<PAGE> 1
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1995
Commission File No. 0-5954
COMPUTER RESEARCH, INC.
-----------------------
(Exact name of issuer as specified in its charter)
Pennsylvania 25-1201499
------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or organization)
Cherrington Corporate Center, Building 200, Coraopolis, PA 15108
-----------------------------------------------------------------
(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: (412) 262-4430
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
Indicate by check mark whether the Issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained herein, and will not be contained, to the best of the Issuer's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[ ]
The Issuer's Revenue during the Fiscal Year 1995: $6,217,753
----
The aggregate market value of 2,077,693 voting shares held by non-affiliates
of the Issuer, computed by reference to $.50 (which is the average of the bid
and ask prices of the Issuer's Common Stock on October 31, 1995, of $.44 and
$.56 respectively) is $1,038,847.
As of October 31, 1995, the Issuer had 3,889,895 shares of Common Stock,
without par value, outstanding.
Documents Incorporated by Reference:
1. Proxy Statement for the Registrant's next annual meeting of
shareholders, which is to be filed not later than December 31, 1995, is
incorporated by reference into Part III of this Form 10-KSB.
<PAGE> 2
PART I
------
ITEM 1. BUSINESS
- ------- --------
Computer Research, Inc. (Registrant), a Pennsylvania corporation organized
in July 1969, is a data processing service company providing accounting
services to securities firms, banks and other financial institutions. The
principal office and data center for the Registrant is located at the
Cherrington Corporate Center, Building 200, Coraopolis, Pennsylvania, which is
in the vicinity of the Pittsburgh International Airport and approximately 20
miles from downtown Pittsburgh, Pennsylvania. The Registrant also maintains a
full service data center staffed with systems, programming and client service
personnel at One Denver Place, 999 18th Street, Denver, Colorado. A service
and sales support office is located in the Wall Street area of New York City.
The principal data processing service offered by the Registrant is a
computerized "Accounting and Recordkeeping System", that is utilized by stock
and bond brokerage clients, as well as brokerage subsidiaries and capital
markets divisions of banks. A fully integrated subsystem of software modules,
when operated on the Registrant's high speed electronic computing equipment,
offers a comprehensive on-line automated system for serving financial
institutions with brokerage accounting, institutional safekeeping, capital
markets and portfolio accounting. The systems provide such firms with on-line
retrieval, reports and records on a day-to-day basis utilizing data supplied by
the client. Presently, this service is being utilized by approximately 55
financial institutions throughout the country.
The Registrant is also engaged, on a limited basis, in selling
communications equipment, micro- and mini-computer equipment, software and
equipment maintenance services to the clients of the data processing accounting
service.
The Registrant's competition for its "Accounting and Recordkeeping System"
is primarily from three sources, (a) other independent data processing service
companies, (b) in-house computer systems, and (c) correspondent clearing firms
that offer trade clearing and recordkeeping services to securities firms on a
"fully disclosed basis". The Registrant's "Accounting and Recordkeeping
System" is also designed to support brokerage houses and banks who offer
clearing services and safekeeping services to correspondent brokers and banks.
In April of 1995, the Registrant announced it has entered into a joint
project with Wachovia Operational Services Corporation for converting the
Registrant's entire actively marketed software product line to operate on IBM
computer equipment. Note K of the Registrant's Consolidated Financial
Statements contains information regarding this joint project. The project,
which will require no major incurment of debt by the Registrant, is scheduled
for completion during the 1997 fiscal year. Upon the successful completion of
the joint project, Registrant will continue to retain ownership of the
converted software and will continue to offer its services on a service bureau
basis. In addition, Registrant will be able to license the software to firms
desiring to utilize the system on an in-house basis. In consideration for
entering into the joint project with Registrant, Wachovia
2
<PAGE> 3
Operational Services Corporation will secure an in-house license agreement for
servicing Wachovia Investments, Incorporated, a current client of Registrant
which may result in a reduction in service revenues to Registrant.
The Registrant presently employs approximately 50 persons. In general,
Registrant's relations with its employees have been satisfactory.
ITEM 2. PROPERTIES
- ------- ----------
Registrant's principal facilities, all of which are leased, are as follows:
<TABLE>
<CAPTION>
APPROX. SQ. LEASE EXPIRATION
FT. OF DATE (INCLUDING
LOCATION TYPE OF FACILITY FLOOR SPACE RENEWAL OPTIONS)
- -------- ---------------- ----------- ----------------
<S> <C> <C> <C>
Coraopolis, PA Executive Offices 25,024 12/31/97
and Pittsburgh Data
Center As Well As
8,333 Sq. Ft. Which
are Subleased to a
Tenant
Denver, CO Offices & Operations 8,566 12/31/96
of the Denver Data
Center
New York, NY Branch Office 850 8/31/98
</TABLE>
The Registrant's aggregate rental expense for the above properties for the
year ended August 31, 1995, was approximately $456,653. The rental expense to
be incurred by the Registrant for rentals during fiscal year ending August 31,
1996, is anticipated to be approximately $483,000. Due to a reduced
requirement for office space, which resulted from the termination of a business
segment in February of 1992, the Registrant obtained a sublease tenant for
approximately 8,333 square feet. The sublease tenant has committed to rent the
space to the end of the Registrant's lease obligation in December of 1997.
The Registrant owns and operates three Honeywell Bull DPS7000 computer
mainframe systems; two located at the Denver data center and one located at the
Pittsburgh data center. The Registrant also owns and operates a Honeywell Bull
DPS7 mainframe system which is located at its Pittsburgh data center.
Commencing on July 1 of 1995, a 24 month lease was entered into for the
installation of an additional Honeywell Bull DPS7000 system located at the
Pittsburgh data center. Additionally, due to expanding business requirements,
the Company intends to install an additional Honeywell Bull DPS7000 computer
system commencing in January of 1996 on a 24 month lease with a total lease
commitment of approximately $60,000.
3
<PAGE> 4
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Registrant has no knowledge of any material litigation or pending legal
proceedings against it or affecting its assets or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
(Not applicable)
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
- ------- ----------------------------------------------------------------
MATTERS
-------
The Company's Common Stock is traded in the Over-the-Counter market and are
quoted on the NASD Bulletin Board Trading System under the NASDAQ symbol CRIX.
As of October 31, 1995, there were approximately 1,025 shareholders.
The following tables set forth the range of high and low closing bid prices
of the Company's Common Stock for the periods indicated and were derived from
sources the Company deems reliable. All prices represent inter-dealer
quotations, without retail mark-up, mark-down or commission and may not
represent actual transactions.
<TABLE>
<CAPTION>
Bid Prices
--------------
Ended August 31, 1995
High Low
---- ---
<S> <C> <C>
First quarter 9/16 7/16
Second quarter 5/8 3/8
Third quarter 7/16 3/8
Fourth quarter 7/16 3/8
</TABLE>
<TABLE>
<CAPTION>
Bid Prices
--------------
Ended August 31, 1995
High Low
---- ---
<S> <C> <C>
First quarter 5/8 5/16
Second quarter 5/8 3/8
Third quarter 5/8 1/2
Fourth quarter 5/8 7/16
</TABLE>
4
<PAGE> 5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATION
--------------------
I. RESULTS OF OPERATIONS
---------------------
The Registrant's principal source of revenue is derived from providing
computerized accounting and support services to securities firms, banks and
other financial institutions. The Registrant's revenues are directly affected
by stock and bond market trading volume which indirectly impacts the number of
transactions processed for clients of the Registrant. During the past year, a
number of mergers and consolidations have taken place in the banking industry.
Consequently, with a substantial portion of the revenues derived from banking
clients, the Registrant could be positively or negatively impacted by a merger
involving one of its clients. Due to the volatile nature of the industry
served, the results of operations for the period represented are not necessarily
indicative of the results of operations to be expected for the coming year or
any specific period.
Note J of the Registrant's Consolidated Financial Statements contains
information concerning a discontinued operations and such information is
incorporated by reference herein.
REVENUES:
The total revenues for the year ending August 31, 1995, increased by
approximately 13% over the previous year. This was due to an approximate 35%
increase in the number of transactions processed for the current year as
compared to the previous year. The increased trading activity occurred
primarily during the first six months of the year ending August 31, 1995, due
to the addition of new business, combined with an increase in trading activity
for existing clients.
Total revenues for the year ending August 31, 1994, increased
approximately 8% over the previous year, primarily attributable to the addition
of new banking clients.
COSTS AND EXPENSES:
The total costs and expenses for the year ending August 31, 1995,
increased approximately 7% over the previous year. This increase is primarily
attributed to the costs associated with the increased business activity
occurring during the year.
The costs and expenses for the year ending August 31, 1994, increased
less than 1% over the previous year.
5
<PAGE> 6
NET INCOME:
For the year ending August 31, 1995, the Registrant reported a profit
of $398,139 or a profit of $.10 per share.
For the year ended August 31, 1994, the Registrant reported a profit of
$5,082 or $.00 per share.
II. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Due to the relatively stable operating costs of the data processing
service business, the working capital requirements of the Registrant are
normally predictable. Cash or cash equivalents on hand at the end of the year
ended August 31, 1995, were approximately $182,000 above the end of the previous
year. This increase was attributable to cash generated from profitable
operations during the year. The management of the Registrant believes that
current cash on hand, along with revenues generated by operations, will
adequately satisfy the cash requirements of the Registrant for the coming year.
In addition, if needed, the Registrant has a $500,000 working line of credit
which it intends to renew in January of 1996.
The Registrant intends to install an additional Honeywell Bull mainframe
computer system in January 1996 on a 24 month lease with a total commitment of
approximately $60,000.
During the 1997 fiscal year, the Registrant intends to have the software
of its product line operational on IBM computer equipment. At that time, the
Registrant will have the option to purchase computer processing time from an
outside supplier or if cost justified, install IBM computer equipment of its own
for its service business.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
(See Item 13, below, for list of Consolidated Financial Statements of
the Registrant which are attached hereto and included herein.)
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
Not applicable.
6
<PAGE> 7
PART III
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
See Note 1.
ITEM 10. EXECUTIVE COMPENSATION
- -------- ----------------------
See Note 1.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
See Note 1.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
See Note 1.
NOTE 1 - Items 9, 10, 11 and 12 are incorporated herein by reference to the
Registrant's Proxy Statement which will be filed with the
Commission no later than 120 days from fiscal year end.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
- -------- ------------------------------------------------------
(a) The following documents are filed as part of this report.
(1) & (2) A list of Financial Statements and Schedules are set
forth in the Index to the Consolidated Financial Statements attached hereto on
page 11.
(3) Exhibits:
(3) Articles of Incorporation are incorporated by
reference to the Registrant's Form 10, and exhibits thereto; which is currently
on file with the Commission. The Registrant's By-Laws are incorporated by
reference to the Form 10-K Annual Report for the fiscal year ended August 31,
1990.
(4) Form of certificates of common stock are
incorporated by reference to Form 10 and exhibits thereto.
(10)(i) The lease for the Registrant's data center in
Denver, Colorado, is incorporated by reference to the Form 10-K Annual Report
for the fiscal year ended August 31, 1990.
7
<PAGE> 8
(10)(ii) Lease for Registrant's principal offices and
data center in Coraopolis, Pennsylvania, executed June 4, 1986, and effective
beginning October 23, 1986, is incorporated by reference to the Registrant's
Annual Report on Form 10-K for the period ending August 31, 1987.
(22) List of the Registrant's Subsidiaries is
incorporated by reference to the Registrant's Annual Report on Form 10-K for the
period ending August 31, 1987.
8
<PAGE> 9
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMPUTER RESEARCH, INC.
(Registrant)
By: /s/ James L. Schultz
---------------------------------
James L. Schultz, President
Dated: November 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ James L. Schultz
---------------------------------
James L. Schultz, Director
Chief Executive Officer,
Treasurer and Principal Financial
and Accounting Officer
Date: November 28, 1995
By: /s/ David J. Vagnoni
---------------------------------
David J. Vagnoni, Director
Executive Vice President
Date: November 28, 1995
By: /s/ Virgil J. Falco
---------------------------------
Virgil J. Falco, Director
Date: November 28, 1995
By: /s/ David K. Klotz
---------------------------------
David K. Klotz, Director
Date: November 28, 1995
9
<PAGE> 10
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
{Item 13(a)}
Report of Independent Certified Public Accountants
Balance Sheets -- Pages 12 and 13
August 31, 1995 and 1994
Statements of Operations -- Page 14
Years ended August 31, 1995 and 1994
Statements of Changes in Stockholders' Equity -- Page 15
Years ended August 31, 1995 and 1994
Statements of Cash Flows -- Pages 16 and 17
Years ended August 31, 1995 and 1994
Notes to Financial Statements
10
<PAGE> 11
Suite 550
Four Station Square
Pittsburgh, PA 15219-1116
412 232-3100
FAX 412 391-8370
Report of Independent Certified Public Accountants
--------------------------------------------------
[LOGO]
GRANT THORNTON LLP Accountants and
Management Consultants
The U.S. Member Firm of
Board of Directors Grant Thornton International
Computer Research, Inc.
We have audited the accompanying balance sheet of Computer Research,
Inc. as of August 31, 1995 and 1994, and the related statements of operations,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Computer Research,
Inc. as of August 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Pittsburgh, Pennsylvania
October 20, 1995
<PAGE> 12
COMPUTER RESEARCH, INC.
BALANCE SHEETS
August 31,
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 873,508 $ 691,881
Accounts receivable - trade
(net of allowance for doubtful accounts
of $30,000 and $20,000 in 1995 and
1994, respectively) 776,099 580,138
Inventories, at the lower of cost
(first-in, first-out) or market
(Note B) 80,518 101,347
Prepaid expenses 75,911 53,146
Prepaid and refundable income taxes - 5,000
---------- ----------
Total current assets 1,806,036 1,431,512
---------- ----------
EQUIPMENT AND LEASEHOLD
IMPROVEMENTS - AT COST (Notes D and F)
Data processing equipment 4,255,912 4,216,203
Data processing equipment under
capital leases 104,339 18,416
Other 798,889 776,910
---------- ----------
5,159,140 5,011,529
Less accumulated depreciation
and amortization 4,879,610 4,785,985
---------- ----------
279,530 225,544
OTHER ASSETS 1,341 2,768
---------- ----------
$2,086,907 $1,659,824
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE> 13
COMPUTER RESEARCH, INC.
BALANCE SHEETS - Continued
August 31,
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank (Note C) $ 25,000 $ 50,000
Current portion of long-term obligations (Note D) 45,852 6,521
Accounts payable 82,057 168,478
Accrued payroll 157,036 87,708
Accrued vacation pay 281,720 264,604
Customer deposits 70,350 40,850
Accrued rent 103,847 122,274
Accrued lease obligations (Note J) 20,204 61,457
Other current liabilities 32,246 2,363
---------- ----------
Total current liabilities 818,312 804,255
LONG-TERM OBLIGATIONS (Note D) 35,885 4,127
ACCRUED LEASE OBLIGATIONS (Note J) 17,909 39,151
---------- ----------
Total liabilities 872,106 847,533
---------- ----------
COMMITMENTS (Note E) - -
STOCKHOLDERS' EQUITY (Note G)
Common stock - no par value; $.0008
stated value; 5,000,000 shares authorized;
and 3,887,895 and 3,864,895 shares issued and
outstanding in 1995 and 1994, respectively 3,110 3,092
Additional paid-in capital 715,842 711,489
Retained earnings 495,849 97,710
---------- ----------
Total stockholders' equity 1,214,801 812,291
---------- ----------
$2,086,907 $1,659,824
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE> 14
COMPUTER RESEARCH, INC.
STATEMENTS OF OPERATIONS
For the years ended August 31,
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Revenues (Note K)
Sales of services $5,971,018 $5,333,859
Sales of equipment and supplies 86,571 63,078
Operating lease income (Note F) 48,160 50,995
Other income 112,004 46,134
---------- ----------
6,217,753 5,494,066
---------- ----------
Costs and expenses
Cost of services 3,914,732 3,639,603
Cost of equipment and supplies sold 69,082 35,372
Selling and administrative expenses 1,700,509 1,639,258
Depreciation and amortization 95,904 88,445
Interest expense 12,587 6,284
---------- ----------
5,792,814 5,408,962
---------- ----------
Income from continuing operations
before income taxes 424,939 85,104
Provision for income taxes (Note H) 26,800 -
---------- ----------
Income from continuing operations 398,139 85,104
Discontinued operations (Note J)
Income from discontinued operations - 4,312
Loss on disposal of discontinued operations - (84,334)
---------- ----------
- (80,022)
---------- ----------
Net Income $ 398,139 $ 5,082
========== ==========
Income per common share
Income from continuing operations $ .10 $ .02
Loss from discontinued operations - (.02)
---------- ----------
Income per common share $ .10 $ -
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE> 15
COMPUTER RESEARCH, INC.
STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
For the years ended August 31,
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
------ ---------- -------- ----------
<S> <C> <C> <C> <C>
Balance at
August 31, 1993 $3,072 $706,761 $ 92,628 $ 802,461
Net income - - 5,082 5,082
Stock options exercised 20 4,728 - 4,748
------ -------- -------- ----------
Balance at
August 31, 1994 3,092 711,489 97,710 812,291
Net income - - 398,139 398,139
Stock options exercised 18 4,353 - 4,371
------ -------- -------- ----------
Balance at
August 31, 1995 $3,110 $715,842 $495,849 $1,214,801
====== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE> 16
COMPUTER RESEARCH, INC.
STATEMENTS OF CASH FLOWS
For the years ended August 31,
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Net income $ 398,139 $ 5,082
--------- --------
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 95,904 90,921
Provision for (recovery of) losses on doubtful accounts 10,000 (11,982)
Gain on sale of fixed assets - (13,560)
Change in assets and liabilities
Accounts receivable (205,961) (82,099)
Refundable income taxes 5,000 3,069
Inventories 20,829 8,190
Prepaid expenses (22,765) (6,622)
Customer deposits 29,500 4,000
Other assets 1,427 526
Accounts payable, accrued expenses, and
other current liabilities 11,479 63,264
Accrued lease obligations (62,495) (11,892)
--------- --------
Total adjustments (117,082) 43,815
--------- --------
Net cash provided by operating activities 281,057 48,897
--------- --------
Cash flows from investing activities
Proceeds from sale of fixed assets - 14,890
Additions to equipment and
leasehold improvements (63,967) (85,349)
--------- --------
Net cash used in investing activities (63,967) (70,459)
--------- --------
Cash flows from financing activities
Issuance of stock 4,371 4,748
Payments on existing debt - (2,781)
Payments on capital lease obligations (14,834) (14,049)
Net (payments) borrowings on line of credit (25,000) 29,890
--------- --------
Net cash (used in) provided by financing activities (35,463) 17,808
--------- --------
Net increase (decrease) in cash 181,627 (3,754)
Cash and cash equivalents at beginning of year 691,881 695,635
--------- --------
Cash and cash equivalents at end of year $ 873,508 $691,881
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 17
COMPUTER RESEARCH, INC.
STATEMENTS OF CASH FLOWS - Continued
For the years ended August 31, 1995 and 1994
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------
In fiscal 1995, the Company entered into capital lease obligations totaling
$85,923 for the purchase of new equipment.
<TABLE>
<CAPTION>
Cash Paid During the Year 1995 1994
- ------------------------- ------- ------
<S> <C> <C>
Interest $12,747 $5,971
======= ======
Income taxes $ 1,153 $1,489
======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 18
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
August 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
- ----------------------
The financial statements for the year ended August 31, 1994 include Computer
Research, Inc. and its inactive, wholly owned subsidiary, Computer Applications
Division, Inc. As of March 1, 1992, the Company terminated the Value Added
Reseller (VAR) business of Computer Applications Division, Inc. The VAR
segment has been accounted for and reported as a discontinued operation. On
August 31, 1994, Computer Applications Division, Inc. was liquidated and merged
into its parent company, Computer Research, Inc. All intercompany accounts and
transactions have been eliminated in fiscal 1994.
Revenue Recognition
- -------------------
Sales of services, equipment and supplies are recognized when services are
performed or when a product is shipped, respectively. Rental income from
operating leases is recognized over the respective lease terms.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Financial Accounting
Standards Board Statement No. 109 (FAS 109), Accounting for Income Taxes, which
requires the asset and liability method of accounting for income taxes.
Enacted statutory tax rates are applied to temporary differences arising from
the differences in financial statement carrying amounts and the tax bases of
existing assets and liabilities. The temporary differences at August 31, 1995
and 1994 are principally related to depreciation, accrued vacation and other
accruals and allowances.
Equipment and leasehold improvements
- ------------------------------------
Depreciation and amortization of equipment and leasehold improvements are
computed by use of the straight-line method based upon the estimated useful
lives of the related assets.
18
<PAGE> 19
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
August 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Equipment and leasehold improvements - Continued
- ------------------------------------
Maintenance and repairs are charged to operations as incurred.
The policy of the Company is to adjust the asset and related depreciation
accounts of the cost and accumulated depreciation when such assets are retired
or disposed. Any resulting profit or loss is included in income in the year of
retirement or disposal.
Earnings per share
- ------------------
Earnings per common share is computed based upon the number of weighted average
common shares outstanding during each of the years and common stock equivalents
arising from the assumed exercise of stock options outstanding at the end of
each year. Weighted average common and common equivalent shares outstanding
for the years ended August 31, 1995 and 1994 were 3,974,123 and 3,966,714,
respectively.
Cash Equivalents
- ----------------
For purposes of the statement of cash flows, the Company considers investments
having original maturities of three months or less, money market and other
interest-bearing deposit accounts to be cash equivalents.
NOTE B - INVENTORIES
Inventories at August 31, 1995 and 1994 consist of:
<TABLE>
<CAPTION>
1995 1994
------- --------
<S> <C> <C>
Equipment held for resale $16,156 $ 22,552
Work in process 41,216 56,931
Computer supplies 23,146 21,864
------- --------
$80,518 $101,347
======= ========
</TABLE>
Work in process consists of unbilled revenues for services performed. Computer
supplies are primarily computer paper and ribbons which are sold to customers.
19
<PAGE> 20
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
August 31, 1995 and 1994
NOTE C - NOTE PAYABLE
Note payable to bank consists of borrowings from a line of credit which expires
January 31, 1996. The line of credit bears interest at the prime interest rate
plus 1 percent. At August 31, 1995, the Company's available and unused
borrowings on the line of credit were $500,000 and $475,000 respectively. The
line of credit is primarily collateralized by accounts receivable, equipment
and inventory.
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations at August 31, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Capital lease obligations for data processing
equipment payable in monthly installments
of $2,900 through June, 1997. $58,207 -
Capital lease obligations for data processing
equipment payable in monthly installments
of $1,055 through April, 1997. 19,403 -
Capital lease obligations for data processing
equipment payable in monthly installments
of $645 through April, 1996. 4,127 10,648
------- -------
81,737 10,648
Less current portion 45,852 6,521
------- -------
$35,885 $ 4,127
======= =======
</TABLE>
20
<PAGE> 21
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
August 31, 1995 and 1994
NOTE D - LONG-TERM OBLIGATIONS - Continued
Aggregate maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
Year Ending August 31,
----------------------
<S> <C>
1996 $52,619
1997 37,441
-------
90,060
Less amounts representing interest 8,323
-------
$81,737
=======
</TABLE>
NOTE E - LEASE COMMITMENTS
The Company has several operating lease agreements for automobiles, equipment,
and office space. Certain of the leases contain escalation clauses and require
the Company to pay for taxes, utilities and other operating expenses of the
lessor. As disclosed in Note J, the Company entered into a noncancelable
sublease agreement for certain office space in fiscal 1995.
Rental expense charged to operations was $574,230 and $626,723 for the years
ended August 31, 1995 and 1994, respectively. As of August 31, 1995, the
Company is committed to the following minimum annual rentals on operating
leases.
<TABLE>
<CAPTION>
Sublease
Rental
Year Ending August 31, Amount Income Total
---------------------- ---------- ---------- --------
<S> <C> <C> <C>
1996 $ 515,123 $ 94,221 $420,902
1997 405,330 102,121 303,209
1998 125,810 34,918 90,892
---------- -------- --------
$1,046,263 $231,260 $815,003
========== ======== ========
</TABLE>
21
<PAGE> 22
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
August 31, 1995 and 1994
NOTE F - EQUIPMENT HELD UNDER OPERATING LEASES
The Company leases minicomputers and data processing equipment, as lessor,
under operating leases that have one-year or two-year initial lease terms.
Customers may terminate these leases during the initial term only by purchasing
or leasing equipment of equal or greater value from the Company. Property
leased and property held for lease amounted to $4,593 (net of accumulated
depreciation of $1,551,364) at August 31, 1995 and $7,221 (net of accumulated
depreciation of $1,548,736) at August 31, 1994.
NOTE G - STOCK OPTIONS
The Company has reserved 250,000 shares of common stock under a stock option
plan for key employees. Options can be granted at prices which are not less
than 100% of the fair market value on the date granted. Outstanding stock
options expire on February 22, 1996 and are exercisable at option prices
ranging from $.19 to $.21 per share.
Stock options outstanding at August 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Outstanding, beginning of year 184,000 211,000
Less exercised at $.19 - $.21 per share 23,000 25,000
Less canceled - 2,000
------- -------
Outstanding, end of year 161,000 184,000
======= =======
</TABLE>
22
<PAGE> 23
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
August 31, 1995 and 1994
NOTE H - INCOME TAXES
The Company has recorded reduced provisions for income taxes for the years
ended August 31, 1995 and 1994 due to the utilization of federal and state net
operating loss carryforwards. Reconciliations of the expected federal
statutory rates and effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----- ------
<S> <C> <C>
Expected statutory rate 34.0% 34.0%
Nondeductible expenditures 11.7% 506.8%
State income taxes - net of federal benefit 4.0% 0.0%
Utilization of federal and state income tax
loss carryforwards (43.4)% (540.8)%
----- ------
6.3% 0.0%
===== ======
</TABLE>
At August 31, 1995, the Company has a federal net operating loss carryforward
of approximately $650,000 and a state net operating loss carryforward of
approximately $1,750,000 expiring as follows:
<TABLE>
<CAPTION>
Federal State
-------- --------
<S> <C> <C>
1996 $ - $330,000
1997 - 158,000
1998 - 662,000
1999 - -
2000 and thereafter 650,000 600,000
</TABLE>
The utilization of the net operating loss carryforwards could be subject to
limitations in the future.
Deferred tax assets and (liabilities) at August 31, 1995 and 1994 consist of
the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Temporary differences related to:
Accrued expenses and allowances $ 152,000 $ 167,000
Depreciation (3,000) (24,000)
Net operating loss carryforwards 313,000 528,000
Valuation allowance (462,000) (671,000)
--------- ---------
Net deferred taxes $ 0 $ 0
========= =========
</TABLE>
23
<PAGE> 24
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
August 31, 1995 and 1994
NOTE H - INCOME TAXES - Continued
The Company has established a valuation allowance at August 31, 1995 and 1994,
as the result of the uncertainty as to the ultimate recoverability of the
deferred tax assets which are dependent on future taxable income.
NOTE I - EMPLOYEE BENEFIT PLAN
The Company has a qualified profit-sharing plan, which includes a salary
reduction, deferred compensation feature under Section 401(k) of the Internal
Revenue Code. Substantially all employees are eligible to participate in this
plan. Employer contributions to the plan are determined annually by the Board
of Directors. Employer contribution expense for the years ended August 31, 1995
and 1994 was $57,607 and $0, respectively.
NOTE J - DISCONTINUED OPERATIONS
As of March 1, 1992, the Company terminated the value added reseller (VAR)
business of the Company's wholly owned subsidiary, Computer Applications
Division, Inc. and merged its leasing operation into Computer Research, Inc..
The VAR segment has been accounted for and reported as a discontinued
operation.
During 1992, the Company recorded an estimate for future lease obligations
related to space previously occupied by the discontinued segment assuming that
such space would be utilized by the Company, subleased or the remaining
obligation otherwise eliminated by August 31, 1994. In November 1994, the
Company entered into a sublease agreement for this space which expires
concurrently with the primary lease. The net value of the difference between
the future lease obligations and the sublease rentals of $84,334 ($.02 per
share) has been recorded as a loss on the disposal of the segment in the fourth
quarter of fiscal 1994.
24
<PAGE> 25
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
August 31, 1995 and 1994
NOTE J - DISCONTINUED OPERATIONS - Continued
Operating results of the discontinued operations were as follows:
<TABLE>
<CAPTION>
Year ended August 31
----------------------
1995 1994
-------- -------
<S> <C> <C>
Revenues $ - $23,080
Costs and expenses - 18,768
-------- -------
Income from discontinued operations $ - $ 4,312
======== =======
</TABLE>
Net assets of the discontinued business included in the consolidated balance
sheet at August 31, 1995 and 1994 consisted of equipment and leasehold
improvements of $2,544 and $4,896, respectively.
NOTE K - MAJOR CLIENTS
The continuing operations of the Company primarily consist of providing
services and products to banks and security brokerage/dealer sectors. The
Company had sales to major clients (10% or more of consolidated revenue) as
follows: 1995 (one client) - 19.2% of consolidated revenue, 1994 (one client)
- - 15.2% of consolidated revenue.
On February 9, 1995, the Company and the major client noted above, entered into
an agreement in principle to negotiate the terms and conditions of a definitive
agreement regarding a joint project to convert the Company's computer
production software from its existing hardware platform to an IBM AS/400
platform. The project is scheduled for completion during the 1997 fiscal year.
Upon successful completion of the project, the Company intends to license the
software to third parties, including the major client, which may result in a
reduction in service revenues from the major client. The agreement also may
provide the Company with the ability to out source data center operations on
terms favorable to the Company, resulting in a reduction in its cost of
operations.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000201511
<NAME> COMPUTER RESEARCH, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1994
<PERIOD-END> AUG-31-1995
<EXCHANGE-RATE> 1
<CASH> 873,508
<SECURITIES> 0
<RECEIVABLES> 806,099
<ALLOWANCES> 30,000
<INVENTORY> 80,518
<CURRENT-ASSETS> 1,806,036
<PP&E> 5,159,140
<DEPRECIATION> 4,879,610
<TOTAL-ASSETS> 2,086,907
<CURRENT-LIABILITIES> 818,312
<BONDS> 53,794
<COMMON> 3,110
0
0
<OTHER-SE> 1,211,691
<TOTAL-LIABILITY-AND-EQUITY> 2,086,907
<SALES> 86,571
<TOTAL-REVENUES> 6,217,753
<CGS> 69,082
<TOTAL-COSTS> 5,792,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,587
<INCOME-PRETAX> 424,939
<INCOME-TAX> 26,800
<INCOME-CONTINUING> 398,139
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 398,139
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
