<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, 1998
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)
Southpointe Plaza I, Suite 300, 400 Southpointe Boulevard, Canonsburg, PA 15317
-------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: (724) 745-0600
--------------
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 1998: $6,778,518
----
The aggregate market value of 2,314,553 voting shares held by
non-affiliates of the Issuer, computed by reference to $1.03 (which is the
average of the bid and ask prices of the Issuer's Common Stock on October 31,
1998, of $1.05 and $1.00 respectively) is $2,383,990.
As of October 31, 1998, 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,
1998, is incorporated by reference into Part III of this Form
10-KSB.
<PAGE> 2
PART I
ITEM 1. BUSINESS
CORPORATE STRUCTURE
Computer Research, Inc. (Registrant), a Pennsylvania
corporation organized in July 1969, is a data processing service company
providing computerized accounting services to securities firms, banks and other
financial institutions. The principal office and data center for the Registrant
is 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, operations and client service personnel at Denver
Place, 999 18th Street, Denver, Colorado. A service and sales support office is
located in the Wall Street area of New York City.
SERVICES OFFERED
The principal data processing service offered by the
Registrant is an IBM AS/400 computerized "Accounting and Recordkeeping System"
that is utilized by stock and bond brokerage firms, as well as brokerage
subsidiaries and capital markets divisions of banks. A fully integrated
subsystem of software modules operated on the IBM AS/400 computer equipment
offers a comprehensive 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 daily business transaction data supplied
by the client. Presently, this service is being utilized by approximately 45
financial institutions throughout the country.
RESELLER AGREEMENTS
The Registrant offers its clients two products that it has
obtained through reseller agreements.
One of the reseller products is a computerized order
management system that is used to electronically route buy/sell orders for
financial institutions to a pre-designated execution point. Upon completion of
the order execution, the system routes the details of the executed order to the
computerized recordkeeping system, as well as directing notification of the
order execution results to the financial institution that initiated the order.
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Another reseller product is a computerized data and document
imaging system which electronically facilitates the storage and retrieval of
data records and documents. The system catalogs and manages the storage of this
information on optical disk files and provides automated retrieval for
displaying or printing the stored information.
COMPETITION
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 offer recordkeeping
services to such clearing firms on a correspondent basis, as well as to banks
that offer safekeeping services to other banks.
JOINT VENTURE
During the 1995 fiscal year, the Registrant had entered into a
jointly supported project with Wachovia Operational Services Corporation (WOSC)
for converting its software from operating on a non-year 2000 compliant
Honeywell Bull computer mainframe configuration to the IBM AS/400. A major
portion of the conversion project included modifying the Registrant's service
software to include a four digit year in support of being prepared for
processing beginning in the year 2000 (see YEAR 2000). The project, which
required no major cash outlay by the Registrant, was completed during the 1997
fiscal year. In consideration for participating in and providing funds for the
joint conversion project, WOSC secured a perpetual software license agreement
for the internal servicing of its affiliate, Wachovia Investments, Incorporated
(WII), a previous full service client of the Registrant. The Registrant has
retained the sole ownership of the converted software and will continue to offer
its services on a service bureau or in-house basis.
During the 1997 fiscal year, the Registrant began converting
its clients from the Honeywell Bull configuration to the IBM AS/400 platform. At
the close of the 1998 fiscal year, approximately 75% of the Registrant's clients
were being serviced on the IBM configuration and the remaining clients are
scheduled to be converted during the first half of the 1999 fiscal year.
Beginning in the second quarter of the Registrant's 1998
fiscal year, WOSC utilized its Software License Agreement to offer processing
services to WII, a previous full service client of the Registrant. As a result,
WII no longer utilizes the Registrant's system on a service bureau basis.
However, other data processing support services, as well as systems and
programming, are continuing to be supplied by the Registrant to WII. The net
revenue loss for the 1998 fiscal year, as a result of this transaction, amounted
to approximately $1,000,000. The Registrant is currently involved in adding two
new accounts to its data processing services and believes it can obtain
additional new business to replace the lost revenues on a monthly basis prior to
the end of the 1999 fiscal year.
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DATA PROCESSING FACILITIES
The Registrant has IBM AS/400 computer equipment located at
its Pittsburgh, Pennsylvania, and Denver, Colorado, data centers in support of
its service business. In addition, the Registrant has entered into a service
agreement with Wachovia Operational Services Corporation (WOSC) for purchasing
computer processing time on an IBM AS/400 computer located in Winston-Salem,
North Carolina.
EMPLOYEES
The Registrant presently employs approximately 50
non-unionized employees. The majority of the Registrant's employees are located
at the corporate headquarters in Pittsburgh, Pennsylvania, and at its Denver,
Colorado, data center. In general, Registrant's relations with its employees
have been satisfactory.
YEAR 2000
In an effort to efficiently utilize computer storage
facilities, many existing computer software systems currently in operation were
developed to identify a year by utilizing two digits (for example, "98" is used
to represent "1998"). Such programs would read "00" as the year "1900" and thus,
may not accurately recognize dates beginning with the year 2000 (Y2K) or may
otherwise produce erroneous results after the turn of the century. Such failures
could cause disruptions in normal business operations, as well as problems in
maintaining computerized financial and accounting records.
In all areas of the Registrant's operation, a primary focus
has been, and continues to be, in attempting to assure that mission critical
systems are or will become Y2K compliant. In support of being prepared to
process accurately after the Y2K, the Registrant's software was modified to
contain a four digit year. This modification was performed and funded as part of
the joint venture project with Wachovia Operational Services Corporation for
converting the software to operate on an IBM AS/400. As a result, the Registrant
incurred no substantial costs for this software modification. Additionally, the
Registrant is replacing non-Y2K compliant computer mainframe equipment with the
IBM AS/400.
Currently, the modified software containing a four digit year
is operational on the IBM AS/400 and is being internally tested off-line with
transactions dated after the year 2000. This internal testing will continue into
the 1999 calendar year.
In providing its services to its clients, the Registrant's
computer software is interfaced with over 100 other organizations that provide
computer services to the financial industry. Many of those organizations have
not modified their software from two digits to a four digit platform. As a
result, when receiving data transmission from these organizations, situations
exist which require the Registrant to programmatically apply the appropriate two
digit century designation to the transaction (windowing) when it is entered
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into the Registrant's computer system. In support of verifying the validity of
this windowing technique, as well as verifying the accuracy of the Registrant's
software for processing after Y2K, the Registrant will participate in financial
industry system testing mandated by the National Securities Clearing Corp. This
mandated testing project is scheduled for early calendar year 1999. The
Registrant does not expect this industry mandated system testing to
significantly effect its operating costs during the 1999 fiscal year.
The Registrant is dependent upon vendors that have supplied
computer software and equipment that may be subject to the Y2K issue. Also, it
is dependent upon public utilities, as well as communications suppliers, that
may be subject to the Y2K issue. The Registrant has received written responses
from these suppliers indicating that they have addressed the Y2K issue and do
not anticipate major disruptions in the next century.
At this time, the Registrant does not have reason to believe
there will be any significant interruption in its operation caused by the Y2K
issue. However, there is no guarantee that Y2K problems will not exist with the
Registrant's software or with any of the vendors or suppliers that it utilizes.
As a result, the Registrant will employ contingency plans which require
management, staff members and other resources to be available to react promptly
should a problem occur. The Registrant believes that with contingent plans and
facilities that are in place, any disruption for Y2K problems will be of a
minimum nature. Management of the Registrant will continue to monitor the
possibility that Y2K problems could arise and will develop timely solutions
should a problem occur in this regard.
Failure of the Registrant's software or third party vendors to
correctly address Y2K issues could cause business disruptions for the Registrant
and its clients. It is not possible to predict with certainty all of the adverse
effects that may result from a Y2K failure, in the unlikely event that one
should occur, or whether such effects could have a material impact on
Registrant.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
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.
5
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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 and 25,024 Expired 12/31/97
Pittsburgh Data Center
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 8/31/03
</TABLE>
The Registrant's aggregate rental expense for the above
properties for the year ended August 31, 1998, was approximately $504,000. The
rental expense to be incurred by the Registrant for rentals during the fiscal
year ending August 31, 1999, is anticipated to be approximately $479,000. 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, as of
December 15, 1997, to Southpointe Plaza I in Canonsburg, Pennsylvania. The lease
on the office space and data center located in Coraopolis, Pennsylvania, was
terminated as of December 31, 1997.
During the second quarter of the 1998 fiscal year, the
Registrant terminated the use of two Honeywell Bull DPS7000 computer mainframe
systems located at its Pittsburgh data center. Currently, the Registrant
maintains two Honeywell Bull DPS7000 computer mainframe systems at its Denver
data center. The Honeywell Bull computer systems were fully depreciated in
previous years. With the completion of the conversion of its data processing
service business to the IBM AS/400, the Registrant will be eliminating the use
of the two Denver Honeywell Bull DPS7000 computer mainframe systems during the
second quarter of the 1999 fiscal year. The Registrant has an IBM AS/400 located
at its Pittsburgh data center on a lease that expires in April of 2001 and an
IBM AS/400 located at its Denver data center on a lease that expires in April of
2000.
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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 Registrant's Common Stock is traded in the Over-the-Counter market
and is quoted on the NASDAQ Bulletin Board Trading System under the symbol CRIX.
As of October 31, 1998, there were approximately 900 shareholders.
The following tables set forth the range of high and low closing bid
prices of the Registrant's Common Stock for the periods indicated and were
derived from the NASDAQ Over-the-Counter Bulletin Board. All prices represent
inter-dealer quotations, without retail mark-up, mark-down or commission, and
may not represent actual transactions.
Bid Prices
---------------------------------
Ended August 31, 1998
High Low
---- ---
First quarter 1-1/2 1
Second quarter 1-1/2 1-1/8
Third quarter 1-7/16 1-1/8
Fourth quarter 1-11/16 1-3/16
Bid Prices
---------------------------------
Ended August 31, 1997
High Low
---- ---
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
7
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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 or may choose to convert their business from the
currently utilized self-clearing approach to a fully disclosed basis under which
their recordkeeping needs would be supplied by a clearing agent, after which the
Registrant's services may 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 new clients that have
been obtained, as well as current potential clients, are interested in utilizing
the Registrant's system on a service basis as opposed to installing in-house
software license agreements. The Registrant intends to continue soliciting new
business on a service basis, as well as an in-house license agreement basis.
REVENUES:
The total revenues for the year ended August 31, 1998, were $6,778,518
or an approximate 13% decrease over the 1997 fiscal year. As set forth below,
the loss of revenues of a full service major customer during the second quarter
of the 1998 fiscal year, which was anticipated, was the primary reason for this
decrease.
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<PAGE> 9
In March of 1996, the Registrant and Wachovia Operational Services
Corporation (WOSC), an affiliate of a major client that in the 1997 fiscal year
accounted 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
during the 1997 fiscal year. In consideration for its participation in the
conversion project, WOSC obtained a perpetual operating license agreement which
it utilized beginning in the second quarter of the 1998 fiscal year to service
Wachovia Investments, Incorporated, a previous full service major customer of
the Registrant. The net revenue loss for 1998, as a result of this transaction,
amounted to approximately $1,000,000.
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.
COSTS AND EXPENSES:
The total costs and expenses for the year ended August 31, 1998, were
$6,370,696, which is approximately equal to the previous year. While selling and
administrative expenses increased approximately $400,000 for the year in support
of soliciting new business, this increase was off-set by a reduction in cost of
services primarily attributable to the conversion to the IBM AS/400.
The total costs and expenses for the year ended August 31, 1997,
increased approximately 5% over the previous year.
CHANGE IN INCOME TAX RATE:
The Registrant's effective tax rate has increased for the year ended
August 31, 1998, primarily due to an increase in state taxes as a percent of net
income. This increase resulted as certain state net operating loss carryforwards
had been depleted during the year ended August 31, 1997.
NET INCOME:
The net income for the year ended August 31, 1998, was $261,822 or $.06
per share as compared to $916,670 or $.23 per share for the previous year. This
was primarily due to the decrease in revenues for the 1998 fiscal year.
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 1998 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.
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During the third quarter of the 1997 fiscal year, the Registrant
entered into a lease for approximately $292,000 of computer equipment located at
its Pittsburgh data center which will expire in April of 2001. In addition,
during the 1998 fiscal year, the Registrant entered into a lease for
approximately $215,000 of computer equipment located at its Denver data center
which will expire in April of 2000.
IV. RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note A in the Financial Statements of the Registrant which are
attached hereto and included herein for a list of recent accounting
pronouncements and their expected impact.
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.
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.
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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 13.
(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.
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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, 1998
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, 1998
By: /s/ David J. Vagnoni
---------------------------
David J. Vagnoni, Director
Executive Vice President
Date: November 24, 1998
By: /s/ Kenneth C. Ebbitt
---------------------------
Kenneth C. Ebbitt, Director
Date: November 24, 1998
By: /s/ David K. Klotz
---------------------------
David K. Klotz, Director
Date: November 24, 1998
12
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INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(Item 13(a))
Report of Independent Public Accountants -- Page 14
Balance Sheets -- Pages 15 and 16
August 31, 1998 and 1997
Statements of Earnings -- Page 17
Years Ended August 31, 1998 and 1997
Statements of Changes in Stockholders' Equity -- Page 18
Years Ended August 31, 1998 and 1997
Statements of Cash Flows -- Page 19
Years Ended August 31, 1998 and 1997
Notes to Financial Statements -- Pages 20 to 28
13
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ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Computer Research, Inc.:
We have audited the accompanying balance sheets of Computer Research, Inc. as of
August 31, 1998 and 1997, 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, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
October 23, 1998
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COMPUTER RESEARCH, INC.
BALANCE SHEETS
AUGUST 31,
<TABLE>
<CAPTION>
ASSETS:
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 766,823 $ 336,259
Short-term investments 1,996,700 2,378,249
Accounts receivable, net of allowance of $30,000 721,239 856,223
Inventories 43,891 40,770
Prepaid expenses 79,955 66,713
----------- -----------
Total current assets 3,608,608 3,678,214
----------- -----------
PROPERTY AND EQUIPMENT - AT COST
Data processing equipment 1,672,213 4,539,636
Data processing equipment under capital leases 256,471 219,410
Leasehold improvements 154,551 271,610
Office equipment 535,887 577,004
----------- -----------
2,619,122 5,607,660
Less accumulated depreciation and amortization (2,064,718) (5,182,993)
----------- -----------
554,404 424,667
----------- -----------
OTHER LONG-TERM ASSETS 39,905 --
----------- -----------
$ 4,202,917 $ 4,102,881
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
15
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COMPUTER RESEARCH, INC.
BALANCE SHEETS
AUGUST 31,
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY:
1998 1997
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term obligations $ 37,765 $ 49,782
Accounts payable 149,382 84,216
Customer deposits 97,650 96,800
Accrued liabilities
Compensation and payroll taxes 76,281 237,068
Vacation 281,058 328,613
Income taxes 13,000 --
Other 330 5,003
---------- ----------
Total current liabilities 655,466 801,482
---------- ----------
LONG-TERM OBLIGATIONS 97,061 112,831
---------- ----------
Total liabilities 752,527 914,313
---------- ----------
STOCKHOLDERS' EQUITY
Common stock - no par value; $.0008 stated
value; 10,000,000 shares authorized; 4,037,255
shares issued and outstanding 3,230 3,230
Additional paid-in capital 744,342 744,342
Retained earnings 2,702,818 2,440,996
---------- ----------
3,450,390 3,188,568
---------- ----------
Total stockholders' equity $4,202,917 $4,102,881
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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COMPUTER RESEARCH, INC.
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUES
Sales of services $6,424,501 $7,500,753
Sales of equipment and supplies 188,837 103,729
Other income 165,180 163,104
---------- ----------
6,778,518 7,767,586
---------- ----------
COSTS AND EXPENSES
Cost of services 3,839,980 4,334,998
Cost of equipment and supplies sold 148,790 75,211
Selling and administrative expenses 2,211,543 1,806,234
Depreciation and amortization 156,855 164,024
Interest expense 13,528 12,449
6,370,696 6,392,916
---------- ----------
Earnings before income taxes 407,822 1,374,670
PROVISION FOR INCOME TAXES 146,000 458,000
---------- ----------
NET EARNINGS $ 261,822 $ 916,670
========== ==========
Earnings per common share (Basic and diluted) $ 0.06 $ 0.23
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 18
COMPUTER RESEARCH, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ -------- ---------- ----------
<S> <C> <C> <C> <C>
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
Net earnings -- -- 261,822 261,822
------ -------- ---------- ----------
Balance at August 31, 1998 $3,230 $744,342 $2,702,818 $3,450,390
====== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 19
COMPUTER RESEARCH, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1998 1997
--------- -----------
<S> <C> <C>
Net earnings $ 261,822 $ 916,670
--------- -----------
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization 156,855 164,024
Gain on sale of fixed assets (647) (500)
Change in assets and liabilities
Accounts receivable 134,984 (24,802)
Refundable income taxes (6,801) (9,829)
Inventories (3,121) 1,188
Prepaid expenses (6,441) 7,526
Other assets (39,905) --
Accounts payable, accrued liabilities and other current
liabilities (134,849) (362,565)
Customer deposits 850 8,350
--------- -----------
100,925 (216,608)
--------- -----------
Net cash provided by operating activities 362,747 700,062
--------- -----------
Cash flows from investing activities
Proceeds from the sale of fixed assets 647 500
Sales (purchases) of short-term investments, net 381,548 (1,637,103)
Additions to property and equipment (286,591) (120,490)
--------- -----------
Net cash provided by (used in) investing activities 95,604 (1,757,093)
--------- -----------
Cash flows from financing activities
Payments on long-term obligations (27,787) (93,634)
--------- -----------
Net cash used in financing activities (27,787) (93,634)
--------- -----------
NET INCREASE (DECREASE) IN CASH 430,564 (1,150,665)
Cash and cash equivalents at beginning of year 336,259 1,486,924
========= ===========
Cash and cash equivalents at end of year $ 766,823 $ 336,259
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 20
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998 AND 1997
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 and bank accounting and recordkeeping systems are accessed from data
centers in Pittsburgh, Pennsylvania, Denver, Colorado and Winston-Salem, North
Carolina.
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, 1998
and 1997. The estimated market value of such investments held at August 31, 1998
and 1997, approximated the carrying value. All investments in debt securities
held by the Company at August 31, 1998 and 1997, have an original maturity date
of twelve months or less.
INVENTORIES
Inventories, which primarily consist of equipment for sale, 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:
Data processing equipment..................................5 years
Data processing equipment under capital leases..........Lease term
Leasehold improvements..................................Lease term
Office equipment...........................................5 years
Accelerated depreciation methods are used for tax purposes. Maintenance and
repairs are charged to operations as incurred.
20
<PAGE> 21
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
AUGUST 31, 1998 AND 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
In connection with the Company's conversion of its software to operate on an IBM
AS 400, and in conjunction with the move of the Company's headquarters, the
Company disposed of property and equipment with an original cost of $3,276,000.
This property and equipment primarily consisted of the Bull computer and related
equipment, as well as equipment that was leased to customers and was now
obsolete. All items disposed of were fully depreciated.
Immaterial proceeds were received for the disposed property and equipment.
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
During 1998, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS 128). This statement requires the disclosure of
basic and diluted earnings per share and revises the method to calculate these
amounts. As the Company did not have any common stock equivalents outstanding
during 1998 or 1997, the adoption of this standard did not have an impact on
earnings per share amounts. Weighted average common shares outstanding for the
years ended August 31, 1998 and 1997 were 4,037,255.
21
<PAGE> 22
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
AUGUST 31, 1998 AND 1997
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.
RECLASSIFICATION
Certain reclassifications have been made to the 1997 financial statements in
order to conform to the 1998 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 when purchased,
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 $37,061 and $161,714 during the years ended 1998 and 1997,
respectively. The Company paid the following amounts for interest and income
taxes during each year.
1998 1997
---- ----
Interest $ 14,000 $ 12,000
Income taxes $146,000 $721,000
22
<PAGE> 23
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
AUGUST 31, 1998 AND 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (SFAS 128) and Statement No. 129 "Disclosure of
Information about Capital Structure" (SFAS 129). These statements did not have a
significant impact on the Company's financial statements.
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). In February
1998, Statement 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," (SFAS 132) was issued. These statements are effective
for fiscal 1999. In June 1998, Statement 133, "Accounting for Derivative
Instruments and Hedging Activities" was issued, effective for fiscal years
beginning after June 15, 1999.
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. The
Company does not anticipate that the statement will have a significant impact on
its disclosures.
SFAS 131 introduces a new model for segment reporting called the "management
approach." The management approach is based on the way the chief operating
decision-maker organizes segments within a Company for making operating
decisions and assessing performance. The Company does not currently anticipate
that the statement will have a significant impact on its financial statements.
SFAS 132 requires revision of certain footnote disclosure requirements related
to pension and other retiree benefits. The Company does not anticipate that the
statement will have an impact on its financial statements.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company does not presently anticipate
that the statement will have a significant impact on its financial statements.
23
<PAGE> 24
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
AUGUST 31, 1998 AND 1997
NOTE B - 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, 1998). 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 made during
1998.
NOTE C - LONG-TERM OBLIGATIONS
Long-term obligations at August 31, 1998 and 1997 consist of obligations under
capital leases for various data processing equipment. The leases, which expire
on various dates through 2001, provide for monthly payments ranging from $1,804
to $3,805. Equipment under the capital leases had a cost of $256,000 and
$219,000 and accumulated amortization of $107,000 and $57,000 as of August 31,
1998 and 1997, respectively.
Commitments for future minimum payments under these obligations are as follows:
1999 $ 67,308
2000 52,876
2001 26,635
--------
Net minimum lease payments 146,819
Less amount representing interest (11,993)
--------
Present value of minimum lease payments 134,826
Less current portion (37,765)
--------
$ 97,061
========
NOTE D - 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.
24
<PAGE> 25
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
AUGUST 31, 1998 AND 1997
NOTE D - LEASE COMMITMENTS (CONTINUED)
Rental expense charged to operations was $677,000 and $682,000 for the years
ended August 31, 1998 and 1997, respectively. As of August 31, 1998, the Company
is obligated to pay, and entitled to receive, the following minimum annual
rentals on operating leases.
YEAR ENDING
AUGUST 31, AMOUNT
1999 $ 569,392
2000 525,125
2001 479,313
2002 364,275
Thereafter 14,759
----------
$1,952,864
==========
NOTE E - 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 $6,000 and $1,556,000 at August 31, 1998
and 1997. These properties were substantially depreciated in each year.
NOTE F - STOCK OPTIONS
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,
1998, the new plan had not yet been finalized and no options had been granted.
No options were outstanding during 1998 or 1997.
25
<PAGE> 26
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
AUGUST 31, 1998 AND 1997
NOTE F - STOCK OPTIONS (CONTINUED)
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 August 31,1998, this statement has no impact on the Company.
NOTE G - INCOME TAXES
The Company has recorded reduced provisions for income taxes for years prior to
August 31, 1998, 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:
1998 1997
---- ----
Expected statutory rate 34.0 % 34.0 %
State income taxes, net of federal benefit 1.3 0.1
Permanent nondeductible expenditures 4.3 3.7
Change in valuation allowance (4.2) (3.2)
Other 0.4 (1.3)
---- ----
35.8 % 33.3 %
==== ====
At August 31, 1998, the Company has state net operating loss carryforwards of
approximately $106,000, which expire 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 during
prior years.
26
<PAGE> 27
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
AUGUST 31, 1998 AND 1997
NOTE G - INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at August 31, 1998 and 1997 consist of the
following:
1998 1997
---- ----
Temporary differences related to:
Accrued expenses and allowances $ 124,000 $ 145,000
Depreciation (3,000) (3,000)
Net operating loss carryforwards 8,000 37,000
Valuation allowance (129,000) (179,000)
--------- ---------
NET DEFERRED TAXES $ -- $ --
========= =========
The Company has established a valuation allowance at August 31, 1998 and 1997 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 $50,000 and $44,000 for the years ended August 31, 1998 and 1997,
respectively.
NOTE H - 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, 1998 and
1997 was $54,000 and $225,000, respectively.
NOTE I - MAJOR CUSTOMERS
The primary business of the Company consists of providing data processing and
accounting services to banks, security broker/dealers and other financial
institutions. Sales to one customer amounted to approximately 11.7% and 24.4% of
total revenues during the fiscal years ended August 31, 1998 and 1997,
respectively.
27
<PAGE> 28
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
AUGUST 31, 1998 AND 1997
NOTE I - MAJOR CUSTOMERS (CONTINUED)
In February of 1995, the Company entered into a joint project with Wachovia
Operational Services Corporation (WOSC) 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. In consideration for providing funds for
the joint project with the Company, WOSC has secured a perpetual software
license agreement for providing services to its affiliate, Wachovia Investments,
Incorporated (WII), a former full service major customer of the Company.
Beginning in the second quarter of the Company's 1998 fiscal year, WOSC utilized
its software license agreement to begin servicing WII. As a result, WII no
longer utilizes the Company's system on a service bureau basis. WII purchases
other services, software programming and maintenance from the Company.
28
<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-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<EXCHANGE-RATE> 1
<CASH> 766,823
<SECURITIES> 1,996,700
<RECEIVABLES> 751,239
<ALLOWANCES> 30,000
<INVENTORY> 43,891
<CURRENT-ASSETS> 3,608,608
<PP&E> 2,619,122
<DEPRECIATION> 2,064,718
<TOTAL-ASSETS> 4,202,917
<CURRENT-LIABILITIES> 655,466
<BONDS> 134,826
0
0
<COMMON> 3,230
<OTHER-SE> 3,447,160
<TOTAL-LIABILITY-AND-EQUITY> 4,202,917
<SALES> 188,837
<TOTAL-REVENUES> 6,778,518
<CGS> 148,790
<TOTAL-COSTS> 6,357,168
<OTHER-EXPENSES> 13,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,528
<INCOME-PRETAX> 407,822
<INCOME-TAX> 146,000
<INCOME-CONTINUING> 261,822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 261,822
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
