-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GOfmaUK+XtZua2oToZ7C9RUVB8rO57Ja6o+ExS0JA0p9/Q+JEiOpD8l9PPkBwyET VpHOTDh3gCva31a2/BzCMA== 0000950128-96-000636.txt : 19961202 0000950128-96-000636.hdr.sgml : 19961202 ACCESSION NUMBER: 0000950128-96-000636 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961127 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER RESEARCH INC CENTRAL INDEX KEY: 0000201511 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 251201499 STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-05954 FILM NUMBER: 96673598 BUSINESS ADDRESS: STREET 1: CHERRINGTON CORPORATE CTR BLDG 200 CITY: CORAOPOLIS STATE: PA ZIP: 15108 BUSINESS PHONE: 4122624430 MAIL ADDRESS: STREET 1: CHERRINGTON CORPORATE CENTER BLDG 200 CITY: CORAOPOLIS STATE: PA ZIP: 15108 10KSB 1 COMPUTER RESEARCH, INC. 10KSB 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, 1996 Commission File No. 0-5954 COMPUTER RESEARCH, INC. ----------------------- (Exact name of issuer as specified in its charter) Pennsylvania 25-1201499 - ------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) Incorporation or organization) Cherrington Corporate Center, Building 200, Coraopolis, PA 15108 ---------------------------------------------------------------- (Address of principal executive offices, including zip code) Issuer's telephone number, including area code: (412) 262-4430 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Without Par Value Indicate by check mark whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is contained herein, and will not be contained, to the best of the Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Issuer's Revenue during the Fiscal Year 1996: $7,461,733 The aggregate market value of 2,268,353 voting shares held by non-affiliates of the Issuer, computed by reference to $1.30 (which is the average of the bid and ask prices of the Issuer's Common Stock on October 31, 1996, of $1.25 and $1.34 respectively) is $2,948,859. As of October 31, 1996, 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, 1996, is incorporated by reference into Part III of this Form 10-KSB. 2 PART I ITEM 1. BUSINESS Computer Research, Inc. (Registrant), a Pennsylvania corporation organized in July 1969, is a data processing service company providing accounting services to securities firms, banks and other financial institutions. The principal office and data center for the Registrant is located at the Cherrington Corporate Center, Building 200, Coraopolis, Pennsylvania, which is in the vicinity of the Pittsburgh International Airport and approximately 20 miles from downtown Pittsburgh, Pennsylvania. The Registrant also maintains a full service data center staffed with systems, programming and client service personnel at One Denver Place, 999 18th Street, Denver, Colorado. A service and sales support office is located in the Wall Street area of New York City. The principal data processing service offered by the Registrant is a computerized "Accounting and Recordkeeping System", that is utilized by stock and bond brokerage clients, as well as brokerage subsidiaries and capital markets divisions of banks. A fully integrated subsystem of software modules, when operated on the Registrant's high speed electronic computing equipment, offers a comprehensive on-line automated system for serving financial institutions with brokerage accounting, institutional safekeeping, capital markets and portfolio accounting. The system provides such firms with on-line retrieval, reports and records on a day-to-day basis utilizing data supplied by the client. Presently, this service is being utilized by approximately 55 financial institutions throughout the country. The Registrant is also engaged, on a limited basis, in selling communications equipment, micro- and mini-computer equipment, software and equipment maintenance services to the clients of the data processing accounting service. The Registrant's competition for its "Accounting and Recordkeeping System" is primarily from three sources, (a) other independent data processing service companies, (b) in-house computer systems, and (c) correspondent clearing firms that offer trade clearing and recordkeeping services to securities firms on a "fully disclosed basis". The Registrant's "Accounting and Recordkeeping System" is also designed to support banks who offer safekeeping services to other banks, and brokerage houses who offer clearing services on a "fully disclosed basis" to their correspondent firms. In April of 1995, the Registrant announced it has entered into a joint project with Wachovia Operational Services Corporation for converting the Registrant's entire actively marketed software product line to operate on IBM computer equipment in place of the currently utilized Honeywell Bull configuration. Note J of the Registrant's Financial Statements contains information regarding this joint project. The project, which will require no major incurment of debt by the Registrant, is scheduled for completion at the close of 2 3 the 1997 fiscal year. Upon the successful completion of the joint project, the Registrant will continue to retain sole ownership of the converted software and will continue to offer its services on a service bureau basis. In addition, the Registrant will be able to license the software to firms desiring to utilize the system on an in-house basis. In consideration for entering into the joint project with the Registrant, Wachovia Operational Services Corporation will secure an in-house software license agreement for servicing Wachovia Investments, Incorporated, a current client of the Registrant. The Registrant currently is finalizing an agreement that will provide an option to purchase computer processing time from Wachovia Operational Services Corporation for some of its processing needs. In addition, the Registrant will have AS/400 computer processing capacity at its own facility to compliment its processing needs. During fiscal year 1998, Wachovia Operational Services Corporation will utilize its Software License Agreement to offer processing services to Wachovia Investments, Incorporated, a current client of the Registrant. Wachovia Investments, Incorporated currently accounts for approximately 20% of the Registrant's service revenues. While this event could have an adverse affect on the revenues generated by the Registrant in 1998, the impact on the financial condition cannot, at this time, be totally quantified. The Registrant is currently in discussion with several prospective new clients and believes it can replace the lost revenues prior to the end of the 1998 fiscal year. In addition, it will eliminate approximately $300,000 of annual maintenance expenses associated with the outgoing Honeywell Bull computer equipment. Statements regarding the Registrant's expectations as to its future operations and financial condition and certain other information presented in this statement constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Registrant believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors which could cause actual results to differ from expectations include a general downturn in the economy or the stock market and related transaction activity, gain or loss of significant clients, unforeseen new competition, changes in government policy or regulation or unforeseen costs and other effects related to legal proceedings. The Registrant presently employs approximately 50 persons. In general, Registrant's relations with its employees have been satisfactory. 3 4 ITEM 2. PROPERTIES Registrant's principal facilities, all of which are leased, are as follows:
APPROX. SQ. LEASE EXPIRATION FT. OF DATE (INCLUDING LOCATION TYPE OF FACILITY FLOOR SPACE RENEWAL OPTIONS) -------- ---------------- ----------- ---------------- Coraopolis, PA Executive Offices 25,024 12/31/97 and Pittsburgh Data Center As Well As 8,333 Sq. Ft. Which are Subleased to a Tenant Denver, CO Offices & Operations 8,566 12/31/96 of the Denver Data Center New York, NY Branch Office 850 8/31/98
The Registrant's aggregate rental expense for the above properties for the year ended August 31, 1996, was approximately $469,000. The Registrant intends to renew its lease for the Denver facility prior to December 31, 1996. As a result, the rental expense to be incurred by the Registrant for rentals during the fiscal year ending August 31, 1997, is anticipated to be approximately $494,000. Due to a reduced requirement for office space, which resulted from the termination of a business segment in February of 1992, the Registrant obtained a sublease tenant for approximately 8,333 square feet at its Coraopolis, Pennsylvania, location. The sublease tenant has committed to rent the space for the duration of the Registrant's lease obligation which is until the end of December of 1997. The Registrant owns and operates three Honeywell Bull DPS7000 computer mainframe systems; two located at the Denver data center and one located at the Pittsburgh data center. The Registrant also owns and operates a Honeywell Bull DPS7 mainframe system which is located at its Pittsburgh data center. In addition, the Registrant has a DPS7000 computer mainframe system located at its Denver facility on a 24 month lease expiring in June of 1997. Also, the Registrant has a DPS7000 computer mainframe system located at its Pittsburgh facility on a 24 month lease expiring in January of 1998. 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. 4 5 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Not applicable) PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's Common Stock is traded in the Over-the-Counter market and is quoted on the NASD Bulletin Board Trading System under the NASDAQ symbol CRIX. As of October 31, 1996, there were approximately 990 shareholders. The following tables set forth the range of high and low closing bid prices of the Company's Common Stock for the periods indicated and were derived from sources the Company deems reliable. All prices represent inter-dealer quotations, without retail mark-up, mark-down or commission and may not represent actual transactions.
Bid Prices ---------------- Ended August 31, 1996 High Low ---- --- First quarter 13/16 7/16 Second quarter 2 1/8 5/8 Third quarter 3 1/8 1 5/8 Fourth quarter 1 7/8 1 1/4
Bid Prices ---------------- Ended August 31, 1995 High Low ---- --- First quarter 9/16 7/16 Second quarter 5/8 3/8 Third quarter 7/16 3/8 Fourth quarter 7/16 3/8
5 6 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION I. RESULTS OF OPERATIONS The Registrant's principal source of revenue is derived from providing computerized accounting and support services to securities firms, banks and other financial institutions. The Registrant's revenues are directly affected by stock and bond market trading volume which indirectly impacts the number of transactions processed for its clients. The clients serviced are subject to mergers and acquisitions and may choose to convert their business from self-clearing to a fully disclosed basis. 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. REVENUES: The total revenues for the year ended August 31, 1996, increased by approximately 20% over the previous year. This was primarily due to an approximate 25% increase in the number of transactions processed for the current year as compared to the previous year. In addition, revenues from systems and programming also increased. The total revenues for the year ended August 31, 1995, increased by approximately 13% over the previous year, primarily due to the addition of new business and a general increase in trading activity for existing clients. COSTS AND EXPENSES: The total costs and expenses for the year ended August 31, 1996, increased approximately 6% over the previous year. Salary increases, plus matching funds, contributed to the Registrant's 401(k) Plan were partly responsible for this increase. The costs and expenses for the year ended August 31, 1995, increased approximately 7% over the previous year. NET INCOME: The net income for the year ended August 31, 1996, was $1,028,478 or $.26 per share. For the year ended August 31, 1995, the net income was $398,139 or $.10 per share. 6 7 II. LIQUIDITY AND CAPITAL RESOURCES Due to the relatively stable operating costs of the data processing service business, the working capital requirements of the Registrant are normally predictable. Cash or cash equivalents on hand at the end of the year ended August 31, 1996, were approximately $613,000 above the previous year. This increase was attributable to cash generated from profitable operations during the year. The management of the Registrant believes that current cash on hand, along with revenues generated by operations, will adequately satisfy the cash requirements of the Registrant for the coming year. In addition, if needed, the Registrant has a $750,000 working line of credit which it intends to renew in January of 1997. During the 1997 fiscal year, the Registrant intends to have the software of its product line operational on IBM computer equipment. At that time, the Registrant will have the option to purchase computer processing time from an outside supplier. In addition, it intends to install an IBM AS/400 computer system of its own near the end of the 1997 fiscal year in support of its service business. 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. 7 8 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Note 1. NOTE 1 - Items 9, 10, 11 and 12 are incorporated herein by reference to the Registrant's Proxy Statement which will be filed with the Commission no later than 120 days from fiscal year end. ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report. (1) & (2) A list of Financial Statements and Schedules are set forth in the Index to the Financial Statements attached hereto on Page 10. (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. (27) Financial Data Schedule 8 9 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 27, 1996 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 27, 1996 By: /s/ David J. Vagnoni --------------------------------- David J. Vagnoni, Director Executive Vice President Date: November 27, 1996 By: /s/ Lynn M. Bushman --------------------------------- Lynn M. Bushman, Director Date: November 27, 1996 By: /s/ David K. Klotz --------------------------------- David K. Klotz, Director Date: November 27, 1996 9 10 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (Item 13(a)) Report of Independent Certified Public Accountants Balance Sheets -- Pages 12 and 13 August 31, 1996 and 1995 Statements of Earnings -- Page 14 Years Ended August 31, 1996 and 1995 Statements of Changes in Stockholders' Equity -- Page 15 Years Ended August 31, 1996 and 1995 Statements of Cash Flows -- Page 16 Years Ended August 31, 1996 and 1995 Notes to Financial Statements -- Pages 17 to 24 10 11 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors COMPUTER RESEARCH, INC. We have audited the accompanying balance sheets of Computer Research, Inc. as of August 31, 1996 and 1995, 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, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Cleveland, Ohio October 16, 1996 11 12 COMPUTER RESEARCH, INC. BALANCE SHEETS August 31, ASSETS
1996 1995 ---------- ---------- CURRENT ASSETS Cash and cash equivalents $1,486,924 $ 873,508 Short-term investments (note A) 741,146 -- Accounts receivable - trade (net of allowance for doubtful accounts of $30,000 in each year) 831,421 776,099 Inventories (notes A and B) 41,958 80,518 Prepaid expenses 64,411 75,911 ---------- ---------- Total current assets 3,165,860 1,806,036 PROPERTY AND EQUIPMENT - AT COST (notes A, D and F) Data processing equipment 4,355,558 4,255,912 Data processing equipment under capital leases 143,615 104,339 Leasehold improvements 271,610 268,745 Office equipment 541,611 530,144 ---------- ---------- 5,312,394 5,159,140 Less accumulated depreciation and amortization 5,019,740 4,879,610 ---------- ---------- 292,654 279,530 OTHER ASSETS -- 1,341 ---------- ---------- $3,458,514 $2,086,907 ========== ==========
The accompanying notes are an integral part of these statements. 12 13 COMPUTER RESEARCH, INC. BALANCE SHEETS CONTINUED August 31, LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995 ---------- ---------- CURRENT LIABILITIES Note payable to bank (note C) $ -- $ 25,000 Current portion of long-term obligations (note D) 64,731 45,852 Accounts payable 128,232 82,057 Customer deposits 88,450 70,350 Accrued liabilities Compensation and payroll taxes 232,112 157,036 Vacation 301,614 281,720 Rent 63,642 103,847 Lease obligations 13,952 20,204 Income taxes 272,000 27,500 Other current liabilities 5,911 4,746 ---------- ---------- Total current liabilities 1,170,644 818,312 LONG-TERM OBLIGATIONS (NOTE D) 12,019 35,885 ACCRUED LEASE OBLIGATIONS 3,953 17,909 COMMITMENTS (NOTE E) -- -- STOCKHOLDERS' EQUITY (NOTE G) Common stock - no par value; $.0008 stated value; 5,000,000 shares authorized; 4,037,255 and 3,887,895 shares issued and outstanding in 1996 and 1995, respectively 3,230 3,110 Additional paid-in capital 744,342 715,842 Retained earnings 1,524,326 495,849 ---------- ---------- 2,271,898 1,214,801 ---------- ---------- $3,458,514 $2,086,907 ========== ==========
The accompanying notes are an integral part of these statements. 13 14 COMPUTER RESEARCH, INC. STATEMENTS OF EARNINGS For the years ended August 31,
1996 1995 ---------- ---------- REVENUES (NOTE J) Sales of services $7,150,358 $5,957,412 Sales of equipment and supplies 95,719 86,571 Operating lease income (note F) 31,275 48,160 Other income 184,381 112,004 ---------- ---------- 7,461,733 6,204,147 COSTS AND EXPENSES Cost of services 4,126,695 3,901,126 Cost of equipment and supplies sold 75,144 69,082 Selling and administrative expenses 1,813,747 1,700,509 Depreciation and amortization 140,130 95,904 Interest expense 12,540 12,587 ---------- ---------- 6,168,256 5,779,208 ---------- ---------- Earnings before income taxes 1,293,477 424,939 Provision for income taxes (notes A and H) 265,000 26,800 ---------- ---------- NET EARNINGS $1,028,477 $ 398,139 ========== ========== Earnings per common share $.26 $.10 ========== ==========
The accompanying notes are an integral part of these statements. 14 15 COMPUTER RESEARCH, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended August 31, 1996 and 1995
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL ------ ---------- ---------- ---------- Balance, August 31, 1994 $3,092 $711,489 $ 97,710 $ 812,291 Net earnings -- -- 398,139 398,139 Stock options exercised 18 4,353 -- 4,371 ------ -------- ---------- ---------- Balance at August 31, 1995 3,110 715,842 495,849 1,214,801 Net earnings -- -- 1,028,477 1,028,477 Stock options exercised 121 29,139 -- 29,260 Common stock redeemed (1) (639) -- (640) ------ -------- ---------- ---------- Balance at August 31, 1996 $3,230 $744,342 $1,524,326 $2,271,898 ====== ======== ========== ==========
15 16 COMPUTER RESEARCH, INC. STATEMENTS OF CASH FLOWS For the year ended August 31,
1996 1995 ---------- --------- Net earnings $1,028,477 $ 398,139 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 140,130 95,904 Provision for losses on doubtful accounts -- 10,000 Change in assets and liabilities Accounts receivable (55,322) (205,961) Inventories 38,560 20,829 Prepaid expenses 11,500 (17,765) Other assets 1,341 1,427 Accounts payable, accrued liabilities and other current liabilities 102,105 (16,021) Customer deposits 18,100 29,500 Accrued lease obligations (20,208) (62,495) Income taxes 244,500 27,500 ---------- --------- 480,706 (117,082) ---------- --------- Net cash provided by operating activities 1,509,183 281,057 Cash flows from investing activities Purchases of short-term investments (741,146) -- Additions to property and equipment (95,562) (63,967) ---------- --------- Net cash used in investing activities (836,708) (63,967) Cash flows from financing activities Issuance of common stock 29,260 4,371 Common stock redeemed (640) -- Payments on long-term obligations (62,679) (14,834) Net payments on line of credit (25,000) (25,000) ---------- --------- Net cash used in financing activities (59,059) (35,463) ---------- --------- NET INCREASE IN CASH 613,416 181,627 Cash and cash equivalents at beginning of year 873,508 691,881 ---------- --------- Cash and cash equivalents at end of year $1,486,924 $ 873,508 ========== =========
The accompanying notes are an integral part of these statements. 16 17 Computer Research, Inc. NOTES TO FINANCIAL STATEMENTS August 31, 1996 and 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows. NATURE OF OPERATIONS Computer Research, Inc. (the Company) provides data processing, accounting, and recordkeeping services for securities brokerage firms, banks, and other financial institutions across the continental United States. The Company's brokerage accounting and recordkeeping systems which can be utilized in either an on-line/real time mode or a distributed batch processing mode are located in data centers in Pittsburgh, Pennsylvania and Denver, Colorado. SHORT-TERM INVESTMENTS In accordance with the provisions of Statement of Financial Accounting Standards No. 115, the Company has classified all of its short-term investments which consist of various debt securities as "available for sale" at August 31, 1996. The estimated market value of such investments held at August 31, 1996 approximated the carrying value. All investments in debt securities held by the Company at August 31, 1996 have an original maturity date of thirteen months or less. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT The Company provides for depreciation and amortization using the straight-line method for financial reporting purposes over the following estimated useful lives: 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. 17 18 Computer Research, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED August 31, 1996 and 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Sales of services, equipment and supplies are recognized when services are performed or when a product is installed. Rental income from operating leases is recognized over the respective lease terms. INCOME TAXES The Company utilizes the asset and liability method in accounting for income taxes. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. EARNINGS PER SHARE Earnings per common share is computed based upon the number of weighted average common shares outstanding during each of the years and common share equivalents arising from the assumed exercise of stock options outstanding at the end of each year. Weighted average common shares and common share equivalents outstanding for the years ended August 31, 1996 and 1995 were 3,970,208 and 3,974,123, respectively. 18 19 Computer Research, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED August 31, 1996 and 1995 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. RECLASSIFICATIONS Certain reclassifications have been made to the 1995 financial statements in order to conform to the 1996 financial statements presentation. CASH EQUIVALENTS For purposes of the Statement of Cash Flows, the Company considers all highly liquid investments having original maturities of three months or less, money market and other interest-bearing deposit accounts to be cash equivalents. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION The Company entered into capital lease obligations for the purchase of new equipment totalling $57,692 and $85,923 during the years ended 1996 and 1995, respectively. The Company paid the following amounts for interest and income taxes during each year.
========================= 1996 1995 ------------------------- Interest $12,540 $12,747 Income taxes $22,500 $ 1,153
19 20 Computer Research, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED August 31, 1996 and 1995 NOTE B - INVENTORIES Inventories at August 31, 1996 and 1995 consist of:
=========================== 1996 1995 --------------------------- Equipment held for resale $16,466 $16,156 Work in-process 9,070 41,216 Computer supplies 16,422 23,146 --------------------------- $41,958 $80,518 ===========================
Work in-process consists of unbilled revenues for services performed. Computer supplies are primarily computer paper and ribbons which are sold to customers. NOTE C - NOTE PAYABLE TO BANK Note payable to bank represents borrowings from a line of credit of up to the lesser of $750,000 or a specified percentage of eligible accounts receivable and inventory as defined in the note agreement. The line of credit, which expires January 27, 1997, bears interest at the prime interest rate plus 1 percent (8.25% at August 31, 1996). 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. NOTE D - LONG-TERM OBLIGATIONS Long-term obligations at August 31, 1996 and 1995 consist of obligations under capital leases for various data processing equipment. The leases, which expire on various dates through 1998, provide for monthly rental payments ranging from $1,055 to $2,900. Equipment under the capital leases had a cost of $143,615 and $104,339 and accumulated amortization of $66,455 and $27,304 as of August 31, 1996 and 1995, respectively. 20 21 Computer Research, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED August 31, 1996 and 1995 NOTE D - LONG-TERM OBLIGATIONS (CONTINUED) Commitments for future minimum payments under these obligations are as follows: 1997 $67,440 1998 12,500 ------- Net minimum lease payments 79,940 Less amount representing interest 3,190 ------- Present value of minimum lease payments 76,750 Less current portion 64,731 ------- $12,019 =======
NOTE E - LEASE COMMITMENTS The Company has several operating lease agreements for automobiles, equipment, and office space. Certain of the leases contain escalation clauses and require the Company to pay for taxes, utilities and other operating expenses of the lessor. The Company entered into a noncancelable sublease agreement for certain office space in fiscal 1995. Rental expense charged to operations was $679,954 and $574,230 for the years ended August 31, 1996 and 1995, respectively. As of August 31, 1996, the Company is obligated to pay, and entitled to receive, the following minimum annual rentals on operating leases.
================================== SUBLEASE RENTAL YEAR ENDING AUGUST 31, AMOUNT INCOME NET ------------------------------------------------------------- 1997 $406,730 $108,412 $298,318 1998 129,210 36,832 92,378 ---------------------------------- $535,940 $145,244 $390,696 ==================================
21 22 Computer Research, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED August 31, 1996 and 1995 NOTE F - EQUIPMENT UNDER OPERATING LEASES TO CUSTOMERS The Company leases minicomputers and data processing equipment, as lessor, under operating leases that have one-year or two-year initial lease terms. Customers may terminate these leases during the initial term only by purchasing or leasing equipment of equal or greater value from the Company. Property leased and property held for lease had a cost of $1,555,957 at August 31, 1996 and 1995. These properties were substantially depreciated in each year. NOTE G - STOCK OPTIONS The Company had reserved 250,000 shares of common stock under a stock option plan for key employees. Options under the plan could be granted at prices not less than 100% of the fair market value on the date granted. Stock options, which were exercisable at option prices ranging from $.19 to $.21 per share, expired on February 22, 1996. Stock option activity for the years ended August 31, 1996 and 1995 was as follows:
=================== 1996 1995 ------------------- Outstanding, beginning of year 161,000 184,000 Less exercised at $.19 - $.21 per share 150,000 23,000 Less expired 11,000 -- ------------------- Outstanding, end of year -- 161,000 ===================
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, 1996, the new plan had not yet been finalized and no options had been granted. 22 23 Computer Research, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED August 31, 1996 and 1995 NOTE H - INCOME TAXES The Company has recorded reduced provisions for income taxes for the years ended August 31, 1996 and 1995 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:
================ 1996 1995 ---------------- Expected statutory rate 34.0% 34.0% Permanent nondeductible expenditures 1.3 4.0 State income taxes - net of federal benefit 2.3 3.2 Utilization of federal income tax loss carryforwards (17.2) (34.4) Other .1 (.5) ---------------- 20.5% 6.3% ================
At August 31, 1996, the Company has state net operating loss carryforwards of approximately $1,030,000, of which approximately $650,000 expires in fiscal year 1998 and the remainder expires in fiscal year 2001. The utilization of the state net operating loss carryforwards could be subject to limitations in the future. All federal net operating loss carryforwards have been utilized as of August 31, 1996. Deferred tax assets and liabilities at August 31, 1996 and 1995 consist of the following:
======================== 1996 1995 ------------------------ Temporary differences related to: Accrued expenses and allowances $ 143,000 $ 152,000 Depreciation (3,000) (3,000) Net operating loss carryforwards 83,000 313,000 Valuation allowance (223,000) (462,000) ------------------------ NET DEFERRED TAXES $ -- $ -- ========================
23 24 Computer Research, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED August 31, 1996 and 1995 NOTE H - INCOME TAXES (CONTINUED) The Company has established a valuation allowance at August 31, 1996 and 1995 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 $239,000 and $209,000 for the years ended August 31, 1996 and 1995, respectively. NOTE I - EMPLOYEE BENEFIT PLAN The Company has a qualified profit-sharing plan, which includes a salary reduction, deferred compensation feature under Section 401(k) of the Internal Revenue Code. Substantially all employees are eligible to participate in this plan. Employer contributions to the plan are determined annually by the Board of Directors. Employer contribution expense for the years ended August 31, 1996 and 1995 was $210,828 and $57,607, respectively. NOTE J - MAJOR CUSTOMERS The continuing operations of the Company primarily consist of providing services and products to banks and security brokerage/dealer sectors. Sales to one customer amounted to 19.9% and 19.2% of total revenues during the fiscal years ended August 31, 1996 and 1995, respectively. On February 9, 1995, the Company and an affiliate of the major client noted above, entered into an agreement in principle to negotiate the terms and conditions of a definitive agreement regarding a joint project to convert the Company's computer production software from its existing hardware platform to an IBM AS/400 platform. The project is scheduled for completion during the 1997 fiscal year. Upon successful completion of the project, the Company intends to license the software to third parties, including the major client, which may result in a reduction in service revenues from the major client. The agreement also may provide the Company with the ability to out source data center operations on terms favorable to the Company, resulting in a reduction in its cost of operations. 24 EX-27 2 COMPUTER RESEARCH, INC. 10KSB
5 0000201511 COMPUTER RESEARCH, INC. 1 U.S. DOLLARS YEAR AUG-31-1996 SEP-01-1995 AUG-31-1996 1 1,486,924 741,146 861,421 30,000 41,958 3,165,860 5,312,394 5,019,740 3,458,514 1,170,644 76,750 0 0 3,230 2,268,668 3,458,514 95,719 7,461,733 75,144 6,168,256 0 0 12,540 1,293,477 265,000 1,028,477 0 0 0 1,028,477 .26 .26
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