<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 February 28, 1999
------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT
For the transition period from to
---------------- ----------------
Commission File No. 0-5954
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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)
heck 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 February 28, 1999)
-----------------------------------
<PAGE> 2
PART I - FINANCIAL STATEMENTS
ITEM I
A. COMPUTER RESEARCH, INC. BALANCE SHEET
February 28, 1999 (Unaudited) and August 31, 1998 (Audited)
<TABLE>
ASSETS
<CAPTION>
FEBRUARY 28, AUGUST 31,
1999 1998
------------ -----------
CURRENT ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 689,795 $ 766,823
Short-Term Investments 1,816,533 1,996,700
Accounts Receivable - Trade
(net of allowance for doubtful accounts
of $37,500 and $30,000) 1,160,642 721,239
Inventories at the Lower of Cost
(first-in, first-out) or market 54,979 43,891
Prepaid Expenses 101,533 79,955
---------- ----------
Total Current Assets 3,823,482 3,608,608
---------- ----------
EQUIPMENT and LEASEHOLD IMPROVEMENTS - At Cost
Data Processing Equipment 1,723,206 1,672,213
Data Processing Equipment Under Capital Leases 446,471 256,471
Leasehold Improvements 159,009 154,551
Office Equipment 556,101 535,887
---------- ----------
2,884,787 2,619,122
Less Accumulated Depreciation and Amortization 2,140,602 2,064,718
---------- ----------
744,185 554,404
---------- ----------
OTHER ASSETS 66,321 39,905
---------- ----------
$4,633,988 $4,202,917
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
A. COMPUTER RESEARCH, INC. BALANCE SHEET - CONT'D.
February 28, 1999 (Unaudited) and August 31, 1998 (Audited)
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
FEBRUARY 28, AUGUST 31,
1999 1998
------------ ----------
LIABILITIES
CURRENT LIABILITIES
<S> <C> <C>
Line of Credit Payable $ 100,000 $ -0-
Current Portion of Long-Term Obligations 87,881 37,765
Accounts Payable 215,556 149,382
Accrued Payroll 33,939 76,281
Accrued Income Taxes 33,000 13,000
Accrued Vacation 288,231 281,058
Customer Deposits 90,400 97,650
Other Liabilities 98 330
---------- ----------
Total Current Liabilities 849,105 655,466
LONG-TERM OBLIGATIONS 199,080 97,061
---------- ----------
Total Liabilities 1,048,185 752,527
---------- ----------
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 2,838,231 2,702,818
---------- ----------
Total Stockholders' Equity 3,585,803 3,450,390
---------- ----------
$4,633,988 $4,202,917
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
B. COMPUTER RESEARCH, INC. CAPITALIZATION AND STOCKHOLDERS' EQUITY
February 28, 1999 (Unaudited)
<TABLE>
<CAPTION>
DEBT AMOUNT
--------
<S> <C>
Short-Term Line of Credit $100,000
Long-Term Debt (Including $87,881 due within one year) 286,961
--------
Total Debt $386,961
========
</TABLE>
<TABLE>
STOCKHOLDERS' EQUITY
<CAPTION>
SHARES ISSUED AMOUNT
------------- ------
<S> <C> <C>
Common Stock $4,037,255 $ 3,230
Capital in Excess of Par Value 744,342
Retained Earnings -
Balance at Beginning of Current Fiscal Year 2,702,818
Net Income for Period 135,413
----------
2,838,231
----------
Total Stockholders' Equity $3,585,803
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
C. COMPUTER RESEARCH, INC. STATEMENT OF INCOME
For the Six Months Ended February 28, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
REVENUES
<S> <C> <C>
Sales of Services $3,631,103 $3,392,419
Sales of Equipment, Software and Supplies 27,500 10,293
Other Income 58,738 76,036
---------- ----------
3,717,341 3,478,748
---------- ----------
COSTS AND EXPENSES
Operating Expenses 2,163,141 1,968,691
Selling and Administrative Expenses 1,261,967 1,065,528
Depreciation and Amortization 79,428 80,049
Cost of Equipment, Software and Supplies Sold 21,111 7,593
Interest Expense 12,149 7,486
---------- ----------
3,537,796 3,129,347
---------- ----------
INCOME BEFORE INCOME TAXES 179,545 349,401
LESS: PROVISION FOR INCOME TAXES 44,132 126,000
---------- ----------
NET INCOME $ 135,413 $ 223,401
========== ==========
Average Number of Shares Outstanding 4,037,255 4,037,255
---------- ----------
EARNINGS PER COMMON SHARE $ .03 $ .06
========== ==========
(Basic and Diluted)
DIVIDENDS PER COMMON SHARE $ -- $ --
========== ==========
</TABLE>
The results for the periods ended February 28, 1999 and 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 six months ended February 28, 1999
and 1998.
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
C. COMPUTER RESEARCH, INC. STATEMENT OF INCOME
For the Fiscal Second Quarter Ended February 28, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
REVENUES
<S> <C> <C>
Sales of Services $1,987,396 $1,525,061
Sales of Equipment, Software and Supplies -0- 10,293
Other Income 27,792 34,631
---------- ----------
2,015,188 1,569,985
---------- ----------
COSTS AND EXPENSES
Operating Expenses 1,128,781 939,415
Selling and Administrative Expenses 657,110 570,247
Depreciation and Amortization 41,699 41,517
Cost of Equipment, Software and Supplies Sold -0- 7,593
Interest Expense 9,598 3,632
---------- ----------
1,837,188 1,562,404
---------- ----------
INCOME BEFORE INCOME TAXES 178,000 7,581
LESS: PROVISION FOR INCOME TAXES 43,632 4,000
---------- ----------
NET INCOME $ 134,368 $ 3,581
========== ==========
Average Number of Shares Outstanding 4,037,255 4,037,255
---------- ----------
EARNINGS PER COMMON SHARE $ .03 $ .00
========== ==========
(Basic and Diluted)
DIVIDENDS PER COMMON SHARE $ -- $ --
========== ==========
</TABLE>
The results for the period ended February 28, 1999 and 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 February 28, 1999
and 1998.
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
D. COMPUTER RESEARCH, INC. STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 135,413 $ 223,401
----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and Amortization 79,428 80,049
Provision for Losses on Accounts Receivable 7,500 -0-
Change in Assets and Liabilities:
Accounts Receivable (446,903) (174,835)
Inventories (11,088) (14,417)
Prepaid Expenses (21,578) (37,759)
Accounts Payable, Accrued Expenses and Other Current Liabilities 50,773 (52,568)
Customer Deposits (7,250) (8,900)
Accrued Lease Obligation -0- (8,836)
----------- -----------
Total Adjustments (349,118) (217,266)
----------- -----------
Net Cash Provided by (Used By) Operating Activities (213,705) 6,135
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Equipment and Leasehold Improvements (75,665) (137,809)
Short-Term Investment Maturities 1,875,000 1,089,918
Additions to Other Assets (29,960) (45,410)
Additions to Short-Term Investments (1,694,833) (700,000)
----------- -----------
Net Cash Provided by Investing Activities 74,542 206,699
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on Capital Lease Obligations (37,865) (33,287)
Proceeds from Line of Credit 200,000 -0-
Payment on Line of Credit (100,000) -0-
----------- -----------
Net Cash Provided by (Used In) Financing Activities 62,135 (33,287)
----------- -----------
Net Increase (Decrease) in Cash (77,028) 179,547
Cash and Cash Equivalents at August 31, 1998 and 1997 766,823 336,259
----------- -----------
Cash and Cash Equivalents at February 28, 1999 and 1998 $ 689,795 $ 515,806
=========== ===========
CASH PAID DURING THE PERIOD
Interest $ 12,149 $ 7,486
=========== ===========
Income Taxes $ 9,000 $ 71,000
=========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In December 1998, the Company entered into a long term capital lease for
additional computer equipment at a cost of $190,000. Additionally, 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 statements.
7
<PAGE> 8
COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED FEBRUARY 28, 1999
NOTE A - COMPANY'S ANNUAL REPORT UNDER FORM 10-KSB
The accompanying financial information should be read in
conjunction with the Company's 1998 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. 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, Wachovia Investments, Incorporated (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 beginning of the second quarter of the 1998 fiscal year, WOSC
utilized its license agreement to begin servicing WII which accounted
for approximately 23% of the Company's first quarter 1998 service
revenues. With the second quarter 1999 service revenues approximately
equal to that of the first quarter of the previous year, the Company
believes it has reached a point where it has replaced the lost revenues
attributed to WII.
REVENUES
The total revenues for the first six months of the 1999 fiscal
year were $3,717,341 or an increase of approximately 5% over
the comparable period of the previous year. This increase is
primarily attributable to an increased number of transactions
processed for clients.
9
<PAGE> 10
The total revenues for the second quarter of the current year
were $2,015,188 or an increase of approximately 28% over the
comparable period of the previous year. This increase is
primarily attributable to an increased number of transactions
processed for clients, as well as from new clients added
during the second quarter of the current year.
COSTS AND EXPENSES
The total costs and expenses for the first six months of the
current year were $3,537,796 or an increase of approximately
13% over the comparable period of the previous year. The
primary contributors to the increase were expanded
communications costs, data processing service costs, employee
benefit costs, as well as increased payroll costs.
The total costs and expenses for the second quarter of the
current year were $1,837,184 or an increase of approximately
18% over the corresponding period of the previous year. In
addition to the cost items mentioned above, there were costs
associated with installing new clients on the Company's
services.
PROVISION FOR INCOME TAXES
Tax expense is normally accrued at 36% of income before taxes
for financial reporting purposes. In filing the year-end 1998
tax returns, the Company generated tax refunds of
approximately $20,000 higher than had been previously
estimated. This tax benefit is recorded as a reduction of
current year tax expense.
NET INCOME
The net income for the first six months of the current year
was $135,413 or $.03 per share as compared to $223,401 or $.06
per share for the comparable period of the previous year.
The net income for the fiscal second quarter of the current
year was $134,368 or $.03 per share as compared to $3,581 or
$.00 per share for the comparable period of the previous year.
These improved results were directly attributable to the
increased revenues for the second quarter of the current year.
10
<PAGE> 11
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
1999 fiscal year. In addition, approximately $650,000 of a $750,000
line of credit was available at the end of the second quarter. This,
along with funds generated by operations, should adequately support the
operating needs of the Company in the near term.
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, 99 = 1999). This design would
have created problems for processing at the turn of the century since
the 00 representation for the year 2000 would have been interpreted by
the software to be 1900. However, as part of the conversion project 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. During the first half of the 1999 calendar
year, the Company is doing extensive securities industry mandated
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. In any event, the
Company will employ contingency plans which require management, staff
members and other resources to be available to react promptly should a
problem occur. Additionally, 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 incur any substantial cost in the system testing and vendor
evaluation.
4. CONVERSION OF OPERATIONS TO THE IBM AS/400 COMPUTER CONFIGURATION
Shortly after the close of the second quarter of the 1999 fiscal year,
the Company completed the project of converting its service business to
operating on the IBM AS/400 platform. As of the date of this report,
all of the Company's service business is now operational under the IBM
platform. In conjunction with this modification, approximately $13,000
of monthly maintenance costs associated to the previous computer
configuration will be eliminated starting in the month of April 1999.
11
<PAGE> 12
5. "SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
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 detailed
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.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on January
26, 1999. The following persons were elected to serve as the Company's Board of
Directors until the next annual meeting of stockholders:
James L. Schultz
David J. Vagnoni
Lynn M. Bushman
Kenneth C. Ebbitt
K. David Klotz
SIGNATURES
COMPUTER RESEARCH, INC.
---------------------------------------
(Registrant)
Date April 13, 1999 /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> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> FEB-28-1999
<EXCHANGE-RATE> 1
<CASH> 689,795
<SECURITIES> 1,816,533
<RECEIVABLES> 1,198,142
<ALLOWANCES> 37,500
<INVENTORY> 54,979
<CURRENT-ASSETS> 3,823,482
<PP&E> 2,884,787
<DEPRECIATION> 2,140,602
<TOTAL-ASSETS> 4,633,988
<CURRENT-LIABILITIES> 849,105
<BONDS> 386,961
0
0
<COMMON> 3,230
<OTHER-SE> 3,582,573
<TOTAL-LIABILITY-AND-EQUITY> 4,633,988
<SALES> 27,500
<TOTAL-REVENUES> 3,717,341
<CGS> 21,111
<TOTAL-COSTS> 3,537,796
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,500
<INTEREST-EXPENSE> 12,149
<INCOME-PRETAX> 179,545
<INCOME-TAX> 44,132
<INCOME-CONTINUING> 135,413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135,413
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
