights of
substantial value to Seller, whether or not in the ordinary course of
business;
(d) amendment, cancellation or termination of, or notice of
default by Seller under any Contract, Permit, license or other instrument
material to Seller;
(e) capital expenditure, other than in the ordinary course of
business and consistent with past practice;
(f) failure to operate the business of Seller in the ordinary
course consistent with past practice;
(g) damage, destruction or loss (whether or not covered by
insurance) with respect to any of the Purchased Assets;
(h) any declaration, setting aside or payment of dividends or
distributions in respect of any capital stock of Seller or any redemption,
purchase or other acquisition of any of Seller's equity securities;
(i) any payment, discharge or satisfaction of any liabilities
other than the payment, discharge or satisfaction in the ordinary course
of business and consistent with past practice of liabilities reflected or
reserved against in the Balance Sheet or incurred in the ordinary course
of business and consistent with past practice since the Balance Sheet
Date, or as otherwise approved by the Bankruptcy Court;
(j) agreement by Seller to do any of the foregoing; or
(k) any other material adverse change in the business,
financial condition or operations of Seller (items (a) through (k), above,
being referred to collectively herein as "Material Adverse Changes").
4.4 TITLE TO ASSETS, ETC.
Seller has good and marketable title to the Purchased Assets.
Without limiting the generality of the foregoing, neither Parent nor any
other Affiliate has any legal or equitable interest in any of the Project
Contracts. None of the Purchased Assets is subject to any Encumbrances,
except liens which are specified in the Disclosure Schedule and which are
to be discharged pursuant to the Order at or prior to the Closing. Seller
enjoys peaceful, and undisturbed possession of all its facilities, and its
facilities are not subject to any Encumbrances, encroachments, building or
use restrictions, exceptions, reservations or limitations which in any
material respect interfere with or impair the present and continued use
thereof in the usual and normal conduct of the business of Seller. None
of the real property improvements (including leasehold improvements),
equipment and other assets owned or used by Seller at its facilities is
subject to any commitment or other arrangement for their sale or use by
any affiliate of Seller or third parties.
4.5 CONTRACTS AND COMMITMENTS.
A. Seller is not a party to any written or oral:
(a) commitment, contract, note, loan, evidence of
indebtedness, purchase order or letter of credit involving any obligation
or liability on the part of Seller;
(b) lease of real property (the Disclosure Schedule
indicates with respect to each Lease listed on the Disclosure Schedule the
term, annual rent, renewal options and number of square feet leased);
(c) lease of personal property (the Disclosure Schedule
indicates with respect to each lease listed on the Disclosure Schedule a
general description of the leased items, term, annual rent and renewal
options);
(d) contract or commitment not otherwise described above
or listed in the Disclosure Schedule (including purchase orders, franchise
agreements and undertakings or commitments to any governmental or
regulatory authority) relating to the business of Seller and otherwise
materially affecting Seller's business under contracts not in the ordinary
course of business;
(e) Permit;
(f) contracts or agreements containing covenants limiting
the freedom of Seller to engage in any line of business or compete with
any person; or
(g) employment contracts, including, without limitation,
contracts to employ executive officers and other contracts with officers
or directors of Seller.
B. Seller is not (and, to the best knowledge of Seller, no
other party is) in material breach or violation of, or default under any
of the Contracts or other instruments, obligations, evidences of
indebtedness or commitments described in (a) through (g) above, the breach
or violation of which would have a material adverse effect on the
business, financial condition or operations of Seller, other than and to
the extent alleged for the filing of a petition in bankruptcy.
C. Except as otherwise set forth on the Disclosure Schedule:
(i) none of the Project Contracts has been assigned or is the subject of
any security agreement; (ii) each of the Project Contracts is a valid and
binding obligation of the Seller and (to the best knowledge of the Seller)
the other party or parties thereto, enforceable in accordance with its
terms; (iii) neither the Seller nor (to the best knowledge of the Seller)
any other party thereto, has terminated, canceled, modified or waived any
term or condition of any Project Contract, (iv) neither the Seller nor (to
the best knowledge of the Seller) any other party to any Project Contract
is in default or alleged to be in default under any Project Contract and
there exists no event, condition or occurrence that, after notice or lapse
of time, or both, would constitute such a default by the Seller or (to the
best knowledge of the Seller) any other party to any such Project
Contract; and (v) none of the Project Contracts contains any covenant or
other restriction preventing or limiting the consummation of the
transactions contemplated hereby, including any provision prohibiting the
assignment of the Seller's rights thereunder or granting any party a right
of termination or modification of any provision as a result thereof.
4.6 NO CONFLICT OR VIOLATION.
Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will result in (a) a
violation of or a conflict with any provision of the Articles of
Incorporation or Bylaws of Seller, (b) a breach of, or a default under,
any term or provision of any contract, agreement, indebtedness, lease,
Encumbrance, commitment, license, franchise, Permit, authorization or
concession to which Seller is a party or by which the Purchased Assets are
bound, which breach or default would have a material adverse effect on the
business, financial condition or operations of Seller or its ability to
consummate the transactions contemplated hereby, (c) a violation by Seller
of any statute, rule, regulation, ordinance, code, order, judgment, writ,
injunction, decree or award, which violation would have a material adverse
effect on the business, financial condition or operations of Seller or its
ability to consummate the transactions contemplated hereby, or (d) an
imposition of any material Encumbrance, restriction or charge on any of
the Purchased Assets.
4.7 CONSENTS AND APPROVALS.
Except for the approval of the Court contemplated by
Sections 6.5, 7.4 and 8.6, no consent, approval or authorization of, or
declaration, registration with, any governmental or regulatory authority,
or any other person or entity, required to be made or obtained by, Seller
in connection with the execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated hereby.
4.8 FINANCIAL STATEMENTS.
Seller has heretofore delivered to Purchaser the Financial
Statements. Except as otherwise set forth therein, the Financial
Statements are complete, are in accordance with the books and records of
Seller accurately reflect the assets, liabilities and financial condition
and results of operations indicated thereby in accordance with generally
accepted accounting principles consistently applied, and contain and
reflect all necessary adjustments for a fair representation of the
Financial Statements as of the date and for the period covered thereby.
4.9 LITIGATION.
There are no suits, actions, proceedings or investigations
pending or, to the best knowledge of Seller, threatened (whether or not
any such suit, action, proceeding or investigation involves, or seeks
recourse against, Seller or any of the Purchased Assets) ("Actions") which
materially affect or would, if adversely determined, materially adversely
affect any of the Purchased Assets or Seller's ability to execute and
deliver this Agreement or consummate the transactions contemplated hereby.
4.10 LABOR MATTERS.
Seller is not a party to any labor agreement with respect to its
employees with any labor organization, group or association. Seller has
not experienced any attempt by organized labor or its representatives to
make Seller conform to demands of organized labor relating to its
employees or to enter into a binding agreement with organized labor that
would cover the employees of Seller. Seller is in material compliance
with all applicable laws respecting employment practices, terms and
conditions of employment and wages and hours and is not engaged in any
unfair labor practice. There is no unfair labor practice charge or
complaint against Seller pending before the National Labor Relations Board
or any other governmental agency arising out of Seller's activities, and
Seller has no knowledge of any facts or information which would give rise
thereto; there is no labor strike or labor disturbance pending or
threatened against Seller nor is any grievance currently being asserted;
and Seller has not experienced a work stoppage or other labor difficulty.
4.11 COMPLIANCE WITH LAW.
Seller and the conduct of its business are in compliance with
all applicable laws, statutes, ordinances, rules, regulations and orders,
whether federal, state or local (collectively, "Law" or "Laws"), except
where the failure to comply would not have a material adverse effect on
the business, financial condition or operations of Seller. Seller has not
received any written notice to the effect that, or otherwise been advised
that, it is not in compliance with Law where the failure to comply would
have a material adverse effect on the business, financial condition or
operations of Seller, and Seller has no reason to anticipate that any
presently existing circumstances are likely to result in violations of any
such Law which would, in any one case or in the aggregate, have a material
adverse effect on the business, financial condition or operations of
Seller. All Permits that are required by Law, or which are otherwise
necessary or appropriate for the operation and conduct of the business of
Seller, are held by Seller in its name, are in full force and effect
Seller is in good standing under, and in compliance with, all Permits.
4.12 NO BROKERS.
Neither Seller nor any Affiliate has entered into or will enter
into any Contract, agreement, arrangement or understanding with any person
or firm which will result in the obligation of Purchaser to pay any
finder's fee, brokerage commission or similar payment in connection with
the transactions contemplated hereby.
4.13 NO OTHER AGREEMENTS TO SELL THE ASSETS OR SELLER.
Neither Seller nor any shareholder of Seller has any legal
obligation, absolute or contingent, to any other person or firm to sell
the Purchased Assets, to sell a majority of the capital stock of Seller or
to effect any merger, consolidation or other reorganization of Seller or
to enter into any agreement with respect thereto.
4.14 PROPRIETARY RIGHTS.
All of Seller's Proprietary Rights are listed in the Disclosure
Schedule. The Proprietary Rights listed in the Disclosure Schedule are in
all material respects all those used in the business of Seller. No person
has a right to receive a royalty or similar payment in respect of any
Proprietary Rights pursuant to any contractual arrangement entered into by
Seller, and no person otherwise has a right to receive a royalty or
similar payment in respect of any such Proprietary Rights. Seller has no
licenses granted by or to it or no other agreements to which it is a
party, relating in whole or in part to any of the Proprietary Rights.
Seller's use of the Proprietary Rights is not infringing upon or otherwise
violating the rights of any third party in or to such Proprietary Rights,
and no proceedings have been instituted against or notices received by
Seller that are presently outstanding alleging that Seller's use of its
Proprietary Rights infringes upon or otherwise violates any rights of a
third party in or to such Proprietary Rights.
4.15 EMPLOYEE BENEFIT PLANS.
(a) DEFINITIONS. The following terms, when used in this
Section 4.15, shall have the following meanings. Any of these terms may,
unless the context otherwise requires, be used in the singular or the
plural depending on the reference.
(1) ERISA. "ERISA" shall mean the Employee Retirement
Income Security Act of 1974, as amended.
(2) ERISA AFFILIATE. "ERISA Affiliate" shall mean any
entity which is (or at any relevant time was) a member of a "controlled
group of corporations" with or under "common control" with the Company as
defined in Section 4.14(b) or (c) of the IRC.
(3) BENEFIT ARRANGEMENT. "Benefit Arrangement" shall mean
any employment, consulting, severance or other similar contract,
arrangement or policy and each plan, arrangement (written or oral),
program agreement or commitment providing for insurance coverage
(including any self-insured arrangements), workers' compensation,
disability benefits, supplemental unemployment benefits, vacation
benefits, retirement benefits, life, health, disability or accident
benefits (including, without limitation, any "voluntary employees'
beneficiary association" as defined in Section 501(c)(9) of the IRC
providing for the same or other benefits) or for deferred compensation,
profit sharing bonuses, stock options, stock appreciation rights, stock
purchases or other forms of incentive compensation or postretirement
insurance, compensation or benefits which is
(i) entered into, maintained, contributed to or
required to be contributed to, as the case may be, by the Company or an
ERISA Affiliate or under which the Company or any ERISA Affiliate may
incur any liability, and
(ii) covers any employee or former employee of the
Company or any ERISA Affiliate (with respect to their relationship with
such entities).
(b) REPRESENTATIONS. Except for the Plan, neither the Seller
nor any ERISA Affiliate maintains, administers, contributes to or is
required to contribute to any "employee benefit plan" as defined in
Section 3(3) of ERISA, any "multiemployer plan," as defined in
Section 4001(a)(3) of ERISA or any Benefit Arrangement, which covers any
employee or former employee of the Company or any ERISA Affiliate (with
respect to their relationship with such entities) (collectively, "Employee
Benefit Plans"), or within the five years prior to the Closing Date,
maintained, administered, contributed to or is required to contribute to
any such Employee Benefit Plan or under which Employee Benefit Plan the
Company or any ERISA Affiliate may incur any liability.
(c) EMPLOYEE PLAN LIABILITIES. Except as otherwise expressly
provided by this Agreement, Purchaser shall have no liability or
obligation with respect to any Employee Benefit Plan, including without
limitation any responsibility for contributions required to fund any
benefits payable thereunder with respect to the employees of the Seller
for any period prior to, at or following the Closing. Seller shall
indemnify, defend and hold Purchaser harmless from and against any such
claims and liabilities.
(d) NO CONTINUING OBLIGATION. Purchaser shall have no
obligation to assume or continue any benefits under any Employee Benefit
Plan. Purchaser shall have no obligation to provide the same or similar
benefits on account of any period prior to Closing. Purchaser's sole
obligations with respect to benefits are to make the Initial Plan Payment.
4.16 SEVERANCE ARRANGEMENTS.
Seller has not entered into any severance or similar arrangement
in respect of any present or former Personnel that will result in any
obligation (absolute or contingent) of Purchaser or Seller to make any
payment to any present or former Personnel following termination of
employment, other than such agreements requiring Seller (but not
Purchaser) to make such payments, which agreements must be approved by the
Bankruptcy Court and which shall not affect Hired Employees. Purchaser
shall have no obligation to assume any severance arrangement between
Seller and any other person (including without limitation, Hired
Employees). No payment made by Seller on any severance arrangement shall
affect the net profit from operations under Section 6.9, below.
4.17 COMPLIANCE WITH LEGISLATION REGULATING ENVIRONMENTAL QUALITY.
There are no toxic wastes or other toxic or hazardous substances
or materials being stored or otherwise held on, under or about any of the
Facilities. The Facilities have been maintained in compliance with all
federal, state and local environmental protection, occupational, health
and safety or similar laws, ordinances, restrictions, licenses, and local
environmental protection, occupational, health and safety or similar laws,
ordinances, restrictions, licenses and regulations, including, but not
limited to the Federal Water Pollution Control Act (42 U.S.C. Section 1251
et seq.), Resource Conservation & Recovery Act (42 U.S.C. Section 6901 et
seq.), Safe Drinking Water Act (21 U.S.C. Section 349, 42 U.S.C. Sections
201; 300f), Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.),
Clean Air Act (42 U.S.C. Section 7401 et seq.), Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. Section
9601 et seq.).
4.18 TAX MATTERS.
Seller has filed or caused to be filed all federal income tax
returns and all other federal, state, county, local or city tax returns
which are required to be filed, and it has paid or caused to be paid all
taxes shown on said returns or on any tax assessment received by it to the
extent that such taxes have become due and before such taxes became
delinquent.
4.19 INSURANCE.
The Disclosure Schedule contains a complete and accurate list of
all policies or binders of fire, liability, title, worker's compensation
and other forms of insurance maintained by Seller on its business,
property or Personnel. Such policies and binders provide sufficient
coverage for the risks insured against, are in full force and effect on
the date hereof and shall be kept in full force and effect by Seller
through the Closing.
4.20 FULL DISCLOSURE.
None of the representations and warranties made by Seller, nor
in any certificate or memorandum furnished or to be furnished by Seller,
or on its behalf, including the Disclosure Statement, contains or will
contain any untrue statement of material fact, or omit any material fact,
the omission of which would be misleading.
4.21 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; APPLICABILITY.
All of the representations and warranties of Seller contained in
this Article IV shall survive the Closing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller as follows:
5.1 ORGANIZATION OF PURCHASER.
Purchaser is duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania.
5.2 AUTHORIZATION.
Purchaser has all necessary corporate power and authority and
has taken all corporate action necessary to enter into this Agreement, to
consummate the transactions contemplated hereby and to perform its
obligations hereunder. This Agreement has been duly executed and
delivered by Purchaser and, subject to approval by the Court, is a legal,
valid and binding obligations of Purchaser, enforceable against Purchaser
in accordance with its terms.
5.3 NO CONFLICT OR VIOLATION.
Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will result in (a) a
violation of or a conflict with any provision of the Articles of
Incorporation or Bylaws of Purchaser, (b) a breach of, or a default under,
any term or provision of any contract, agreement, indebtedness, lease,
commitment, license, franchise, permit, authorization or concession to
which Purchaser is a party which breach or default would have a material
adverse effect on the business, financial condition or operations of
Purchaser or its ability to consummate the transactions contemplated
hereby or (c) a violation by Purchaser of any statute, rule, regulation,
ordinance, code, order, judgment, writ, injunction, decree or award, which
violation would have a material adverse effect on the business or
financial condition of Purchaser or its ability to consummate the
transactions contemplated hereby.
5.4 CONSENTS AND APPROVALS.
Except for the approval of the Court contemplated by
Sections 7.4 and 8.6, and such governmental agencies as may be identified
by Seller in the Disclosure Schedule, no consent, approval or
authorization of, or declaration, filing, or registration with, any
governmental or regulatory authority, or any other person or entity, is
required to be made or obtained by Purchaser in connection with the
execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby.
5.5 LIENS AND LOANS.
The secured liens of record, Line of Credit (revolving), Line of
Credit (revolving - M&E), term loans and additional term loan for the
acquisition of Seller's assets as set forth in Counsel's correspondence of
August 27, 1996 are true and correct. Purchaser will have loan
availability to fund the purchase of Seller's assets as provided in their
Agreement.
ARTICLE VI
COVENANTS OF SELLER AND PURCHASER
Seller and Purchaser each covenants with the other as follows:
6.1 COOPERATION AND BEST EFFORTS.
Prior to the Closing, the Purchaser and the Seller shall
cooperate and diligently pursue and use their respective best efforts to
obtain the assignments and novations of the Contract Rights and Contracts,
the Order, and any required consent of the relevant third parties to the
assignment of the Contracts.
6.2 MAINTENANCE OF ASSETS AND RELATIONSHIPS.
Prior to the Closing, the Seller shall duly perform and
discharge its obligations and liabilities under the Project Contracts and
the Contracts; operate its business in the ordinary course; maintain the
Fixtures and Equipment and its other assets and properties in good repair
and operating condition; and will use its best efforts to preserve and
maintain good relationships with its clients, customers, vendors and
Employees.
6.3 OTHER ACTION.
Neither the Seller nor the Purchaser shall take any action that
would result in any of their respective representations and warranties not
being true in all material respects as of the Closing Date. Each of the
parties shall use its best efforts to cause the fulfillment at the
earliest practicable date of all of the conditions to its obligations to
consummate the sale and purchase under this Agreement.
6.4 INVESTIGATION BY PURCHASER.
Seller shall allow Purchaser at its own expense during regular
business hours to make such inspection of the Purchased Assets and to
inspect and make copies of other Contracts, Books and Records or
information requested by Purchaser and necessary for or reasonably related
to the business, financial condition and operations of Seller. All such
information shall be provided to Purchaser in such form as information may
presently exist or be readily available. Seller hereby authorizes
Purchaser and its agents, representatives, employees, accountants and
lawyers to contact, communicate with: Employees, customers of Seller and
Affiliates (including parties to Contracts), governmental agencies and
permitting authorities, licensors, shareholders of Seller and Affiliates,
creditors and other parties in interest in the Bankruptcy Case, in order
to facilitate Purchaser's investigation and/or the consummation of the
transactions contemplated by this Agreement. Seller shall hold Purchaser
and its agents harmless from any and all claims and liability, and shall
not assert any claim or liability against Purchaser or its agents, arising
from or in connection with the activities of Purchaser and its agents
pursuant to this Section, except for actions by Purchaser that are
intended to cause harm to Seller or that constitute gross misconduct.
6.5 COURT APPROVAL; BEST EFFORTS.
Within five (5) Business Days following the date hereof, Seller
shall file a motion or motions pursuant to Section 363 of the Bankruptcy
Code (and such other Sections of the Bankruptcy Code and Bankruptcy Rules
as may be appropriate) (the "Motion") seeking the Court's approval of this
Agreement and the transactions contemplated hereby. Seller shall use its
best efforts to obtain Court approval of this Agreement and the
transactions contemplated hereby.
6.6 CERTAIN PROHIBITED TRANSACTIONS.
Except as otherwise required by the Court or the Bankruptcy Code
or expressly provided herein, Seller shall not take any of the following
actions without the prior written consent of Purchaser:
(a) pay or incur any obligation to pay any dividend on its
capital stock or make or incur any obligation to make any distribution or
redemption with respect to its capital stock;
(b) make any change to its Articles of Incorporation or bylaws;
(c) mortgage, pledge or otherwise encumber any of its
properties or assets or sell, transfer or otherwise dispose of any of its
properties or assets or cancel, release or assign any indebtedness owed to
it or any claims held by it, except in the ordinary course of business and
consistent with past practice;
(d) make any investment of a capital nature either by purchase
of stock or securities, contributions to capital, property transfer or
otherwise, or by the purchase of any property or assets of any other
individual, partnership, firm or corporation, except in the ordinary
course of business and consistent with past practice;
(e) enter into, terminate or reject any material contract or
agreement, or make any material change in the Leases or any of its
Contracts, other than in the ordinary course of business and consistent
with past practice, or as may be approved by the Bankruptcy Court;
provided, however, that Seller shall not terminate, reject or make any
material adverse change in any Project Contract;
(f) do any other act which would cause any representation or
warranty of Seller in this Agreement to be or become untrue in any
material respect; or
(g) directly or indirectly file or make any motion or request,
or consent or agree to, any motion or request, for the dismissal or
conversion of the Bankruptcy Case, or any plan of reorganization or
liquidation that is inconsistent with the terms of this Agreement.
6.7 NOTIFICATION OF CERTAIN MATTERS.
Seller shall give prompt notice to Purchaser, and Purchaser
shall give prompt notice to Seller, of (i) the occurrence, or failure to
occur, of any event which occurrence or failure would cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect any time from the date hereof to the
Closing Date and (ii) any material failure of Seller or Purchaser, as the
case may be, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder. Additionally,
Seller shall give prompt notice to Purchaser of any objection, allegation
or threat of legal action that Seller may receive in connection with this
Agreement or the transactions contemplated hereby. Each party shall use
all reasonable efforts to remedy any material failure on its part to
comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder.
6.8 NOTICES TO CREDITORS AND PARTIES IN INTEREST.
Seller shall provide notice to all creditors and parties in
interest of all matters that are required by the Bankruptcy Code or the
Federal Rules of Bankruptcy Procedure ("Bankruptcy Rules"). Without
limiting the generality of the foregoing, Seller shall provide notice to
all persons and entities who are shareholders in Parent as of the time
such notice is given or required to be given. Such notices shall be given
in a manner, and within the time, required by the Bankruptcy Code,
Bankruptcy Rules, local rules of the Court ("Local Rules") or order of the
Court, as applicable. At Closing, Seller shall certify Seller's
compliance with all notice requirements by sworn affidavit of an officer
of Seller executed under penalty of perjury. In addition to providing
notices as required above, Seller shall cause Parent to conduct meeting of
Parent's board of directors and, as soon as practicable after the date of
the Order, a meeting of Parent's shareholders to obtain approval and
authorization of the Parent Consent and Indemnification Agreement. Seller
and Parent shall comply with all applicable Laws (including without
limitation, applicable corporate and securities laws, rules and
regulations) in obtaining such approval and authorization.
6.9 NET PROFIT FROM OPERATIONS.
Within thirty (30) days following the Closing, Seller shall make
payment to Purchaser in immediately available funds in an amount equal to
Seller's net profits from operations computed pursuant to generally
accepted accounting principles, consistently applied, accrued during the
period commencing on July 30, 1996, and ending on the Closing Date.
6.10 DISCLOSURE SCHEDULE.
Within ten (10) Business Days following the date hereof, Seller
shall deliver to Purchaser the Final Disclosure Schedule.
ARTICLE VII
CONDITIONS TO SELLER'S OBLIGATIONS
The obligations of Seller to consummate the transactions required to
take place at Closing are subject, in the discretion of Seller, to the
satisfaction, on or prior to the Closing Date, of each of the following
conditions:
7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS.
All representations and warranties of Purchaser contained in
this Agreement shall be true and correct in all material respects at and
as of the Closing Date, except as, and to the extent that, the facts and
conditions upon which such representations and warranties are based are
expressly required or permitted to be changed by the terms hereof, and
Purchaser shall have performed all agreements and covenants required
hereby to be performed by it prior to or at the Closing Date.
7.2 CERTIFICATES.
Purchaser shall have furnished Seller with such certificates of
its officers and others to evidence compliance with the conditions set
forth in this Article VII and the representations and warranties in
Article V.
7.3 CORPORATE DOCUMENTS.
Seller shall have received from Purchaser resolutions adopted by
the board of directors of Purchaser approving this Agreement and the
transactions contemplated hereby, certified by Purchaser's corporate
secretary.
7.4 COURT APPROVAL.
The Court shall have entered an order or orders, including any
findings of fact and conclusions of law (collectively, the "Order") in a
form acceptable to Purchaser that (1) approves the form and content of
this Agreement; (2) authorizes Seller to enter into each and every
transaction contemplated by this Agreement; and (3) authorizes Seller to
convey to Purchaser the Purchased Assets effective on the Closing Date.
ARTICLE RMIN
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligations of Purchaser to consummate the transactions required
to take place at Closing are subject, in the discretion of Purchaser, to
the satisfaction, on or prior to the Closing Date, of each of the
following conditions:
8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS.
All representations and warranties of Seller contained in this
Agreement shall be true and correct in all material respects at and as of
the Closing Date, except as, and to the extent that, the facts and
conditions upon which such representations and warranties are based are
expressly required or permitted to be changed by the terms hereof, and
Seller shall have performed all agreements and covenants required hereby
to be performed by them prior to or at the Closing Date.
8.2 CONSENTS.
All consents, approvals and waivers from third parties and
governmental authorities and other Parties necessary to permit Seller to
transfer the Purchased Assets to Purchaser as contemplated hereby shall
have been obtained.
8.3 NO GOVERNMENTAL PROCEEDINGS OR LITIGATION.
No Action by any governmental authority shall have been
instituted or threatened which questions the validity or legality of the
transaction contemplated hereby and which could reasonably be expected to
affect materially the right or ability of Purchaser to own, operate or
possess the Purchased Assets after the Closing or to damage Purchaser
materially if the transactions contemplated hereunder are consummated.
8.4 CERTIFICATES.
Seller shall have furnished Purchaser with such certificates of
its officers and others to evidence compliance with the conditions set
forth in this Article VIII and the representations and warranties set
forth in Article IV.
8.5 CORPORATE DOCUMENTS.
Purchaser shall have received from Seller resolutions adopted by
the boards of directors and shareholders of Seller approving this
Agreement and the transactions contemplated hereby, certified by Seller's
corporate secretary.
8.6 COURT APPROVAL.
On or before August 30, 1996, or such later date as Purchaser
may agree in writing in Purchaser's sole and absolute discretion, the
Court shall have entered the Order in a form and in substance acceptable
to Purchaser that (1) approves the form and content of this Agreement
effective July 30, 1996; (2) authorizes Seller to enter into each and
every transaction contemplated by this Agreement; (3) authorizes Seller to
convey to Purchaser the Purchased Assets free and clear of all
Encumbrances of all parties and entities; (4) approves the assumption and
assignment to Purchaser of any Contract that is an executory contract and
is a Purchased Asset; (5) determines that the consideration given by
Purchaser under this Agreement represents the fair market value of the
Purchased Assets; (6) determines that this Agreement is in the best
interest of Seller and its Affiliates, including without limitation,
Parent and Parent's shareholders.
8.7 FINALITY.
The Order shall have become a Final Order.
8.8 THIRD PARTY ESTOPPELS AND CONSENTS.
Within ninety (90) days following the entry of the Order, all
parties to any Project Contract have executed and delivered to Purchaser
legally binding instruments consenting to the assumption and assignment to
Purchaser of each such Project Contract, without conditions, restrictions
or modifications to which Purchaser has not agreed in writing, and
verifying the absence of any default, defense or cure requirement in
connection with such Project Contract, or alternatively entering into a
novation of the Project Contract with Purchaser, all in a form and in
substance acceptable to Purchaser and its counsel.
8.9 MATERIAL ADVERSE CHANGE.
There shall not have been a Material Adverse Change.
8.10 CONSULTING AGREEMENT AND NON-COMPETE AGREEMENT.
Purchaser and Dr. Anand shall have agreed to and executed and
delivered the Consulting Agreement and the Non-Compete Agreement in form
and in substance acceptable to Purchaser.
8.11 PERMITS.
All licenses, Permits and other governmental authorizations
required for Purchaser to conduct the business of Seller shall have been
obtained.
8.12 EMPLOYEES AND PROJECT MANAGERS.
At least 90% of the Employees to whom Purchaser has offered
employment have agreed to become Hired Employees on terms and conditions
that are mutually acceptable to Purchaser and each such Employee; and all
of the Project Managers to whom Purchaser has offered engagement or
employment have agreed to such employment or engagement on terms and
conditions that are mutually acceptable to Purchaser and each such Project
Manager.
8.13 ARTICLES OF TRANSFER.
Seller shall have executed and furnished to Purchaser Articles
of Transfer describing the sale of assets contemplated hereby, which
Articles of Transfer shall have been filed with the Maryland State
Department of Assessments and Taxation as of the Closing Date.
8.14 PURCHASE PRICE ALLOCATION.
Seller shall have executed and delivered the Purchase Price
allocation referenced in Section 2.4, above.
8.15 PLAN TRUSTEES.
The Plan Trustees have executed and delivered to Purchaser an
instrument consenting to the terms and conditions of this Agreement and
the performance and consummation thereof, in form and substance acceptable
to Purchaser and its counsel.
8.16 INDEMNIFICATION AGREEMENT.
Dr. Anand shall execute this Agreement as the Indemnification
Agreement.
8.17 PARENT CONSENT.
Seller shall have delivered the Parent Consent and
Indemnification Agreement, duly executed by Parent, and all documentation
reasonably requested by Purchaser to evidence corporate authority and
approvals and authorizations required under this Agreement.
8.18 OPINIONS.
Seller shall have delivered the Parent Opinion and the Seller
Opinion.
8.19 CLOSING DATE.
The Closing shall have occurred on or before November 30, 1996.
8.20 CONSENT AND RELEASE.
Dr. Anand and the Plan Trustees shall acknowledge and agree that
Purchaser shall pay up to $10,000 to the IRS in lieu of paying this amount
to the Plan and Dr. Anand hereby releases and forgives Purchaser from
liability for such payment.
ARTICLE IX
MISCELLANEOUS
9.1 BREACH; REMEDIES; TERMINATION.
A. If any condition precedent to Seller's obligations
hereunder is not satisfied and such condition is not waived by Seller at
or prior to the Closing Date, or if any condition precedent to Purchaser's
obligations hereunder is not satisfied and such condition is not waived by
Purchaser at or prior to the Closing Date, Seller or Purchaser, as the
case may be, may terminate this Agreement at its option by notice to the
other party.
B. Either party may terminate this Agreement upon the
occurrence of a material breach of this Agreement by the other party that
is not cured within a reasonable time after notice of the breach;
provided, however, that a party may not terminate this Agreement solely on
the grounds of a material breach by the other party if the terminating
party is itself in material breach of this Agreement at the time.
C. Purchaser and Seller agree that the novations and/or
assignments of Project Contracts shall be obtained pursuant to applicable
laws, rules and regulations governing the novation and/or assignment of
such contracts.
D. In the event of the termination of this Agreement by either
party pursuant to Sections 9.1(A) or 9.1(B), above, neither party shall
have any liability hereunder of any nature whatsoever to the other party,
including any liability for damages, unless such party has materially
breached its obligations hereunder, in which event the party in default
shall be liable to the other party in damages. In the event of the
termination of this Agreement by Purchaser pursuant to Section 9.1(C),
above, neither party shall have any liability hereunder of any nature
whatsoever, regardless of the occurrence and continuation of a breach or
default. In the event of a breach or default by Seller, in addition to
other remedies available at law or in equity, Purchaser shall be entitled
to specific performance of this Agreement without posting bond or other
security.
E. In the event that a condition precedent to its obligations
is not satisfied, nothing contained herein shall be deemed to require any
party to terminate this Agreement, rather than to waive such condition
precedent and proceed with the Closing.
9.2 ASSIGNMENT.
Neither this Agreement nor any of the rights or obligations
hereunder may be assigned by either party without the prior written
consent of the other party. Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
9.3 NOTICES.
Unless otherwise provided herein, any notice, request,
instruction or other document to be given hereunder by either party to the
other shall be in writing and delivered personally or mailed by certified
mail, postage prepaid, return receipt requested (such mailed notice to be
effective on the date such receipt is acknowledged or refused) as follows:
If to Seller, addressed to: Dr. S.P.S. Anand
Applied Research Corporation
8201 Corporate Drive
Suite 1120
Landover, MD 20875
With a copy to: James M. Greenan, Esquire
Greenan, Walker, Trainor &
Billman
6411 Ivy Lane, 7th Floor
Greenbelt, MD 20770
If to Purchaser, addressed to: Mr. Jack Gulati, CEO
Fidelity Technologies
Corporation
2501 Kutztown Road
Reading, PA 19605
With a copy to: Joseph E. Lewis, Esquire
Stevens & Lee
111 North Sixth Street
P.O. Box 679
Reading, PA 19603
or to such other place and with such other copies as either party may
designate as to itself by written notice to the others.
9.4 CHOICE OF LAW.
This Agreement shall be construed, interpreted and the rights of
the parties determined in accordance with the laws of the State of
Maryland (without reference to the choice of law provisions of Maryland
law).
9.5 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS.
This Agreement, together with all exhibits and schedules hereto
and all agreements contemplated hereby, constitutes the entire agreement
among the parties pertaining to the subject matter hereof and supersedes
all prior agreements, understandings, negotiations and discussions,
whether oral or written, of the parties and their employees, agents,
representatives and attorneys. No supplement, modification or waiver of
this Agreement shall be binding unless executed in writing by the party to
be bound thereby. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar), nor shall such waiver constitute a continuing
waiver unless otherwise expressly provided.
9.6 MULTIPLE COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
9.7 EXPENSES.
Except as set forth below or as otherwise specified herein, each
party hereto shall pay its own legal, accounting, out-of-pocket and other
expenses incident to this Agreement and to any action taken by such party
in preparation for carrying this Agreement into effect. The obligations
of the parties under this Section shall survive termination of this
Agreement.
9.8 TITLES.
The titles, captions or headings of the Articles and Sections
herein are inserted for convenience of reference only and are not intended
to be a part of or to affect the meaning or interpretation of this
Agreement.
9.9 FURTHER ASSURANCES.
Each party shall at any time and from time to time hereafter,
both before and after Closing, execute, acknowledge and deliver to the
other party any and all instruments or assurances that the other party may
reasonably require for the purpose of giving full force and effect to the
provisions of this Agreement, and shall otherwise cooperate with the
other's reasonable requests made in aid of consummating the transactions
herein contemplated.
9.10 SIGNED UNDER SEAL.
This Agreement is signed under seal by the parties.
9.11 TIME IS OF THE ESSENCE.
Time is of the essence under this Agreement.
9.12 NO THIRD PARTY BENEFICIARIES.
This Agreement is for the benefit of the undersigned parties and
is not intended to create rights in, or be enforceable by, any third
party.
9.13 JURY TRIAL.
EACH PARTY HERETO WAIVES THE RIGHT TO TRIAL BY JURY WITH RESPECT
TO ANY CLAIM OR CAUSE OF ACTION ARISING UNDER OR IN CONNECTION WITH THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
9.14 PUBLICITY.
All notices to third parties and all publicity concerning the
transactions contemplated by this Agreement shall be jointly planned and
coordinated by and between Purchaser and Seller. None of the parties
shall act unilaterally in this regard without the prior written approval
of the others; however, this approval shall not be unreasonably withheld.
9.15 REQUIRED FILINGS.
Seller shall file all documents and reports required by Law in
connection with the transactions contemplated by this Agreement, including
without limitation filings as may be required under securities laws.
ARTICLE X
POST-CLOSING OBLIGATIONS
10.1 COVENANT NOT TO COMPETE.
Seller acknowledges and agrees that the Seller's business is
conducted in Montgomery County and Prince Georges County, Maryland, and
that Seller's reputation and goodwill are an integral part of its
business. If Seller deprives Purchaser of any of Seller's goodwill or in
any manner utilizes its reputation and goodwill in competition with
Purchaser, Purchaser will be deprived of the benefits it has bargained for
pursuant to this Agreement. This covenant is necessary to transfer the
business and goodwill of Seller to Purchaser effectively. Accordingly, as
an inducement for Purchaser to enter into this Agreement, Seller agrees
that for a period of three years after the Closing, Seller shall not,
without Purchaser's prior written consent, directly or indirectly, own,
manage, operate, join, control or participate in the ownership,
management, operation or control of, or be connected with, any, profit or
nonprofit business or organization either in Montgomery County or Prince
Georges County, Maryland, which involves high technology research or
development, design or fabrication of sensors or instrumentation,
technical support services, or software development. Seller further
agrees that it shall not solicit or enter into any business or transaction
with any person or entity that is a party to any Project Contract for a
period of three years after the Closing. Seller shall maintain in
confidence, and not to disclose to any third party, any ideas, methods,
developments, inventions, improvements, trade secrets and business plans
and information which are confidential information of Seller. In the
event the agreement in this Section 10.1 shall be determined by any court
of competent jurisdiction to be unenforceable by reason of its extending
for too great a period of time or over too great a geographical area or by
reason of its being too extensive in any other respect, it shall be
interpreted to extend only over the maximum period of time for which it
may be enforceable and/or over the maximum geographical area as to which
it may be enforceable and/or to the maximum extent in all other respects
as to which it may be enforceable, all as determined by such court in such
action.
Seller acknowledges that a breach of the covenants contained in this
Section 10.1 will cause irreparable damage to Purchaser, the exact amount
of which will be difficult to ascertain, and that the remedies at law for
any such breach will be inadequate. Accordingly, Seller agrees that if
Seller breaches the covenant contained in this Section 10.1, in addition
to any other remedy which may be available at law or in equity, Purchaser
shall be entitled to specific performance and injunctive relief, without
posting bond or other security.
10.2 INDEMNIFICATION BY THE SELLER.
Subject to Section 9.1 and the further provisions of this
Article X, the Seller shall protect, defend, hold harmless and indemnify
the Purchaser, its officers, directors, stockholders, employees and
agents, and their respective successors and assigns from, against and in
respect of any and all losses, liabilities, deficiencies, penalties,
fines, costs, damages and expenses whatsoever (including reasonable
professional fees and costs of investigation, litigation, settlement, and
judgment and interest) ("Losses") that may be suffered or incurred by any
of them arising from or by reason of any of the following.
(a) Any breach of any representation, warranty, covenant
or agreement made by the Seller, in this Agreement or contained in any
certificate executed by the Seller and delivered to the Purchaser in
connection with this Agreement;
(b) Any liability or obligation of the Seller which has
not been assumed by the Purchaser pursuant to the express provisions of
this Agreement; and
(c) Any and all costs and expenses (including reasonable
legal fees) incident to the enforcement of the provisions of this Section.
10.3 INDEMNIFICATION BY THE PURCHASER.
Subject to Section 9.1 and the further provisions of this
Article X, the Purchaser shall protect, defend, hold harmless and
indemnify the Seller, its officers, directors, employees and agents, and
stockholders and their respective successors and assigns from, against and
in respect of any all Losses that may be suffered or incurred by any of
them arising from or by reason of any of the following.
(a) Any breach of any representation, warranty, covenant
or agreement made by the Purchaser in this Agreement or contained in any
certificate executed by the Purchaser and delivered to the Seller in
connection with this Agreement; and
(b) Any and all costs and expenses (including reasonable
legal fees) incident to the enforcement of the provisions of this Section.
10.4 INDEMNIFICATION PROCEDURES.
Whenever a party hereto (such party and each of its affiliates
which is entitled to indemnification pursuant to any provisions of this
Agreement, an "Indemnified Party") shall learn after the Closing of a
claim that, if allowed (whether voluntarily or by judicial or
quasi-judicial tribunal or agency), would give rise to an obligation of
another party (the "Indemnifying Party") to indemnify the Indemnified
Party under any provision of this Agreement, before paying the same or
agreeing thereto, the Indemnified Party shall promptly notify the
Indemnifying Party in writing of all such facts within the Indemnified
Party's knowledge with respect to such claim and the amount thereof (a
"Notice of Claim"). If, prior to the expiration of fifteen (15) days from
the mailing of a Notice of Claim, the Indemnifying Party shall request, in
writing, that such claim not be paid, the Indemnified Party shall not pay
the same, provided the Indemnifying Party proceeds promptly, at its or
their own expense (including employment of counsel reasonably satisfactory
to the Indemnified Party), to settle, compromise or litigate, in good
faith, such claim. After notice from the Indemnifying Party requesting
the Indemnified Party not to pay such claim and the Indemnifying Party's
assumption of the defense of such claim at its or their expense, the
Indemnifying Party shall not be liable to the Indemnified Party for any
legal or other expense subsequently incurred by the Indemnified Party in
connection with the defense thereof. However, the Indemnified Party shall
have the right to participate at its expense and with counsel of its
choice in such settlement, compromise or litigation. The Indemnified
Party shall not be required to refrain from paying any claim which has
matured by a court judgment or decree, unless an appeal is duly taken
therefrom and execution thereof has been stayed, nor shall the Indemnified
Party be required to refrain from paying any claim where the delay in
paying such claim would result in the foreclosure of a lien upon any of
the property or assets then held by the Indemnified Party. The failure to
provide a timely Notice of Claim as provided in this Section shall not
excuse the Indemnifying Party from its or their continuing obligations
hereunder; however, the Indemnified Party's claim shall be reduced by any
damages to the Indemnifying Party resulting from the Indemnified Party's
delay or failure to provide a Notice of Claim as provided in this Section.
10.5 ALLEGATIONS BY THIRD PARTIES.
For purposes of this Article X, any assertion of fact and/or law
by a third party that, if true, would constitute a breach of a
representation or warranty made by a party to this Agreement or make
operational an indemnification obligation hereunder, shall, on the date
that such assertion is made, immediately invoke the Indemnifying Party's
obligation to protect, defend, hold harmless and indemnify the Indemnified
Party pursuant to this Article X.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed on their respective behalf, by their respective officers
thereunto duly authorized, all as of the day and year first above written.
SELLER:
APPLIED RESEARCH OF MARYLAND, INC.
By ________________________________
Title:_____________________________
PURCHASER:
FIDELITY TECHNOLOGIES CORPORATION
By ________________________________
Title:_____________________________
Agreed and consented to: ___________________________________
DR. S.P.S. ANAND