<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
EXCHANGE ACT
For the transition period from ______ to ______
Commission File No. 0-5954
COMPUTER RESEARCH, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
PENNSYLVANIA 25-1201499
- ------------------------------ ------------------
(STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.
SOUTHPOINTE PLAZA I, SUITE 300, 400 SOUTHPOINTE BOULEVARD, CANONSBURG, PA 15317
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(724) 745-0600
- --------------------------------------------------------------------------------
(ISSUER'S TELEPHONE NUMBER)
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
4,037,255 (As of May 31, 1998)
- ---------------------------------------------
<PAGE> 2
PART I - FINANCIAL STATEMENTS
ITEM I
A. COMPUTER RESEARCH, INC. BALANCE SHEET
May 31, 1998 (Unaudited) and August 31, 1997 (Audited)
ASSETS
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 797,874 $ 336,259
Short-Term Investments 1,759,216 2,378,249
Accounts Receivable - Trade
(net of allowance for doubtful accounts
of $30,000 at 5/31/98 and 8/31/97) 928,288 856,223
Inventories
(first-in, first-out) or market 147,127 40,770
Prepaid Expenses 75,856 66,713
---------- ----------
Total Current Assets 3,708,361 3,678,214
---------- ----------
EQUIPMENT and LEASEHOLD IMPROVEMENTS - At Cost
Data Processing Equipment 1,628,285 4,439,883
Data Processing Equipment Under Capital Leases 256,471 319,163
Leasehold Improvements 153,507 271,610
Office Equipment 529,695 577,004
---------- ----------
2,567,958 5,607,660
Less Accumulated Depreciation and Amortization 2,029,155 5,182,993
---------- ----------
538,803 424,667
---------- ----------
OTHER ASSETS 42,218 -0-
---------- ----------
$4,289,382 $4,102,881
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
A. COMPUTER RESEARCH, INC. BALANCE SHEET - CONT'D.
May 31, 1998 (Unaudited) and August 31, 1997 (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1998 1997
---------- ----------
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Current Portion of Long-Term Obligations $ 57,770 $ 12,017
Accounts Payable 122,436 84,216
Accrued Payroll 109,480 237,068
Accrued Income Taxes 40,000 -0-
Accrued Vacation 338,864 328,613
Customer Deposits 114,466 96,800
Accrued Rent -0- 4,888
Accrued Lease Obligation -0- 37,765
Other Liabilities 80 115
---------- ----------
Total Current Liabilities 783,096 801,482
LONG-TERM OBLIGATIONS 91,017 108,882
ACCRUED LEASE OBLIGATION -0- 3,949
---------- ----------
Total Liabilities 874,113 914,313
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock - No Par Value; $.0008 Stated Value;
10,000,000 Shares Authorized; 4,037,255 Shares
Issued and Outstanding Each Year 3,230 3,230
Additional Paid-In Capital 744,342 744,342
Retained Earnings 2,667,697 2,440,996
---------- ----------
Total Stockholders' Equity 3,415,269 3,188,568
---------- ----------
$4,289,382 $4,102,881
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
B. COMPUTER RESEARCH, INC. CAPITALIZATION AND STOCKHOLDERS' EQUITY
May 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
DEBT AMOUNT
----------
<S> <C> <C>
Short-Term Loans, Notes $ -0-
Long-Term Debt (Including $57,770 due within one year) 148,787
----------
Total Debt $ 148,787
==========
STOCKHOLDERS' EQUITY
SHARES ISSUED AMOUNT
------------- ----------
Common Stock 4,037,255 $ 3,230
Capital in Excess of Par Value 744,342
Retained Earnings -
Balance at Beginning of Current Fiscal Year 2,440,996
Net Income for Period 226,701
----------
2,667,697
----------
Total Stockholders' Equity $3,415,269
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
C. COMPUTER RESEARCH, INC. STATEMENT OF INCOME
For the Nine Months Ended May 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------ ----
<S> <C> <C>
REVENUES
Sales of Services $4,870,821 $5,605,866
Sales of Equipment, Software and Supplies 10,293 101,714
Rental Income From Operating Leases 120 14,730
Other Income 109,960 105,065
---------- ----------
4,991,194 5,827,375
---------- ----------
COSTS AND EXPENSES
Operating Expenses 2,895,258 3,250,781
Selling and Administrative Expenses 1,600,984 1,378,382
Depreciation and Amortization 121,998 150,741
Cost of Equipment, Software and Supplies Sold 7,593 73,196
Interest Expense 10,660 6,528
---------- ----------
4,636,493 4,859,628
---------- ----------
INCOME BEFORE INCOME TAXES 354,701 967,747
LESS: PROVISION FOR INCOME TAXES 128,000 361,000
---------- ----------
NET INCOME $ 226,701 $606,747
========== ========
Average Number of Shares Outstanding 4,037,255 4,037,255
---------- ----------
EARNINGS PER COMMON SHARE $ .06 $ .15
========== ==========
(Basic and Diluted)
DIVIDENDS PER COMMON SHARE $ - $ -
========== ==========
</TABLE>
The results for the period ended May 31, 1998, are unaudited and are not
necessarily indicative of the results to be expected for the year. All known
adjustments necessary for a fair presentation of the financial information of
the Company have been reflected for the nine months ended May 31, 1998 and 1997.
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
C. COMPUTER RESEARCH, INC. STATEMENT OF INCOME
For the Three Months Ended May 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES
Sales of Services $1,478,402 $1,829,640
Sales of Equipment, Software and Supplies -0- 76,238
Rental Income From Operating Leases -0- 4,110
Other Income 34,044 36,780
---------- ----------
1,512,446 1,946,768
---------- ----------
COSTS AND EXPENSES
Operating Expenses 926,567 1,075,026
Selling and Administrative Expenses 535,456 421,515
Depreciation and Amortization 41,949 52,250
Cost of Equipment, Software and Supplies Sold -0- 55,355
Interest Expense 3,175 1,899
---------- ----------
1,507,147 1,606,045
---------- ----------
INCOME BEFORE INCOME TAXES 5,299 340,723
LESS: PROVISION FOR INCOME TAXES 2,000 123,000
---------- ----------
NET INCOME $ 3,299 $217,723
========== ========
Average Number of Shares Outstanding 4,037,255 4,037,255
---------- ----------
EARNINGS PER COMMON SHARE $ .00 $ .05
========== ==========
(Basic and Diluted)
DIVIDENDS PER COMMON SHARE $ - $ -
========== ==========
</TABLE>
The results for the period ended May 31, 1998, are unaudited and are not
necessarily indicative of the results to be expected for the year. All known
adjustments necessary for a fair presentation of the financial information of
the Company have been reflected for the three months ended May 31, 1998 and
1997.
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
D. COMPUTER RESEARCH, INC. STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net Income $ 226,701 $ 606,747
----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and Amortization 121,998 150,741
Provision for Losses on Doubtful Accounts -0- 25,114
Change in Assets and Liabilities:
Accounts Receivable (72,065) (109,116)
Inventories (106,357) (20,579)
Prepaid Expenses (4,943) 24,608
Accounts Payable, Accrued Expenses and Other Current Liabilities (47,989) (233,705)
Customer Deposits 17,666 5,350
Accrued Lease Obligation -0- (10,467)
----------- -----------
Total Adjustments (91,690) (168,054)
----------- -----------
Net Cash Provided by Operating Activities 135,011 438,693
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Equipment and Leasehold Improvements (198,037) (111,751)
Short-Term Investment Maturities 1,519,033 1,020,000
Additions to Other Assets (47,454) -0-
Additions to Short-Term Investments (900,000) (1,567,692)
----------- -----------
Net Cash Provided by (Used In) Investing 373,542 (659,443)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on Capital Lease Obligations (46,938) (54,644)
----------- -----------
Net Cash (Used In) Financing Activities (46,938) (54,644)
----------- -----------
Net Increase (Decrease) in Cash 461,615 (275,394)
Cash and Cash Equivalents at August 31, 1997 and 1996 336,259 1,486,924
----------- -----------
Cash and Cash Equivalents at May 31, 1998 and 1997 $ 797,874 $ 1,211,530
=========== ===========
CASH PAID DURING THE PERIOD 5/31/98 5/31/97
------- -------
Interest $ 10,660 $ 6,528
=========== ===========
Income Taxes $ 97,000 $ 533,979
=========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
There were no noncash investing and financing activities for the nine months
ended May 31, 1997.
In December 1997, the Company entered into a long term capital lease for a new
phone system at a cost of $37,061.
The accompanying notes are an integral part of these financial statement.
7
<PAGE> 8
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED MAY 31, 1998
NOTE A - COMPANY'S ANNUAL REPORT UNDER FORM 10-KSB
The accompanying financial information should be read in conjunction with
the Company's 1997 Annual Report on Form 10-KSB.
NOTE B - ADJUSTMENTS
In the opinion of management, all adjustments that were made, which are
necessary to a fair statement of the results for the interim periods, were
of a normal and recurring nature.
8
<PAGE> 9
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
1. RESULTS OF OPERATIONS
The Company's principal source of revenue is derived from providing
computerized accounting and support services to securities firms, banks and
other financial institutions. Service revenues are directly affected by
stock and bond trading market volume which indirectly impacts the number of
transactions processed for the clients. In addition, the clients serviced
could be involved in mergers and acquisitions or may choose to convert
their business from self-clearing to a fully disclosed basis which would
eliminate the need for the accounting services provided by the Company. The
Company 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 results to be expected for the coming year or any
specific period.
In March of 1996, the Company and Wachovia Operational Services Corporation
(WOSC) entered into an agreement to jointly participate in a project to
convert the Company's production software to operate on an IBM AS/400
configuration. WOSC is an affiliate of Wachovia Investments, Inc. (WII), a
major service client of the Company that accounted for approximately 20% of
the service revenues in fiscal year 1997. In consideration for providing
funds and participating in the joint conversion project, WOSC has secured a
perpetual software license agreement from the Company for servicing its
affiliate, WII. The Company has retained sole ownership of the converted
software and will continue to offer its services to its clients on a
service bureau basis from the IBM AS/400 platform.
At the start of the second quarter of the current fiscal year, WOSC began
utilizing its software license agreement to offer processing services to
WII. As a result, beginning in the second quarter of the current year, WII
terminated utilization of the Company's basic data processing services, but
continues to utilize software maintenance and other services (which are
primarily communications interfaces) offered by the Company.
During the fiscal third quarter of the current year, the Company obtained
service contracts with two brokerage firms and a banking institution. The
banking institution will begin utilizing the services during the fourth
quarter of the current year. The two brokerage institutions will begin
utilizing the Company's services during the first quarter of the 1999
fiscal year. In addition, the Company is currently in contract discussions
with several additional prospective new clients.
9
<PAGE> 10
During the fiscal third quarter of the current year, the Company entered
into software license agreements for two new product lines. These new
product lines will be installed at two current client locations during the
fourth quarter of the current year.
As a result of the new customer contracts currently in place, combined with
the potential for additional new clients, as well as revenues to be
generated by the sale of the new product lines, the Company believes that
during its 1999 fiscal year, it can replace the approximate 20% revenue
loss attributed to WII. However, because of the relatively fixed cost
element of the Company's operations, to the extent that such revenues are
not replaced, the percentage decrease in net income will exceed the
percentage decrease in lost revenues.
Statements regarding the Company'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
Company's actual results could differ materially from expected results. The
Company's forward looking statements are based upon operating budgets and
many other detailed business assumptions. While the Company 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.
REVENUES
The total revenues for the first nine months of the current year were
$4,991,194 or a decrease of approximately 13% as compared to the
previous year. The loss of the major client revenues at the beginning
of the second quarter of the current year, as explained above, was the
primary reason for this decrease.
The total revenues for the fiscal third quarter of the current year
were $1,512,446 or a decrease of approximately 22% as compared to the
previous year. This decrease is the result of the loss of the major
client as explained above.
10
<PAGE> 11
COSTS AND EXPENSES
The total costs and expenses for the first nine months of the current
year decreased approximately 5% as compared to the comparable period
of the previous year. The primary contributors to this decrease were
reduced equipment maintenance costs, utility costs, as well as reduced
personnel costs in computer operations.
The total costs and expenses for the fiscal third quarter of the
current year decreased approximately 6% as compared to the comparable
period of the previous year.
NET INCOME
The net income for the first nine months of the current year was
$226,701 or $.06 per share as compared to $606,747 or $.15 per share
for the previous year. The reduction in net income is attributable to
the reduced revenues for the current year.
The net income for the fiscal third quarter of the current year was
$3,299 or $.00 per share as compared to $217,723 or $.05 per share for
the comparable period of the previous year.
2. CAPITAL RESOURCES AND LIQUIDITY
The Company had approximately $2.5 million in cash, cash equivalents and
short- term investments at the end of the second quarter 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 Company in the near term.
In the third quarter of the 1998 fiscal year, the Company entered into an
18 month minimum lease commitment of approximately $4,300 per month for IBM
computer equipment. Also during the period, outdated computer equipment
that is not year 2000 compliant, which had an original value of $2.8
million, was removed from service and discarded. Since this equipment had
previously been fully depreciated, it had no material affect on the
Company's balance sheet.
3. SOFTWARE MODIFICATION FOR YEAR 2000
The software product line of the Company had been originally designed to
reflect the year as two digits (i.e, 98 = 1998). This design would have
created problems for processing at the turn of the century. However, as
part of the conversion project
11
<PAGE> 12
to the IBM AS/400, each date field in the entire product line was modified
to contain a four digit representation for the year. This new design format
should enable the software to accurately handle transactions beginning in
the year 2000. For the remainder of calendar year 1998, the Company will be
doing extensive off-line testing for predetermined critical calendar dates
in the year 2000 and above in order to verify system processing accuracy.
While it would be impossible to guarantee that there will be no problems
with the system at the turn of the century, the management of the Company
is confident that there will be little, if any, disruptions. The Company is
continuing to monitor and evaluate its third party software and hardware
suppliers, as well as firms with which it has a communications interface to
determine that these suppliers will also be year 2000 compliant. The
Company does not expect to assume any substantial debt in funding this
system testing and vendor evaluation.
12
<PAGE> 13
PART II - OTHER INFORMATION
Not applicable.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPUTER RESEARCH, INC.
-----------------------
(Registrant)
Date 7/10/98 /s/ JAMES L. SCHULTZ
-------------------------- ---------------------------------------
James L. Schultz, President & Treasurer
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000201511
<NAME> COMPUTER RESEARCH, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-31-1998
<EXCHANGE-RATE> 1
<CASH> 797,874
<SECURITIES> 1,759,216
<RECEIVABLES> 958,288
<ALLOWANCES> 30,000
<INVENTORY> 147,127
<CURRENT-ASSETS> 3,708,361
<PP&E> 2,567,958
<DEPRECIATION> 2,029,155
<TOTAL-ASSETS> 4,289,382
<CURRENT-LIABILITIES> 783,096
<BONDS> 148,787
0
0
<COMMON> 3,230
<OTHER-SE> 3,412,039
<TOTAL-LIABILITY-AND-EQUITY> 4,289,382
<SALES> 10,293
<TOTAL-REVENUES> 4,991,194
<CGS> 7,593
<TOTAL-COSTS> 4,636,493
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,660
<INCOME-PRETAX> 354,701
<INCOME-TAX> 128,000
<INCOME-CONTINUING> 226,701
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 226,701
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
