<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, 1996
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 1996: $7,461,733
The aggregate market value of 2,268,353 voting shares held by
non-affiliates of the Issuer, computed by reference to $1.30 (which is the
average of the bid and ask prices of the Issuer's Common Stock on October 31,
1996, of $1.25 and $1.34 respectively) is $2,948,859.
As of October 31, 1996, the Issuer had 4,037,255 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, 1996, 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 system provides 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 banks who
offer safekeeping services to other banks, and brokerage houses who offer
clearing services on a "fully disclosed basis" to their correspondent firms.
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 in place of the currently utilized Honeywell
Bull configuration. Note J of the Registrant's 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 at the
close of
2
<PAGE> 3
the 1997 fiscal year. Upon the successful completion of the joint project, the
Registrant will continue to retain sole ownership of the converted software and
will continue to offer its services on a service bureau basis. In addition, the
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 the Registrant, Wachovia Operational Services Corporation will
secure an in-house software license agreement for servicing Wachovia
Investments, Incorporated, a current client of the Registrant.
The Registrant currently is finalizing an agreement that will
provide an option to purchase computer processing time from Wachovia
Operational Services Corporation for some of its processing needs. In addition,
the Registrant will have AS/400 computer processing capacity at its own
facility to compliment its processing needs.
During fiscal year 1998, Wachovia Operational Services
Corporation will utilize its Software License Agreement to offer processing
services to Wachovia Investments, Incorporated, a current client of the
Registrant. Wachovia Investments, Incorporated currently accounts for
approximately 20% of the Registrant's service revenues. While this event could
have an adverse affect on the revenues generated by the Registrant in 1998, the
impact on the financial condition cannot, at this time, be totally quantified.
The Registrant is currently in discussion with several prospective new clients
and believes it can replace the lost revenues prior to the end of the 1998
fiscal year. In addition, it will eliminate approximately $300,000 of annual
maintenance expenses associated with the outgoing Honeywell Bull computer
equipment.
Statements regarding the Registrant's expectations as to its
future operations and financial condition and certain other information
presented in this statement constitute forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Although the
Registrant believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, there can be
no assurance that actual results will not differ materially from its
expectations. Factors which could cause actual results to differ from
expectations include a general downturn in the economy or the stock market and
related transaction activity, gain or loss of significant clients, unforeseen
new competition, changes in government policy or regulation or unforeseen costs
and other effects related to legal proceedings.
The Registrant presently employs approximately 50 persons. In
general, Registrant's relations with its employees have been satisfactory.
3
<PAGE> 4
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, 1996, was approximately $469,000. The
Registrant intends to renew its lease for the Denver facility prior to December
31, 1996. As a result, the rental expense to be incurred by the Registrant for
rentals during the fiscal year ending August 31, 1997, is anticipated to be
approximately $494,000. 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 at
its Coraopolis, Pennsylvania, location. The sublease tenant has committed to
rent the space for the duration of the Registrant's lease obligation which is
until the end of 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. In addition, the Registrant has a DPS7000 computer mainframe system
located at its Denver facility on a 24 month lease expiring in June of 1997.
Also, the Registrant has a DPS7000 computer mainframe system located at its
Pittsburgh facility on a 24 month lease expiring in January of 1998.
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.
4
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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 is quoted on the NASD Bulletin Board Trading System under the NASDAQ
symbol CRIX.
As of October 31, 1996, there were approximately 990
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, 1996
High Low
---- ---
<S> <C> <C>
First quarter 13/16 7/16
Second quarter 2 1/8 5/8
Third quarter 3 1/8 1 5/8
Fourth quarter 1 7/8 1 1/4
</TABLE>
<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>
5
<PAGE> 6
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 its clients. The clients serviced are subject to
mergers and acquisitions and may choose to convert their business from
self-clearing to a fully disclosed basis. The Registrant could be positively or
negatively impacted by a merger involving one of its clients. Also, 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.
REVENUES:
The total revenues for the year ended August 31, 1996, increased by
approximately 20% over the previous year. This was primarily due to an
approximate 25% increase in the number of transactions processed for the
current year as compared to the previous year. In addition, revenues from
systems and programming also increased.
The total revenues for the year ended August 31, 1995, increased by
approximately 13% over the previous year, primarily due to the addition of new
business and a general increase in trading activity for existing clients.
COSTS AND EXPENSES:
The total costs and expenses for the year ended August 31, 1996,
increased approximately 6% over the previous year. Salary increases, plus
matching funds, contributed to the Registrant's 401(k) Plan were partly
responsible for this increase.
The costs and expenses for the year ended August 31, 1995, increased
approximately 7% over the previous year.
NET INCOME:
The net income for the year ended August 31, 1996, was $1,028,478 or
$.26 per share.
For the year ended August 31, 1995, the net income was $398,139 or
$.10 per share.
6
<PAGE> 7
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, 1996, were approximately $613,000 above 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 $750,000 working line of credit which it intends
to renew in January of 1997.
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. In addition, it intends to install an IBM AS/400
computer system of its own near the end of the 1997 fiscal year in support of
its service business.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(See Item 13, below, for list of 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.
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.
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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 Financial Statements attached
hereto on Page 10.
(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.
(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.
(27) Financial Data Schedule
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 27, 1996
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 27, 1996
By: /s/ David J. Vagnoni
---------------------------------
David J. Vagnoni, Director
Executive Vice President
Date: November 27, 1996
By: /s/ Lynn M. Bushman
---------------------------------
Lynn M. Bushman, Director
Date: November 27, 1996
By: /s/ David K. Klotz
---------------------------------
David K. Klotz, Director
Date: November 27, 1996
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, 1996 and 1995
Statements of Earnings -- Page 14
Years Ended August 31, 1996 and 1995
Statements of Changes in Stockholders' Equity -- Page 15
Years Ended August 31, 1996 and 1995
Statements of Cash Flows -- Page 16
Years Ended August 31, 1996 and 1995
Notes to Financial Statements -- Pages 17 to 24
10
<PAGE> 11
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
COMPUTER RESEARCH, INC.
We have audited the accompanying balance sheets of Computer Research, Inc. as
of August 31, 1996 and 1995, and the related statements of earnings, 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 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, 1996 and 1995, 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
Cleveland, Ohio
October 16, 1996
11
<PAGE> 12
COMPUTER RESEARCH, INC.
BALANCE SHEETS
August 31,
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,486,924 $ 873,508
Short-term investments (note A) 741,146 --
Accounts receivable - trade (net of allowance for
doubtful accounts of $30,000 in each year) 831,421 776,099
Inventories (notes A and B) 41,958 80,518
Prepaid expenses 64,411 75,911
---------- ----------
Total current assets 3,165,860 1,806,036
PROPERTY AND EQUIPMENT - AT COST
(notes A, D and F)
Data processing equipment 4,355,558 4,255,912
Data processing equipment under capital leases 143,615 104,339
Leasehold improvements 271,610 268,745
Office equipment 541,611 530,144
---------- ----------
5,312,394 5,159,140
Less accumulated depreciation and amortization 5,019,740 4,879,610
---------- ----------
292,654 279,530
OTHER ASSETS -- 1,341
---------- ----------
$3,458,514 $2,086,907
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE> 13
COMPUTER RESEARCH, INC.
BALANCE SHEETS CONTINUED
August 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Note payable to bank (note C) $ -- $ 25,000
Current portion of long-term obligations (note D) 64,731 45,852
Accounts payable 128,232 82,057
Customer deposits 88,450 70,350
Accrued liabilities
Compensation and payroll taxes 232,112 157,036
Vacation 301,614 281,720
Rent 63,642 103,847
Lease obligations 13,952 20,204
Income taxes 272,000 27,500
Other current liabilities 5,911 4,746
---------- ----------
Total current liabilities 1,170,644 818,312
LONG-TERM OBLIGATIONS (NOTE D) 12,019 35,885
ACCRUED LEASE OBLIGATIONS 3,953 17,909
COMMITMENTS (NOTE E) -- --
STOCKHOLDERS' EQUITY (NOTE G)
Common stock - no par value; $.0008 stated value;
5,000,000 shares authorized; 4,037,255 and
3,887,895 shares issued and outstanding in 1996
and 1995, respectively 3,230 3,110
Additional paid-in capital 744,342 715,842
Retained earnings 1,524,326 495,849
---------- ----------
2,271,898 1,214,801
---------- ----------
$3,458,514 $2,086,907
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
13
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COMPUTER RESEARCH, INC.
STATEMENTS OF EARNINGS
For the years ended August 31,
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
REVENUES (NOTE J)
Sales of services $7,150,358 $5,957,412
Sales of equipment and supplies 95,719 86,571
Operating lease income (note F) 31,275 48,160
Other income 184,381 112,004
---------- ----------
7,461,733 6,204,147
COSTS AND EXPENSES
Cost of services 4,126,695 3,901,126
Cost of equipment and supplies sold 75,144 69,082
Selling and administrative expenses 1,813,747 1,700,509
Depreciation and amortization 140,130 95,904
Interest expense 12,540 12,587
---------- ----------
6,168,256 5,779,208
---------- ----------
Earnings before income taxes 1,293,477 424,939
Provision for income taxes (notes A and H) 265,000 26,800
---------- ----------
NET EARNINGS $1,028,477 $ 398,139
========== ==========
Earnings per common share $.26 $.10
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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COMPUTER RESEARCH, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended August 31, 1996 and 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, August 31, 1994 $3,092 $711,489 $ 97,710 $ 812,291
Net earnings -- -- 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
Net earnings -- -- 1,028,477 1,028,477
Stock options exercised 121 29,139 -- 29,260
Common stock redeemed (1) (639) -- (640)
------ -------- ---------- ----------
Balance at August 31, 1996 $3,230 $744,342 $1,524,326 $2,271,898
====== ======== ========== ==========
</TABLE>
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COMPUTER RESEARCH, INC.
STATEMENTS OF CASH FLOWS
For the year ended August 31,
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Net earnings $1,028,477 $ 398,139
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 140,130 95,904
Provision for losses on doubtful accounts -- 10,000
Change in assets and liabilities
Accounts receivable (55,322) (205,961)
Inventories 38,560 20,829
Prepaid expenses 11,500 (17,765)
Other assets 1,341 1,427
Accounts payable, accrued liabilities and other
current liabilities 102,105 (16,021)
Customer deposits 18,100 29,500
Accrued lease obligations (20,208) (62,495)
Income taxes 244,500 27,500
---------- ---------
480,706 (117,082)
---------- ---------
Net cash provided by operating activities 1,509,183 281,057
Cash flows from investing activities
Purchases of short-term investments (741,146) --
Additions to property and equipment (95,562) (63,967)
---------- ---------
Net cash used in investing activities (836,708) (63,967)
Cash flows from financing activities
Issuance of common stock 29,260 4,371
Common stock redeemed (640) --
Payments on long-term obligations (62,679) (14,834)
Net payments on line of credit (25,000) (25,000)
---------- ---------
Net cash used in financing activities (59,059) (35,463)
---------- ---------
NET INCREASE IN CASH 613,416 181,627
Cash and cash equivalents at beginning of year 873,508 691,881
---------- ---------
Cash and cash equivalents at end of year $1,486,924 $ 873,508
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 17
Computer Research, Inc.
NOTES TO FINANCIAL STATEMENTS
August 31, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows.
NATURE OF OPERATIONS
Computer Research, Inc. (the Company) provides data processing,
accounting, and recordkeeping services for securities brokerage firms,
banks, and other financial institutions across the continental United
States. The Company's brokerage accounting and recordkeeping systems
which can be utilized in either an on-line/real time mode or a
distributed batch processing mode are located in data centers in
Pittsburgh, Pennsylvania and Denver, Colorado.
SHORT-TERM INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115, the Company has classified all of its short-term
investments which consist of various debt securities as "available for
sale" at August 31, 1996. The estimated market value of such
investments held at August 31, 1996 approximated the carrying value.
All investments in debt securities held by the Company at August 31,
1996 have an original maturity date of thirteen months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
The Company provides for depreciation and amortization using the
straight-line method for financial reporting purposes over the
following estimated useful lives:
<TABLE>
<S> <C>
Data processing equipment................................5 years
Data processing equipment under
capital leases.........................................Lease term
Leasehold improvements...................................Lease term
Office equipment.........................................5 years
</TABLE>
Accelerated depreciation methods are used for tax purposes. Maintenance and
repairs are charged to operations as incurred.
17
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Computer Research, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Sales of services, equipment and supplies are recognized when services
are performed or when a product is installed. Rental income from
operating leases is recognized over the respective lease terms.
INCOME TAXES
The Company utilizes the asset and liability method in accounting for
income taxes. The asset and liability method requires the recognition
of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between tax bases and financial
reporting bases of assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
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 share equivalents arising from the assumed exercise of
stock options outstanding at the end of each year. Weighted average
common shares and common share equivalents outstanding for the years
ended August 31, 1996 and 1995 were 3,970,208 and 3,974,123,
respectively.
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<PAGE> 19
Computer Research, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments (SFAS 107), requires disclosure of
the following information about the fair value of certain financial
instruments for which it is practicable to estimate that value. These
amounts represent management's best estimates of fair value. In
accordance with SFAS 107, the Company has excluded certain financial
instruments and all other assets and liabilities from this disclosure.
The carrying value of the Company's cash and notes payable to bank
approximates fair value due to the relatively short period to maturity
of these instruments. The short-term investments, which are classified
as available-for-sale, are carried at fair value. The carrying value
of the Company's long-term debt approximates fair value based on
borrowing rates currently available to the Company for debt with
comparable maturities.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial
statements in order to conform to the 1996 financial statements
presentation.
CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments having original maturities of three months
or less, money market and other interest-bearing deposit accounts to
be cash equivalents.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company entered into capital lease obligations for the purchase of
new equipment totalling $57,692 and $85,923 during the years ended
1996 and 1995, respectively. The Company paid the following amounts
for interest and income taxes during each year.
<TABLE>
<CAPTION>
=========================
1996 1995
-------------------------
<S> <C> <C>
Interest $12,540 $12,747
Income taxes $22,500 $ 1,153
</TABLE>
19
<PAGE> 20
Computer Research, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1996 and 1995
NOTE B - INVENTORIES
Inventories at August 31, 1996 and 1995 consist of:
<TABLE>
<CAPTION>
===========================
1996 1995
---------------------------
<S> <C> <C>
Equipment held for resale $16,466 $16,156
Work in-process 9,070 41,216
Computer supplies 16,422 23,146
---------------------------
$41,958 $80,518
===========================
</TABLE>
Work in-process consists of unbilled revenues for services performed.
Computer supplies are primarily computer paper and ribbons which are
sold to customers.
NOTE C - NOTE PAYABLE TO BANK
Note payable to bank represents borrowings from a line of credit of up
to the lesser of $750,000 or a specified percentage of eligible
accounts receivable and inventory as defined in the note agreement.
The line of credit, which expires January 27, 1997, bears interest at
the prime interest rate plus 1 percent (8.25% at August 31, 1996). The
line of credit is primarily collateralized by accounts receivable,
equipment and inventory. Restrictive covenants in the note agreement,
among other things, require the Company to maintain certain financial
ratios.
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations at August 31, 1996 and 1995 consist of
obligations under capital leases for various data processing
equipment. The leases, which expire on various dates through 1998,
provide for monthly rental payments ranging from $1,055 to $2,900.
Equipment under the capital leases had a cost of $143,615 and $104,339
and accumulated amortization of $66,455 and $27,304 as of August 31,
1996 and 1995, respectively.
20
<PAGE> 21
Computer Research, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1996 and 1995
NOTE D - LONG-TERM OBLIGATIONS (CONTINUED)
Commitments for future minimum payments under these obligations are as
follows:
<TABLE>
<S> <C>
1997 $67,440
1998 12,500
-------
Net minimum lease payments 79,940
Less amount representing interest 3,190
-------
Present value of minimum lease payments 76,750
Less current portion 64,731
-------
$12,019
=======
</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. The Company entered into a
noncancelable sublease agreement for certain office space in fiscal
1995.
Rental expense charged to operations was $679,954 and $574,230 for the
years ended August 31, 1996 and 1995, respectively. As of August 31,
1996, the Company is obligated to pay, and entitled to receive, the
following minimum annual rentals on operating leases.
<TABLE>
<CAPTION>
==================================
SUBLEASE
RENTAL
YEAR ENDING AUGUST 31, AMOUNT INCOME NET
-------------------------------------------------------------
<S> <C> <C> <C>
1997 $406,730 $108,412 $298,318
1998 129,210 36,832 92,378
----------------------------------
$535,940 $145,244 $390,696
==================================
</TABLE>
21
<PAGE> 22
Computer Research, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1996 and 1995
NOTE F - EQUIPMENT UNDER OPERATING LEASES TO CUSTOMERS
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 had a
cost of $1,555,957 at August 31, 1996 and 1995. These properties were
substantially depreciated in each year.
NOTE G - STOCK OPTIONS
The Company had reserved 250,000 shares of common stock under a stock
option plan for key employees. Options under the plan could be granted
at prices not less than 100% of the fair market value on the date
granted. Stock options, which were exercisable at option prices
ranging from $.19 to $.21 per share, expired on February 22, 1996.
Stock option activity for the years ended August 31, 1996 and 1995 was
as follows:
<TABLE>
<CAPTION>
===================
1996 1995
-------------------
<S> <C> <C>
Outstanding, beginning of year 161,000 184,000
Less exercised at $.19 - $.21 per share 150,000 23,000
Less expired 11,000 --
-------------------
Outstanding, end of year -- 161,000
===================
</TABLE>
In fiscal year 1996, the Board of Directors approved a resolution to
reserve 400,000 shares of common stock for issuance to key employees,
directors and other advisors of the Company under a new stock
incentive plan. As of August 31, 1996, the new plan had not yet been
finalized and no options had been granted.
22
<PAGE> 23
Computer Research, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1996 and 1995
NOTE H - INCOME TAXES
The Company has recorded reduced provisions for income taxes for the
years ended August 31, 1996 and 1995 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>
================
1996 1995
----------------
<S> <C> <C>
Expected statutory rate 34.0% 34.0%
Permanent nondeductible expenditures 1.3 4.0
State income taxes - net of federal benefit 2.3 3.2
Utilization of federal income tax loss carryforwards (17.2) (34.4)
Other .1 (.5)
----------------
20.5% 6.3%
================
</TABLE>
At August 31, 1996, the Company has state net operating loss
carryforwards of approximately $1,030,000, of which approximately
$650,000 expires in fiscal year 1998 and the remainder expires in
fiscal year 2001. The utilization of the state net operating loss
carryforwards could be subject to limitations in the future. All
federal net operating loss carryforwards have been utilized as of
August 31, 1996.
Deferred tax assets and liabilities at August 31, 1996 and 1995
consist of the following:
<TABLE>
<CAPTION>
========================
1996 1995
------------------------
<S> <C> <C>
Temporary differences related to:
Accrued expenses and allowances $ 143,000 $ 152,000
Depreciation (3,000) (3,000)
Net operating loss carryforwards 83,000 313,000
Valuation allowance (223,000) (462,000)
------------------------
NET DEFERRED TAXES $ -- $ --
========================
</TABLE>
23
<PAGE> 24
Computer Research, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1996 and 1995
NOTE H - INCOME TAXES (CONTINUED)
The Company has established a valuation allowance at August 31, 1996
and 1995 as the result of the uncertainty as to the ultimate
recoverability of the deferred tax assets which are dependent on
future taxable income. The valuation allowance decreased $239,000 and
$209,000 for the years ended August 31, 1996 and 1995, respectively.
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, 1996 and 1995 was $210,828 and
$57,607, respectively.
NOTE J - MAJOR CUSTOMERS
The continuing operations of the Company primarily consist of
providing services and products to banks and security brokerage/dealer
sectors. Sales to one customer amounted to 19.9% and 19.2% of total
revenues during the fiscal years ended August 31, 1996 and 1995,
respectively.
On February 9, 1995, the Company and an affiliate of 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.
24
<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-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,486,924
<SECURITIES> 741,146
<RECEIVABLES> 861,421
<ALLOWANCES> 30,000
<INVENTORY> 41,958
<CURRENT-ASSETS> 3,165,860
<PP&E> 5,312,394
<DEPRECIATION> 5,019,740
<TOTAL-ASSETS> 3,458,514
<CURRENT-LIABILITIES> 1,170,644
<BONDS> 76,750
0
0
<COMMON> 3,230
<OTHER-SE> 2,268,668
<TOTAL-LIABILITY-AND-EQUITY> 3,458,514
<SALES> 95,719
<TOTAL-REVENUES> 7,461,733
<CGS> 75,144
<TOTAL-COSTS> 6,168,256
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,540
<INCOME-PRETAX> 1,293,477
<INCOME-TAX> 265,000
<INCOME-CONTINUING> 1,028,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,028,477
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
