<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, 1997
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 1997: $7,767,586
----
The aggregate market value of 2,295,853 voting shares held by
non-affiliates of the Issuer, computed by reference to $1.32 (which is the
average of the bid and ask prices of the Issuer's Common Stock on October 31,
1997, of $1.22 and $1.41 respectively) is $3,030,526.
As of October 31, 1997, 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, 1997,
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, as of December 15, 1997, will be
located at Southpointe Plaza I, a suburban office park complex in Canonsburg,
Pennsylvania, which is approximately 20 miles south of 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 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.
During the 1997 fiscal year, the Registrant completed conversion of its
service software to be operational on an IBM AS/400 computer configuration. With
the software operational on the highly utilized IBM configuration, in addition
to continuing to operate its service business, the Registrant is soliciting
financial institutions to utilize the software on their own in-house equipment
under a licensing agreement. The Registrant is also engaged, on a limited basis,
in selling communications equipment, micro- and minicomputer equipment and
software 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.
2
<PAGE> 3
In February of 1995, the Registrant entered into a joint project with
Wachovia Operational Services Corporation to convert the Registrant's entire
software product line to operate on IBM computer equipment in place of Honeywell
Bull equipment. Note J of the Registrant's Financial Statements contains
information regarding this joint project. The project, which required no major
cash outlay by the Registrant, was completed during the 1997 fiscal year.
Currently, approximately 25% of the Registrant's clients are being serviced on
the IBM configuration and the remaining clients are scheduled to be converted to
the IBM system during the first half of the 1998 fiscal year. In consideration
for providing funds for the joint project with the Registrant, Wachovia
Operational Services Corporation has secured a perpetual software license
agreement for the internal servicing of its affiliate, Wachovia Investments,
Incorporated, a client of the Registrant. The Registrant has retained sole
ownership of the converted software and will continue to offer its services on a
service bureau basis. In addition, the Registrant intends to license the
software to firms desiring to utilize the system on an in-house basis.
As part of the joint software conversion project, the Registrant's software
has been modified and currently is year 2000 compatible.
The Registrant has entered into an agreement to purchase computer
processing time from Wachovia Operational Services Corporation for some of its
processing needs. In addition, the Registrant has AS/400 computer processing
capacity at its suburban Pittsburgh facility and intends to install an
additional AS/400 configuration in its Denver facility during the 1998 fiscal
year.
Beginning in the second quarter of the Registrant's 1998 fiscal year,
Wachovia Operational Services Corporation will utilize its Software License
Agreement to offer processing services to Wachovia Investments, Incorporated. As
a result, Wachovia Investments, Incorporated will no longer utilize the
Registrant's data processing services. During the 1997 fiscal year, Wachovia
Investments, Incorporated accounted for approximately 20% of the Registrant's
data processing service revenues. The Registrant anticipates that maintenance
and certain other services provided to Wachovia Investments, Incorporated will
increase, but cannot presently estimate the revenues that will result from such
services. In addition, the Registrant is currently in discussion with several
prospective new clients and believes it can replace a substantial portion, if
not all, of the lost revenues during the 1999 fiscal year. However, because of
the relatively high fixed cost element of the Registrant's operations, to the
extent that such revenues are not replaced, which is not presently anticipated
by management, the percentage decrease in net income will significantly exceed
the percentage decrease in lost revenues. In addition, by converting to the IBM
AS/400, the Registrant will eliminate approximately $420,000 of annual
maintenance and lease 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
3
<PAGE> 4
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 non-unionized employees.
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
Canonsburg, PA Executive Offices 16,010 10/31/02
and a Suburban
Pittsburgh Data Center
Denver, CO Offices & Operations 8,566 12/31/01
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, 1997, was approximately $481,000. The rental expense to be
incurred by the Registrant for rentals during the fiscal year ending August 31,
1998, is anticipated to be approximately $494,000. With the conversion of the
software to operate on the compact IBM AS/400 configuration, the Registrant did
not require the large environmentally controlled data center utilized by the
Honeywell Bull equipment at its Pittsburgh location. Rather than redesign its
configuration to eliminate the data center, the Registrant chose to relocate its
Pittsburgh facility to Southpointe Plaza I in Canonsburg,
4
<PAGE> 5
Pennsylvania. The lease on the office space and data center located in
Coraopolis, Pennsylvania, will be terminated as of December 31, 1997.
The Registrant owns and operates two Honeywell Bull DPS7000 computer
mainframe systems located at its Denver data center which are planned to be
eliminated during the second half of the 1998 fiscal year. These computer
systems were fully depreciated in previous years. It is leasing an additional
DPS7000 computer system, which will be eliminated upon termination of the lease
at the end of January 1998. The Registrant has an IBM AS/400 located at its
Pittsburgh data center on a lease that expires in April of 2001.
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 is
quoted on the NASD Bulletin Board Trading System under the NASDAQ symbol CRIX.
As of October 31, 1997, there were approximately 940 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, 1997 High Low
---- ---
<S> <C> <C>
First quarter 1 5/8 1 1/8
Second quarter 2 1/8 1 7/16
Third quarter 1 3/4 1
Fourth quarter 1 5/8 1 3/16
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
Bid Prices
--------------------
Ended August 31, 1996 High Low
----- ---
<S> <C> <C>
First quarter 3/16 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>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
I. "SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Statements regarding the Registrant's expectations as to its future
operations and financial condition and certain other information presented in
this report constitute forward- looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Since these statements involve
risks and uncertainties and are subject to change at anytime, the Registrant's
actual results could differ materially from expected results. The Registrant's
forward looking statements are based upon operating budgets and many detailed
assumptions. While the Registrant believes that its assumptions are reasonable,
it cautions that there are inherent difficulties in predicting certain important
factors which could directly affect the business. Some factors, which could
cause actual results to differ from expectations, include a general downturn in
the economy or the stock markets and related transaction activity, gain or loss
of significant clients, unforeseen new competition, changes in government policy
or regulation, or costs and other effects related to unanticipated legal
proceedings.
II. 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 for which Registrant services would not
be required. 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. The Registrant is also planning to pursue
the direct licensing of its software to clients in fiscal year 1998 as described
elsewhere herein.
6
<PAGE> 7
REVENUES:
The total revenues for the year ended August 31, 1997, were $7,767,586
which is an approximate 5% increase over the 1996 fiscal year. Additional
service revenues were the primary reason for this increase.
The total revenues for the 1996 fiscal year increased by approximately
20% over the previous year. This was primarily attributed to an increased
number of transactions processed for the clients of the data processing
services offered by the Registrant.
In March of 1996, the Registrant and Wachovia Operational Services
Corporation, an affiliate of a major client that accounts for more than 20% of
the service revenues of the Registrant, entered into a joint agreement to
provide funds to convert the Registrant's production software from its
existing hardware platform to operate on an IBM AS/400 configuration. The
converted software became operational on the IBM equipment at the end of the
1997 fiscal year. In consideration for its participation in the conversion
project, Wachovia Operational Services Corporation obtained a perpetual
operating license which will utilize on an "in-house" basis beginning in
fiscal year 1998 which will result in the loss of the revenues from the major
client. The project required no major cash outlay by the Registrant.
Management of the Registrant believes that the conversion of the existing
software to the IBM AS/400 configuration should enhance the ability to secure
additional software license revenues. Management also believes that while the
revenues for the 1998 year will be adversely affected by the loss of the major
client, the ability to generate software license revenues and continued growth
in recurring revenues from existing clients and potential new clients should
serve to offset the revenue decrease during the 1999 fiscal year. However,
because of the relatively high fixed cost element of the Registrant's
operations, to the extent that such revenues are not replaced, which is not
presently anticipated by management, the percentage decrease in net income
will significantly exceed the percentage decrease in lost revenues.
COSTS AND EXPENSES:
The total costs and expenses for the year ended August 31, 1997,
increased approximately 5% over the previous year. This is primarily
attributable to increased equipment costs, travel and living costs associated
with transferring some existing clients to the ongoing Registrant product line
(Instant System) from a processing system (BID/BOA System) which will be
terminated in the first quarter of the 1998 fiscal year as well as an increase
in payroll costs due to staffing requirements in support of modifying the
Registrant's software to accurately process transactions beginning with the
year 2000.
The total costs and expenses for the 1996 fiscal year increased
approximately 6% over the previous year.
7
<PAGE> 8
NET INCOME:
The net income for the year ended August 31, 1997, was $916,670 or $.23 per
share as compared to $1,028,477 or $.26 per share for the previous year. While
pre-tax income for the current year was approximately $80,000 above the previous
year, net income for fiscal year 1997 decreased due to the fact that the
Registrant has utilized all of its federal net operating losses in fiscal 1996.
III. LIQUIDITY AND CAPITAL RESOURCES
The Registrant had approximately $2.7 million in cash, cash equivalents and
short-term investments at the end of the 1997 fiscal year. In addition, a
$750,000 unused line of credit is available. This, along with funds generated by
operations, should adequately support the operating needs of the Registrant in
the near term.
During the third quarter of the 1997 fiscal year, the Registrant entered
into a lease for approximately $160,000 of computer equipment which will expire
in April of 2001. In addition, the Registrant plans to enter into a lease for
additional computer equipment during the second half of the 1998 fiscal year.
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.
8
<PAGE> 9
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 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.
(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.
9
<PAGE> 10
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 24, 1997
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 24, 1997
By: /s/ David J. Vagnoni
---------------------------------
David J. Vagnoni, Director
Executive Vice President
Date: November 24, 1997
By: /s/ Kenneth C. Ebbitt
---------------------------------
Kenneth C. Ebbitt, Director
Date: November 24, 1997
By: /s/ David K. Klotz
---------------------------------
David K. Klotz, Director
Date: November 24, 1997
10
<PAGE> 11
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(Item 13(a))
Report of Independent Public Accountants -- Pages 12 and 13
Balance Sheets -- Pages 14 and 15
August 31, 1997 and 1996
Statements of Earnings -- Page 16
Years Ended August 31, 1997 and 1996
Statements of Changes in Stockholders' Equity -- Page 17
Years Ended August 31, 1997 and 1996
Statements of Cash Flows -- Page 18
Years Ended August 31, 1997 and 1996
Notes to Financial Statements -- Pages 19 to 27
11
<PAGE> 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
COMPUTER RESEARCH, INC.:
We have audited the accompanying balance sheet of Computer Research, Inc. as of
August 31, 1997, and the related statements of earnings, changes in
stockholders' equity, and cash flows for the year 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 audit. The financial statements of Computer Research, Inc. as of August 31,
1996, were audited by other auditors whose report dated October 16, 1996,
expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides 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, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
October 22, 1997
12
<PAGE> 13
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS
COMPUTER RESEARCH, INC.
We have audited the accompanying balance sheet of Computer Research, Inc. as of
August 31, 1996, and the related statements of earnings, changes in
stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Cleveland, Ohio
October 16, 1996
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<PAGE> 14
COMPUTER RESEARCH, INC.
BALANCE SHEETS
August 31,
<TABLE>
<CAPTION>
ASSETS:
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 336,259 $1,486,924
Short-term investments (note A) 2,378,249 741,146
Accounts receivable - trade (net of allowance for
doubtful accounts of $30,000 in each year) 856,223 831,421
Inventories (notes A and B) 40,770 41,958
Prepaid expenses 66,713 64,411
---------- ----------
Total current assets 3,678,214 3,165,860
---------- ----------
PROPERTY AND EQUIPMENT - AT COST
(NOTES A, D AND F)
Data processing equipment 4,439,883 4,355,558
Data processing equipment under capital leases 319,163 143,615
Leasehold improvements 271,610 271,610
Office equipment 577,004 541,611
---------- ----------
5,607,660 5,312,394
Less accumulated depreciation and amortization 5,182,993 5,019,740
---------- ----------
424,667 292,654
---------- ----------
$4,102,881 $3,458,514
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 15
COMPUTER RESEARCH, INC.
BALANCE SHEETS - CONTINUED
August 31,
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY:
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term obligations (note D) $ 12,017 $ 64,731
Accounts payable 84,216 128,232
Customer deposits 96,800 88,450
Accrued liabilities
Compensation and payroll taxes 237,068 232,112
Vacation 328,613 301,614
Rent 4,888 63,642
Lease obligations 37,765 13,952
Income taxes -- 272,000
Other 115 5,911
---------- ----------
Total current liabilities 801,482 1,170,644
LONG-TERM OBLIGATIONS (NOTE D) 108,882 12,019
ACCRUED LEASE OBLIGATIONS 3,949 3,953
---------- ----------
Total liabilities 914,313 1,186,616
---------- ----------
COMMITMENTS (NOTE E) -- --
STOCKHOLDERS' EQUITY (NOTE G)
Common stock - no par value; $.0008 stated value;
10,000,000 shares authorized; 4,037,255 shares
issued and outstanding in 1997 and 1996 3,230 3,230
Additional paid-in capital 744,342 744,342
Retained earnings 2,440,996 1,524,326
---------- ----------
3,188,568 2,271,898
---------- ----------
Total stockholders' equity $4,102,881 $3,458,514
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
15
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COMPUTER RESEARCH, INC.
STATEMENTS OF EARNINGS
For the years ended August 31,
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES (note J)
Sales of services $7,500,753 $7,150,358
Sales of equipment and supplies 103,729 95,719
Operating lease income (note F) 17,100 31,275
Other income 146,004 108,006
---------- ----------
7,767,586 7,385,358
---------- ----------
COSTS AND EXPENSES
Cost of services 4,334,998 4,050,323
Cost of equipment and supplies sold 75,211 75,144
Selling and administrative expenses 1,806,234 1,813,744
Depreciation and amortization 164,024 140,130
Interest expense 12,449 12,540
---------- ----------
6,392,916 6,091,881
---------- ----------
Earnings before income taxes 1,374,670 1,293,477
PROVISION FOR INCOME TAXES 458,000 265,000
(NOTES A AND H) ---------- ----------
NET EARNINGS $ 916,670 $1,028,477
========== ==========
Earnings per common share $ 0.23 $ 0.26
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 17
COMPUTER RESEARCH, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended August 31, 1997 and 1996
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
----- ------- -------- -----
<S> <C> <C> <C> <C>
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
Net earnings -- -- 916,670 916,670
----------- ----------- ----------- -----------
Balance at August 31, 1997 $ 3,230 $ 744,342 $ 2,440,996 $ 3,188,568
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
17
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COMPUTER RESEARCH, INC.
STATEMENTS OF CASH FLOWS
For the year ended August 31,
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net earnings $ 916,670 $ 1,028,477
----------- -----------
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 164,024 140,130
Loss on sale of fixed assets (500) --
Change in assets and liabilities
Accounts receivable (24,802) (55,322)
Refundable income taxes (9,829) --
Inventories 1,188 38,560
Prepaid expenses 7,526 11,500
Other assets -- 1,341
Accounts payable, accrued liabilities and other
current liabilities (362,565) 102,105
Customer deposits 8,350 18,100
Accrued lease obligations -- (20,208)
Income taxes -- 244,500
----------- -----------
(216,608) 480,706
----------- -----------
Net cash provided by operating activities 700,062 1,509,183
----------- -----------
Cash flows from investing activities
Proceeds from the sale of fixed assets 500 --
Purchases of short-term investments (1,637,103) (741,146)
Additions to property and equipment (120,490) (95,562)
----------- -----------
Net cash used in investing activities (1,757,093) (836,708)
----------- -----------
Cash flows from financing activities
Issuance of common stock -- 29,260
Common stock redeemed -- (640)
Payments on long-term obligations (93,634) (62,679)
Net payments on line of credit -- (25,000)
----------- -----------
Net cash used in financing activities (93,634) (59,059)
----------- -----------
NET (DECREASE) INCREASE IN CASH (1,150,665) 613,416
Cash and cash equivalents at beginning of year 1,486,924 873,508
----------- -----------
Cash and cash equivalents at end of year $ 336,259 $ 1,486,924
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 19
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
August 31, 1997 and 1996
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, 1997. The estimated market value of such investments
held at August 31, 1997, approximated the carrying value. All investments
in debt securities held by the Company at August 31, 1997, have an original
maturity date of twelve 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>
<CAPTION>
<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.
19
<PAGE> 20
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1997 and 1996
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, 1997 and 1996 were
4,037,255 and 3,970,208, respectively.
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
20
<PAGE> 21
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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.
RECLASSIFICATION
Certain reclassifications have been made to the 1996 financial statements in
order to conform to the 1997 financial statements presentation.
CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments having maturities of three months or less, money
market and other interest-bearing deposit accounts to be cash equivalents
when purchased.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company entered into capital lease obligations for the purchase of new
equipment totaling $161,714 and $57,692 during the years ended 1996 and
1995, respectively. The Company paid the following amounts for interest and
income taxes during each year.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest $ 12,450 $12,540
Income taxes $720,570 $22,500
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
128, "Earnings per Share" (SFAS 128) and Statement 129, "Disclosure of
Information about
21
<PAGE> 22
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Capital Structures". In June 1997, the Financial Accounting Standards Board
issued Statement 130, "Reporting Comprehensive Income" (SFAS 130) and
Statement 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS 131). These statements are effective for periods ending
after December 15, 1997. The Company currently believes that the effect of
adopting SFAS 128 will not have a material impact on its earnings per share
and the effect of adopting SFAS 129, SFAS 130 and SFAS 131, will not have a
significant impact on its disclosures.
NOTE B - INVENTORIES
Inventories at August 31, 1997 and 1996 consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Equipment held for resale $29,043 $16,466
Work in-process -- 9,070
Computer supplies 11,727 16,422
------- -------
$40,770 $41,958
======= =======
</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 29, 1998, bears interest at the prime interest
rate plus 1 percent (or 9.5% at August 31, 1997). 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. The Company borrowed and
subsequently repaid $210,000 from the line of credit during 1997. No
borrowings under the line of credit were outstanding at August 31, 1997 and
1996.
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations at August 31, 1997 and 1996 consist of obligations
under capital leases for various data processing equipment. The leases,
which expire on various dates through 2001, provide for monthly rental
payments ranging from $1,055 to $3,805. Equipment under the capital leases
had a cost of $161,718 and $143,615 and
22
<PAGE> 23
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1997 and 1996
NOTE D - LONG-TERM OBLIGATIONS (CONTINUED)
accumulated amortization of $13,477 and $66,455 as of August 31, 1997 and
1996, respectively.
Commitments for future minimum payments under these obligations are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 45,660
1999 45,660
2000 45,660
2001 26,635
--------
Net minimum lease payments 163,615
Less amount representing interest 16,968
--------
Present value of minimum lease payments 146,647
Less current portion 37,765
--------
$108,882
========
</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 noncancellable
sublease agreement for certain office space in fiscal 1995.
Rental expense charged to operations was $682,485 and $603,579 for the years
ended August 31, 1997 and 1996, respectively. As of August 31, 1997, the
Company is obligated to pay, and entitled to receive, the following minimum
annual rentals on operating leases.
<TABLE>
<CAPTION>
SUBLEASE
YEAR ENDING RENTAL
AUGUST 31, AMOUNT INCOME NET
<S> <C> <C> <C>
1998 $ 541,322 $ 36,832 $ 504,490
1999 448,386 -- 448,386
2000 465,266 -- 465,266
2001 465,266 -- 465,266
Thereafter 398,574 -- 398,574
---------- ---------- ----------
$2,318,814 $ 36,832 $2,281,982
========== ========== ==========
</TABLE>
23
<PAGE> 24
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1997 and 1996
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, 1997 and 1996. 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, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Outstanding, beginning of year -- 161,000
Less exercised at $.19 - $.21 per share -- 150,000
Less expired -- 11,000
------ -------
Outstanding, end of year -- --
====== =======
</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, 1997, the new plan had not yet been finalized and no options had been
granted.
The Financial Accounting Standards Board issued Statement 123, "Accounting
for Stock-Based Compensation" (SFAS 123), in October 1995. This statement
established a "fair value based method" of financial accounting and related
reporting standards for stock-based employee compensation plans. SFAS 123
became effective for the year ended August 31, 1997. As the Company has no
options outstanding at
24
<PAGE> 25
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1997 and 1996
NOTE G - STOCK OPTIONS (CONTINUED)
August 31,1997, this statement has no impact on the Company.
NOTE H - INCOME TAXES
The Company has recorded reduced provisions for income taxes for years prior
to August 31, 1997, 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>
1997 1996
---- ----
<S> <C> <C>
Expected statutory rate 34.0% 34.0%
Permanent nondeductible expenditures 3.7 1.3
State income taxes - net of federal benefit -- 2.3
Utilization of net operating loss carryforwards -- (17.2)
Change in valuation allowance (3.2) --
Other (1.2) .1
---- ----
33.3% 20.5%
==== ====
</TABLE>
At August 31, 1997, the Company has state net operating loss carryforwards
of approximately $468,000, of which approximately $309,000 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, 1997 and 1996 consist of
the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Temporary differences related to:
Accrued expenses and allowances $ 145,000 $ 143,000
Depreciation (3,000) (3,000)
Net operating loss carryforwards 37,000 83,000
Valuation allowance (179,000) (223,000)
--------- ---------
NET DEFERRED TAXES $ -- $ --
========= =========
</TABLE>
25
<PAGE> 26
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1997 and 1996
NOTE H - INCOME TAXES (CONTINUED)
The Company has established a valuation allowance at August 31, 1997 and
1996 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 $44,000 and $239,000 for the years ended
August 31, 1997 and 1996, 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, 1997 and 1996 was $224,940 and $210,828,
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 24.4% and 19.9% of total revenues during the
fiscal years ended August 31, 1997 and 1996, respectively.
In February of 1995, the Company entered into a joint project with Wachovia
Operational Services Corporation to convert the Company's entire software
product line to operate on IBM computer equipment in place of Honeywell Bull
equipment. The project, which required no major cash outlay by the Company,
was completed during the 1997 fiscal year. Currently, approximately 25% of
the Company's clients are being serviced on the IBM configuration and the
remaining clients are scheduled to be converted to the IBM system during the
first half of the 1998 fiscal year. In consideration for providing funds for
the joint project with the Company, Wachovia Operational Services
Corporation has secured a perpetual software license agreement for the
internal servicing of its affiliate, Wachovia Investments, Incorporated, a
client of the Company. The Company has retained sole ownership of the
converted software and will continue to offer its services on a service
bureau basis.
Beginning in the second quarter of the Company's 1998 fiscal year, Wachovia
Operational Services Corporation will utilize its Software License Agreement
to offer processing services to Wachovia Investments, Incorporated. As a
result, Wachovia
26
<PAGE> 27
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
August 31, 1997 and 1996
NOTE J - MAJOR CUSTOMERS (CONTINUED)
Investments, Incorporated will no longer utilize the Company's data
processing services. During the 1997 fiscal year, Wachovia Investments,
Incorporated accounted for approximately 20% of the Company's data
processing service revenues. The Company anticipates that maintenance and
certain other services provided to Wachovia Investments, Incorporated will
increase, but cannot presently estimate the revenues that will result from
such services. In addition, the Company is currently in discussion with
several prospective new clients and believes it can replace a substantial
portion, if not all, of the lost revenues during the 1999 fiscal year.
However, because of the relatively high fixed cost element of the Company's
operations, to the extent that such revenues are not replaced, which is not
presently anticipated by management, the percentage decrease in net income
will significantly exceed the percentage decrease in lost revenues. In
addition, by converting to the IBM AS/400, the Company will eliminate
approximately $420,000 of annual maintenance and lease expenses associated
with the outgoing Honeywell Bull computer equipment.
27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 336,259
<SECURITIES> 2,378,249
<RECEIVABLES> 886,223
<ALLOWANCES> 30,000
<INVENTORY> 40,770
<CURRENT-ASSETS> 3,678,214
<PP&E> 5,607,660
<DEPRECIATION> 5,182,993
<TOTAL-ASSETS> 4,102,881
<CURRENT-LIABILITIES> 801,482
<BONDS> 120,899
0
0
<COMMON> 3,230
<OTHER-SE> 3,185,338
<TOTAL-LIABILITY-AND-EQUITY> 4,102,881
<SALES> 103,729
<TOTAL-REVENUES> 7,767,586
<CGS> 75,211
<TOTAL-COSTS> 6,392,916
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,499
<INCOME-PRETAX> 1,374,670
<INCOME-TAX> 458,000
<INCOME-CONTINUING> 916,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 916,670
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
