<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 November 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
EXCHANGE ACT
For the transition period from to
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Commission File No. 0-5954
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COMPUTER RESEARCH, INC.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 25-1201499
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(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
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(Address of principal executive offices)
(724) 745-0600
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(Issuer's telephone number)
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(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
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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 November 30, 1998)
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PART I - FINANCIAL STATEMENTS
ITEM I
A. COMPUTER RESEARCH, INC. BALANCE SHEET
November 30, 1998 (Unaudited) and August 31, 1998 (Audited)
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1998 1998
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 197,316 $ 766,823
Short-Term Investments 2,193,575 1,996,700
Accounts Receivable - Trade
(net of allowance for doubtful accounts
of $30,000) 1,117,702 721,239
Inventories at the Lower of Cost
(first-in, first-out) or market 32,864 43,891
Prepaid Expenses 110,271 79,955
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Total Current Assets 3,651,728 3,608,608
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EQUIPMENT and LEASEHOLD IMPROVEMENTS - At Cost
Data Processing Equipment 1,722,406 1,672,213
Data Processing Equipment Under Capital Leases 256,471 256,471
Leasehold Improvements 158,107 154,551
Office Equipment 543,292 535,887
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2,680,276 2,619,122
Less Accumulated Depreciation and Amortization 2,102,135 2,064,718
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578,141 554,404
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OTHER ASSETS 52,072 39,905
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$4,281,941 $4,202,917
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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A. COMPUTER RESEARCH, INC. BALANCE SHEET - CONT'D.
November 30, 1998 (Unaudited) and August 31, 1998 (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1998 1998
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<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Current Portion of Long-Term Obligations $ 60,440 $ 37,765
Accounts Payable 218,191 149,382
Accrued Payroll 129,536 76,281
Accrued Income Taxes 13,500 13,000
Accrued Vacation 258,230 281,058
Customer Deposits 90,400 97,650
Other Liabilities 98 330
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Total Current Liabilities 770,395 655,466
LONG-TERM OBLIGATIONS 60,111 97,061
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Total Liabilities 830,506 752,527
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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 2,703,863 2,702,818
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Total Stockholders' Equity 3,451,435 3,450,390
$4,281,941 $4,202,917
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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B. COMPUTER RESEARCH, INC. CAPITALIZATION AND STOCKHOLDERS' EQUITY
November 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
DEBT AMOUNT
---- ------
<S> <C>
Short-Term Loans, Notes $ -0-
Long-Term Debt (Including $60,440 due within one year) 120,551
-----------
Total Debt $ 120,551
==========
</TABLE>
STOCKHOLDERS' EQUITY
<TABLE>
<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 1,045
----------
2,703,863
Total Stockholders' Equity $3,451,435
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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C. COMPUTER RESEARCH, INC. STATEMENT OF INCOME
For the Three Months Ended November 30, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES
Sales of Services $1,643,708 $1,867,359
Sales of Equipment, Software and Supplies 27,500 -0-
Rental Income From Operating Leases -0- 90
Other Income 30,946 41,315
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1,702,154 1,908,764
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COSTS AND EXPENSES
Operating Expenses 1,034,359 1,029,277
Selling and Administrative Expenses 604,858 495,281
Depreciation and Amortization 37,729 38,532
Cost of Equipment, Software and Supplies Sold 21,111 -0-
Interest Expense 2,552 3,853
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1,700,609 1,566,943
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INCOME BEFORE INCOME TAXES 1,545 341,821
LESS: PROVISION FOR INCOME TAXES 500 122,000
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NET INCOME $ 1,045 $ 219,821
========== ==========
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 periods ended November 30, 1998 and 1997, 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 November 30, 1998
and 1997.
The accompanying notes are an integral part of these financial statements.
5
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D. COMPUTER RESEARCH, INC. STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net Income $ 1,045 $ 219,821
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ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and Amortization 37,729 38,532
Change in Assets and Liabilities:
Accounts Receivable (396,463) (54,411)
Inventories 11,027 (10,856)
Prepaid Expenses (30,316) (17,122)
Accounts Payable, Accrued Expenses and Other Current Liabilities 99,504 263,594
Customer Deposits (7,250) 22,411
Accrued Lease Obligation -0- (2,959)
----------- ---------
Total Adjustments (285,769) 239,189
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Net Cash Provided by (Used By) Operating Activities (284,724) 459,010
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Equipment and Leasehold Improvements (61,154) (118,122)
Short-Term Investment Maturities 1,225,000 256,000
Additions to Other Assets (12,479) (19,244)
Additions to Short-Term Investments (1,421,875) (22,806)
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Net Cash Provided by (Used In) Investing (270,508) 95,828
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on Capital Lease Obligations (14,275) (16,439)
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Net Cash (Used In) Financing Activities (14,275) (16,439)
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Net Increase (Decrease) in Cash (569,507) 538,399
Cash and Cash Equivalents at August 31, 1998 and 1997 766,823 336,259
----------- ---------
Cash and Cash Equivalents at November 30, 1998 and 1997 $ 197,316 $ 874,658
=========== =========
CASH PAID DURING THE PERIOD
Interest $ 2,552 $ 3,853
=========== =========
Income Taxes $ -0- $ -0-
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statement.
6
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COMPUTER RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 30, 1998
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.
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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 start of the second quarter of the 1998 fiscal year, WOSC began
utilizing its software license agreement to offer processing services
to WII. As a result, WII, a former major client of the Company, which
accounted for approximately 23% of the Company's first quarter 1998
service revenues, 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 second half of the 1998 fiscal year, the Company obtained
service contracts with three brokerage firms and a banking institution.
During the first quarter of the 1999 year, the banking institution, as
well as one of the brokerage firms, were utilizing the Company's
services. The two additional brokerage firms will begin utilizing the
service during the second quarter of the current year. In addition, a
large banking institution will begin utilizing the services during the
second quarter of the current year. With the new clients utilizing the
system, as well as the additional firms under contract, the management
of the Company believes that during its 1999 fiscal year, it can
replace, on a monthly basis, the approximate 20% annual revenue loss
attributed to WII. However, because of the relatively fixed cost
8
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element of the Company's operations, to the extent that such revenues
are not replaced, the percentage decrease in net income could exceed
the percentage decrease in lost revenues.
REVENUES
The total revenues for the first three months of the 1999
fiscal year were $1,702,154 or a decrease of approximately 11%
as compared to the previous year. The loss of revenues from a
major client at the beginning of the second quarter of the
previous year, as explained above, was the primary reason for
this decrease.
The total revenues for the first three months of the 1998
fiscal year increased approximately 6% over the comparable
period of the previous year.
COSTS AND EXPENSES
The total costs and expenses for the first quarter of the 1999
fiscal year were $1,700,609 or an approximate 9% increase over
the previous year. The primary reasons for this increase were
due to increased selling and advertising expenses, as well as
the cost associated with adding IBM AS/400 computer equipment.
The total costs and expenses for the first three months of the
1998 year were relatively equal to the previous year.
NET INCOME
The net income for the first three months of the current year
was $.00 or $1,045 as compared to $.05 or $219,821 for the
previous year. The reason for the decrease was due to the loss
of revenues of a major client as explained above.
2. CAPITAL RESOURCES AND LIQUIDITY
The Company had approximately $2.4 million in cash, cash equivalents
and short-term investments at the end of the first quarter of the 1999
fiscal year. In addition, approximately $650,000 of a $750,000 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.
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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 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 will be
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 this system testing and vendor
evaluation.
4. "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.
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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
------------------ ---------------------------------------
James L. Schultz, President & Treasurer
11
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000201511
<NAME> COMPUTER RESEARCH, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<EXCHANGE-RATE> 1
<CASH> 197,316
<SECURITIES> 2,193,575
<RECEIVABLES> 1,147,702
<ALLOWANCES> 30,000
<INVENTORY> 32,864
<CURRENT-ASSETS> 3,651,728
<PP&E> 2,680,276
<DEPRECIATION> 2,102,135
<TOTAL-ASSETS> 4,281,941
<CURRENT-LIABILITIES> 770,395
<BONDS> 120,551
0
0
<COMMON> 3,230
<OTHER-SE> 3,538,205
<TOTAL-LIABILITY-AND-EQUITY> 4,281,941
<SALES> 27,500
<TOTAL-REVENUES> 1,702,154
<CGS> 21,111
<TOTAL-COSTS> 1,698,057
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,552
<INCOME-PRETAX> 1,545
<INCOME-TAX> 500
<INCOME-CONTINUING> 1,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,045
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
