-----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, T5/jqN54eEVUV4eDujoPDzUUVx484hqRq4QuqI1HdsU/pDrFMyx9hVVrSXCYCl0Y iPqZABXAtk8UpCHg+q5FdA== 0000950128-99-001149.txt : 19991125 0000950128-99-001149.hdr.sgml : 19991125 ACCESSION NUMBER: 0000950128-99-001149 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991124 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: SEC FILE NUMBER: 000-05954 FILM NUMBER: 99763936 BUSINESS ADDRESS: STREET 1: 400 SOUTHPOINTE BLVD STREET 2: STE 300 CITY: CANONSBURG STATE: PA ZIP: 15317-8539 BUSINESS PHONE: 4122624430 MAIL ADDRESS: STREET 1: SOUTHPOINT PLZ I STREET 2: 400 SOUTHPOINTE BLVD STE 300 CITY: CANONSBURGH STATE: PA ZIP: 15317-8539 10KSB 1 COMPUTER RESEARCH, INC. 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, 1999 Commission File No. 0-5954 COMPUTER RESEARCH, INC. -------------------------------------------------- (Exact name of issuer as specified in its charter) Pennsylvania 25-1201499 - -------------------------------- ----------------------------------- (State or other jurisdiction of (IRS Employer Identification Number) Incorporation or organization) Southpointe Plaza I, Suite 300, 400 Southpointe Boulevard, Canonsburg, PA 15317 - ------------------------------------------------------------------------------- (Address of principal executive offices, including zip code) Issuer's telephone number, including area code: (724) 745-0600 ------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Without Par Value Indicate by check mark whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ______ Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is contained herein, and will not be contained, to the best of the Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Issuer's Revenue during the Fiscal Year 1999: $7,828,303 The aggregate market value of 2,314,553 voting shares held by non-affiliates of the Issuer, computed by reference to $1.28 (which is the average of the bid and ask prices of the Issuer's Common Stock on October 31, 1999, of $1.1875 and $1.375 respectively) is $2,962,628. As of October 31, 1999, 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, 1999, is incorporated by reference into Part III of this Form 10-KSB. 2 PART I ITEM 1. BUSINESS CORPORATE STRUCTURE Computer Research, Inc. (Registrant), a Pennsylvania corporation organized in July 1969, is a data processing service company providing data processing, accounting and recordkeeping services to securities firms, banks and other financial institutions. The principal office and a data center for the Registrant is located at Southpointe Plaza I, a suburban office park complex in Canonsburg, Pennsylvania, which is approximately 20 miles south of downtown Pittsburgh, Pennsylvania. The Registrant maintains a full service data center staffed with systems, programming, operations and client service personnel at Denver Place, 999 18th Street, Denver, Colorado, and also utilizes the data processing facilities of Wachovia Operational Services Corporation located in Winston-Salem, North Carolina. A service and sales support office is located in the Wall Street area of New York City. SERVICES OFFERED The principal data processing service offered by the Registrant is an IBM AS/400 computerized "Accounting and Recordkeeping System" that is utilized by stock and bond brokerage firms, as well as brokerage subsidiaries and capital markets divisions of banks. A fully integrated subsystem of software modules operated on the IBM AS/400 computer equipment offers a comprehensive automated system for serving financial institutions with brokerage accounting, institutional safekeeping, capital markets and portfolio accounting. The system provides such firms with on-line retrieval, reports and records on a day-to-day basis utilizing daily business transaction data which is prepared by the client. Presently, this service is being utilized by approximately 45 financial institutions throughout the country. RESELLER AGREEMENTS The Registrant offers its clients three products that it has obtained through reseller agreements. One of the reseller products is a computerized order management system that is used to electronically route buy/sell orders for financial institutions to a pre-designated execution point. Upon completion of the order execution, the system routes the details of the executed order to the computerized recordkeeping system, as well as directing notification of the order execution results to the financial institution that initiated the order. 2 3 The Registrant also offers its clients an internet utilized system which permits customers of the client firm to view their account balances and current positions, as well as place buy and sell orders over the "world wide web" on a 24 hour, seven day per week, basis. Another reseller product is a computerized data and document imaging system which electronically facilitates the storage and retrieval of data records and documents. The system catalogs and manages the storage of this information on optical disk files and provides automated retrieval for displaying or printing the stored information. COMPETITION The Registrant's competition for its "Accounting and Recordkeeping System" is primarily from three sources, (a) other independent data processing service companies, (b) in-house computer systems, and (c) correspondent clearing firms that offer trade clearing and recordkeeping and accounting services to securities firms on a "fully disclosed basis". The Registrant's "System" is also designed to offer recordkeeping and accounting services to such clearing firms on a correspondent basis, as well as to banks that offer safekeeping services to other banks and financial institutions. JOINT VENTURE During the 1999 fiscal year, the Registrant completed transferring all of its clients to be serviced from the IBM AS/400, which was the result of a nearly five year project for converting the software to function on the IBM platform. The conversion project also included modifying the entire software product line to encompass an expanded eight digit date format to accurately handle processing after the year 2000 (see Year 2000). The conversion project to the AS/400, from a previously utilized non-year 2000 compliant computer mainframe configuration, was the result of a joint venture transaction between Wachovia Operational Services Corporation (WOSC) and the Registrant. In return for providing funds for and participating in the software modification and conversion, the joint venture arrangement gave WOSC a perpetual Software License Agreement to utilize the converted software for the internal servicing of its affiliate, Wachovia Investments, Incorporated (WII), a former full service client of the Registrant. As a result, beginning in the second quarter of the 1998 fiscal year, WOSC utilized its Software License Agreement to begin offering processing services to WII. The loss of WII, which accounted for approximately 20% of the 1997 revenues, contributed to a 13% decrease in the Registrant's 1998 total revenues. During the 1999 fiscal year, increased business from existing clients, combined with revenues generated by new clients, enabled the Registrant to replace the amount of revenues which resulted from the loss of WII. 3 4 DATA PROCESSING FACILITIES The Registrant has IBM AS/400 computer equipment located at its suburban Pittsburgh, Pennsylvania, and Denver, Colorado, data centers in support of its service business. In addition, the Registrant has entered into a service agreement with Wachovia Operational Services Corporation (WOSC) for purchasing computer processing time on an IBM AS/400 computer located in Winston-Salem, North Carolina. EMPLOYEES The Registrant presently employs approximately 50 non-unionized employees. The majority of the Registrant's employees are located at the corporate headquarters in suburban Pittsburgh, Pennsylvania, as well as its Denver, Colorado, data center. In general, Registrant's relations with its employees have been satisfactory. YEAR 2000 In previous years, in an effort to efficiently utilize expensive computer storage facilities, many computer software systems were developed utilizing two digits to identify a year (for example, "98" was used to represent "1998"). Such programs left untouched, would read "00" as the year "1900" and thus, would not accurately recognize dates beginning with the year 2000 (Y2K). Such failures could cause disruptions in normal business operations, as well as problems in maintaining computerized financial and accounting records. Much of the Registrant's software was originally developed utilizing the two digit year. In support of being prepared to process accurately after the Y2K, all of the Registrant's software was modified during the past four years to contain a four digit year. This modification was performed and funded as part of a joint venture project with Wachovia Operational Services Corporation for converting the software to operate on an IBM AS/400 (see Joint Venture). As a result, the Registrant incurred no substantial costs for this software modification. At the start of the third quarter of the Registrant's 1999 fiscal year, all of the Registrant's service business was operating on a Y2K compliant four digit year IBM AS/400 system. During the past two years, the Registrant, supported by the involvement of some of its clients, completed extensive detail testing of its software and firmly believes that it is prepared for processing beginning in the year 2000. In providing its services to its clients, the Registrant's computer software is interfaced with over 100 other organizations that provide computer services to the financial industry. Many of those organizations have not modified their software from two digits to a four digit platform. As a result, when receiving data transmission from these organizations, situations exist which require the Registrant to programmatically apply the appropriate two digit century designation to the transaction (windowing) when it is entered 4 5 into the Registrant's computer system. In support of verifying the validity of this "windowing technique", as well as verifying the accuracy of the Registrant's software for processing after Y2K, during the past year, the Registrant successfully participated in financial industry system testing mandated by the Securities Industry Association. The Registrant is also dependent upon vendors that supply it with computer software and equipment, as well as public utilities and communications suppliers that may be subject to the Y2K issue. The Registrant has received written responses from these suppliers indicating that they have addressed the Y2K issue and do not anticipate major disruptions in the year 2000. As the Registrant approaches the start of the year 2000, it believes that all modifications and precautions have been taken to assure that there will be no significant interruption in its operation caused by the Y2K issue. However, there is no guarantee that Y2K problems will not exist with the Registrant's software or with any of the vendors or suppliers that it utilizes. As a result, the Registrant will employ contingency plans which require management, staff members and other resources to be available to react promptly should a problem occur. The Registrant believes that with the contingent plans and facilities that are in place, any unanticipated disruption for Y2K problems will be of a minimum nature. Failure of the Registrant's software or third party vendors to correctly address Y2K issues could cause business disruptions for the Registrant and its clients. It is not possible to predict with certainty all of the adverse effects that may result from a Y2K failure, in the unlikely event that one should occur, or whether such effects could have a material impact on Registrant. RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS Statements regarding the Registrant's expectations as to its future operations and financial condition and certain other information presented in this statement constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Registrant believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors, which could cause actual results to differ from expectations, include a general downturn in the economy or the stock market and related transaction activity, gain or loss of significant clients, unforeseen new competition, changes in government policy or regulation or unforeseen costs and other effects related to legal proceedings. 5 6 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) -------- ---------------- ----------- ---------------- Canonsburg, PA Executive Offices 16,010 10/31/02 and a Suburban Pittsburgh Data Center Denver, CO Offices & Operations 8,566 12/31/01 of the Denver Data Center New York, NY Branch Office 850 8/31/03
The Registrant's aggregate rental expense for the above properties for the year ended August 31, 1999, was approximately $517,000. The rental expense to be incurred by the Registrant for rentals during the fiscal year ending August 31, 2000, is anticipated to be approximately $479,000. With the conversion of the software to operate on the compact IBM AS/400 configuration, the Registrant did not require the large data center space configured at its Denver location. The Registrant contracted with the Denver landlord to reconfigure some of the Denver data center space to contain office facilities as opposed to a large computer room facility. The redesign was completed during the fourth quarter of the current fiscal year at a cost to the Registrant of approximately $60,000. During the third quarter of the 1999 fiscal year, the Registrant completed the conversion of all of its data processing service business to operate on the IBM AS/400 computer configuration. As a result, two Honeywell Bull DPS7000 computer mainframe systems are no longer in use at its Denver data center. These two Honeywell Bull configurations were fully depreciated in previous years. The Registrant has IBM AS/400 computer equipment at its Denver data center on an equipment lease which expires in March of 2000. In addition, the Pittsburgh data center is equipped with IBM AS/400 equipment that is on a lease that expires in November of 2002. 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. 6 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Not applicable) PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Registrant's Common Stock is traded in the Over-the-Counter market and is quoted on the NASDAQ Bulletin Board Trading System under the symbol CRIX. As of October 31, 1999, there were approximately 900 shareholders. The following tables set forth the range of high and low closing bid prices of the Registrant's Common Stock for the periods indicated and were derived from the NASDAQ Over-the-Counter Bulletin Board. All prices represent inter-dealer quotations, without retail mark-up, mark-down or commission, and may not represent actual transactions. Bid Prices ----------------------------------- Ended August 31, 1999 High Low ---- --- First quarter 1-1/8 7/8 Second quarter 1-5/8 13/16 Third quarter 2-9/16 15/16 Fourth quarter 1-15/16 13/16 Bid Prices ----------------------------------- Ended August 31, 1998 High Low ---- --- First quarter 1-1/2 1 Second quarter 1-1/2 1-1/8 Third quarter 1-7/16 1-1/8 Fourth quarter 1-11/16 1-3/16 7 8 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION I. "SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Statements regarding the Registrant's expectations as to its future operations and financial condition and certain other information presented in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Since these statements involve risks and uncertainties and are subject to change at anytime, the Registrant's actual results could differ materially from expected results. The Registrant's forward looking statements are based upon operating budgets and many detailed assumptions. While the Registrant believes that its assumptions are reasonable, it cautions that there are inherent difficulties in predicting certain important factors which could directly affect the business. Some factors, which could cause actual results to differ from expectations, include a general downturn in the economy or the stock markets and related transaction activity, gain or loss of significant clients, unforeseen new competition, changes in government policy or regulation, or costs and other effects related to unanticipated legal proceedings. II. RESULTS OF OPERATIONS The Registrant's principal source of revenue is derived from providing computerized accounting and support services to securities firms, banks and other financial institutions. The Registrant's revenues are directly affected by stock and bond market trading volume which indirectly impacts the number of transactions processed for its clients. In addition, the clients serviced are subject to mergers and acquisitions or may choose to convert their business from the currently utilized self-clearing approach to a fully disclosed basis under which their recordkeeping needs would be supplied by a clearing agent, after which the Registrant's services may not be required. The Registrant could be positively or negatively impacted by a merger involving one of its clients. The Registrant has been notified that due to the result of being acquired, a client that accounted for 11.6% of the 1999 revenues will be terminating the Registrant's services at the beginning of the fiscal third quarter of the year 2000. Also, due to the volatile nature of the industry served, the results of operations for the period represented are not necessarily indicative of the results of operations to be expected for the coming year or any specific period. The Registrant intends to continue soliciting new business on a service basis, as well as an in-house license agreement basis. 8 9 REVENUES: The total revenues for the year ended August 31, 1999, were approximately $7.8 million or an approximate 16% increase over the 1998 fiscal year. This was primarily the result of an increased number of transactions generated by new clients, as well as some of the existing banking and brokerage clients. As set forth below, the loss of revenues of a full service major client during the second quarter of the 1998 fiscal year was the primary reason for an approximate 13% decrease in 1998 revenues as compared to the previous year. In March of 1996, the Registrant and Wachovia Operational Services Corporation (WOSC), an affiliate of a major client that in the 1997 fiscal year accounted for more than 20% of the service revenues of the Registrant, entered into a joint agreement to provide funds to convert the Registrant's production software from its existing hardware platform to operate on an IBM AS/400 configuration. The converted software became operational on the IBM equipment during the 1997 fiscal year. In consideration for its participation in the conversion project, WOSC obtained a perpetual operating license agreement which it utilized beginning in the second quarter of the 1998 fiscal year to service Wachovia Investments, Incorporated, a previous full service major customer of the Registrant. As a result of this transaction, the net revenue loss for 1998 amounted to approximately $1,000,000. COSTS AND EXPENSES: The total costs and expenses for the year ended August 31, 1999, were approximately $7.2 million which is an increase of approximately 13% over the previous year. Increased employee payroll costs, employee benefits, fees related to license agreements, as well as a requirement for the purchase of outside software support, were the primary contributors to this increase. The total costs and expenses for the year ended August 31, 1998, were approximately equal to the previous year. NET INCOME: The net income for the year ended August 31, 1999, was $460,651 or $.11 per share as compared to $261,822 or $.06 per share for the previous year. III. LIQUIDITY AND CAPITAL RESOURCES The Registrant had approximately $2.9 million in cash, cash equivalents and short-term investments at the end of the 1999 fiscal year. In addition, a $750,000 unused line of credit is available. This, along with funds generated by operations, should adequately support the operating needs of the Registrant in the near term. 9 10 During the first quarter of the 1999 fiscal year, the Registrant entered into a lease for approximately $292,000 of computer equipment located at its Pittsburgh data center which will expire in October of 2002. In addition, during the 1998 fiscal year, the Registrant entered into a lease for approximately $215,000 of computer equipment located at its Denver data center which will expire in April of 2000. IV. RECENT ACCOUNTING PRONOUNCEMENTS Refer to Note A in the Financial Statements of the Registrant which are attached hereto and included herein for a list of recent accounting pronouncements and their expected impact. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (See Item 13, below, for list of Financial Statements of the Registrant which are attached hereto and included herein.) ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See Note 1. ITEM 10. EXECUTIVE COMPENSATION See Note 1. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See Note 1. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Note 1. NOTE 1 - Items 9, 10, 11 and 12 are incorporated herein by reference to the Registrant's Proxy Statement which will be filed with the Commission no later than 120 days from fiscal year-end. 10 11 ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report. (1) & (2) A list of Financial Statements and Schedules are set forth in the Index to the Financial Statements attached hereto on Page 13. (3) Exhibits: (3) Articles of Incorporation are incorporated by reference to the Registrant's Form 10, and exhibits thereto; which is currently on file with the Commission. The Registrant's By-Laws are incorporated by reference to the Form 10-K Annual Report for the fiscal year ended August 31, 1990. (4) Form of certificates of common stock are incorporated by reference to Form 10 and exhibits thereto. (10)(i) The lease for the Registrant's Corporate headquarters and data center in Canonsburg, Pennsylvania, is incorporated by reference to the Form 10-K Annual Report for the fiscal year ended August 31, 1999. 11 12 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 23, 1999 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 23, 1999 By: /s/ David J. Vagnoni ---------------------------------- David J. Vagnoni, Director Executive Vice President Date: November 23, 1999 By: /s/ Kenneth C. Ebbitt ---------------------------------- Kenneth C. Ebbitt, Director Date: November 23, 1999 By: /s/ K. David Klotz ---------------------------------- K. David Klotz, Director Date: November 23, 1999 12 13 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (Item 13(a)) Report of Independent Public Accountants -- Page 14 Balance Sheets -- Pages 15 and 16 August 31, 1999 and 1998 Statements of Earnings -- Page 17 Years Ended August 31, 1999 and 1998 Statements of Changes in Stockholders' Equity -- Page 18 Years Ended August 31, 1999 and 1998 Statements of Cash Flows -- Page 19 Years Ended August 31, 1999 and 1998 Notes to Financial Statements -- Pages 20 to 27 13 14 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Computer Research, Inc.: We have audited the accompanying balance sheets of Computer Research, Inc. as of August 31, 1999 and 1998, 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 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, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Pittsburgh, Pennsylvania October 28, 1999 14 15 COMPUTER RESEARCH, INC. BALANCE SHEETS AUGUST 31,
ASSETS: 1999 1998 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 449,698 $ 766,823 Short-term investments 2,439,882 1,996,700 Accounts receivable, net of allowance of $37,500 and $30,000 in 1999 and 1998, respectively 1,058,999 721,239 Inventories 7,152 43,891 Prepaid expenses 52,689 79,955 Deferred tax asset 25,000 -- ----------- ----------- Total current assets 4,033,420 3,608,608 ----------- ----------- PROPERTY AND EQUIPMENT - AT COST Data processing equipment 1,765,116 1,672,213 Data processing equipment under capital leases 446,471 256,471 Leasehold improvements 185,008 154,551 Office equipment 580,574 535,887 ----------- ----------- 2,977,169 2,619,122 Less accumulated depreciation and amortization (2,249,900) (2,064,718) ----------- ----------- 727,269 554,404 ----------- ----------- OTHER LONG-TERM ASSETS 43,998 39,905 ----------- ----------- $ 4,804,687 $ 4,202,917 =========== ===========
The accompanying notes are an integral part of these statements. 15 16 COMPUTER RESEARCH, INC. BALANCE SHEETS AUGUST 31, LIABILITIES AND STOCKHOLDERS' EQUITY:
1999 1998 ---------- ---------- CURRENT LIABILITIES Current portion of capital leases $ 81,072 $ 37,765 Accounts payable 125,117 149,382 Customer deposits 76,700 97,650 Unearned revenue 17,001 -- Accrued liabilities Compensation and payroll taxes 129,607 76,281 Vacation 260,593 281,058 Income taxes 42,000 13,000 Other 290 330 ---------- ---------- Total current liabilities 732,380 655,466 LONG-TERM PORTION OF CAPITAL LEASES 161,266 97,061 ---------- ---------- Total liabilities 893,646 752,527 ---------- ---------- STOCKHOLDERS' EQUITY Common stock - no par value; $.0008 stated value; 5,000,000 shares authorized; 4,037,255 shares issued and outstanding 3,230 3,230 Additional paid-in capital 744,342 744,342 Retained earnings 3,163,469 2,702,818 ---------- ---------- Total stockholders' equity 3,911,041 3,450,390 ---------- ---------- Total liabilities and stockholders' equity $4,804,687 $4,202,917 ========== ==========
The accompanying notes are an integral part of these statements. 16 17 COMPUTER RESEARCH, INC. STATEMENTS OF EARNINGS FOR THE YEARS ENDED AUGUST 31,
1999 1998 ---------- ---------- REVENUES Sales of services $7,436,873 $6,424,501 Sales of equipment and supplies 75,684 188,837 Other income 315,746 165,180 ---------- ---------- Total Income 7,828,303 6,778,518 ---------- ---------- COSTS AND EXPENSES Cost of services 4,387,430 3,839,980 Cost of equipment and supplies sold 58,211 148,790 Selling and administrative expenses 2,499,264 2,211,543 Depreciation and amortization 201,009 156,855 Interest expense 26,606 13,528 ---------- ---------- Total Expense 7,172,520 6,370,696 ---------- ---------- Earnings before income taxes 655,783 407,822 PROVISION FOR INCOME TAXES 195,132 146,000 ---------- ---------- NET EARNINGS $ 460,651 $ 261,822 ========== ========== Earnings per common share (basic and diluted) $ 0.11 $ 0.06 ========== ==========
The accompanying notes are an integral part of these statements. 17 18 COMPUTER RESEARCH, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED AUGUST 31, 1999 AND 1998
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNING TOTAL ------ -------- ---------- ---------- Balance at August 31, 1997 $3,230 $744,342 $2,440,996 $3,188,568 Net Earnings -- -- 261,822 261,822 ------ -------- ---------- ---------- Balance at August 31, 1998 3,230 744,342 2,702,818 3,450,390 Net earnings -- -- 460,651 460,651 ------ -------- ---------- ---------- Balance at August 31, 1999 $3,230 $744,342 $3,163,469 $3,911,041 ====== ======== ========== ==========
The accompanying notes are an integral part of these statements. 18 19 COMPUTER RESEARCH, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31,
1999 1998 --------- --------- Net earnings $ 460,651 $ 261,822 --------- --------- Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 201,009 156,855 Provision for bad debts 7,500 -- Gain on sale of fixed assets -- (647) Change in assets and liabilities Accounts receivable (345,260) 134,984 Inventories 36,739 (3,121) Prepaid expenses 27,266 (13,242) Deferred tax asset (25,000) -- Other assets (19,920) (39,905) Accounts payable, accrued liabilities and other current liabilities 37,556 (134,849) Unearned revenue 17,001 -- Customer deposits (20,950) 850 --------- --------- (84,059) 100,925 --------- --------- Net cash provided by operating activities 376,592 362,747 --------- --------- Cash flows from investing activities Proceeds from the sale of fixed assets -- 647 (Purchases) sales of short-term investments, net (443,182) 381,548 Additions to property and equipment (168,047) (286,591) --------- --------- Net cash (used in) provided by investing activities (611,229) 95,604 --------- --------- Cash flows from financing activities Payments on long-term obligations (82,488) (27,787) --------- --------- Net cash used in financing activities (82,488) (27,787) --------- --------- NET (DECREASE) INCREASE IN CASH (317,125) 430,564 Cash and cash equivalents at beginning of year 766,823 336,259 --------- --------- Cash and cash equivalents at end of year $ 449,698 $ 766,823 ========= =========
The accompanying notes are an integral part of these statements. 19 20 COMPUTER RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1999 AND 1998 NOTE A - SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows. NATURE OF OPERATIONS Computer Research, Inc. (the Company) provides data processing, accounting, and recordkeeping services for securities brokerage firms, banks, and other financial institutions across the continental United States. The Company's brokerage and bank accounting and recordkeeping systems are accessed from data centers in Pittsburgh, Pennsylvania, Denver, Colorado and Winston-Salem, North Carolina. SHORT-TERM INVESTMENTS In accordance with the provisions of Statement of Financial Accounting Standards No. 115, the Company has classified all of its short-term investments which consist of various debt securities as "available for sale" at August 31, 1999 and 1998. The estimated market value of such investments held at August 31, 1999 and 1998, approximated the carrying value. All investments in debt securities held by the Company at August 31, 1999 and 1998, have an original maturity date of twelve months or less. INVENTORIES Inventories, which primarily consist of equipment for sale, are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT The Company provides for depreciation and amortization using the straight-line method for financial reporting purposes over the following estimated useful lives: Data processing equipment 5 years Data processing equipment under capital lease Lease term Leasehold improvements Lease term Office equipment 5 years Other long-term assets 2 years Accelerated depreciation methods are used for tax purposes. Maintenance and repairs are charged to operation as incurred. 20 21 COMPUTER RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED AUGUST 31, 1999 AND 1998 NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) During fiscal year 1998, the Company's conversion of its software to operate on an IBM AS/400, and in conjunction with the move of the Company's headquarters, the Company disposed of property and equipment with an original cost of $3,276,000. This property and equipment primarily consisted of the Bull computer and related equipment, as well as equipment that was leased to customers and was then obsolete. All items disposed of were fully depreciated. Immaterial proceeds were received for the disposed property and equipment. REVENUE RECOGNITION Sales of services, equipment and supplies are recognized when services are performed or when a product is installed. Rental income from operating leases is recognized over the respective lease terms. INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. EARNINGS PER SHARE During 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This statement requires the disclosure of basic and diluted earnings per share and revises the method to calculate these amounts. As the Company did not have any common stock equivalents outstanding during 1999 or 1998, the adoption of this standard did not have an impact on earnings per share amounts. Weighted average common shares outstanding for the years ended August 31, 1999 and 1998 were 4,037,255. 21 22 COMPUTER RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED AUGUST 31, 1999 AND 1998 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. CASH EQUIVALENTS For purposes of the Statement of Cash Flows, the Company considers all highly liquid investments having maturities of three months or less when purchased, money market and other interest-bearing deposit accounts to be cash equivalents when purchased. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION The Company entered into capital lease obligations for the purchase of new equipment totaling $190,000 and $37,061 during the years ended 1999 and 1998, respectively. The Company paid the following amounts for interest and income taxes during each year. 1999 1998 ---- ---- Interest $ 27,000 $ 14,000 Income taxes $188,000 $146,000 22 23 COMPUTER RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED AUGUST 31, 1999 AND 1998 NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS During 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128) and Statement No. 129 "Disclosure of Information about Capital Structure" (SFAS 129). These statements did not have a significant impact on the Company's financial statements. In fiscal year 1999, the Company adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income" (SFAS 130), Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131), Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," (SFAS 132), and Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This statement had no impact on the Company's disclosures. SFAS 131 introduces a new model for segment reporting called the "management approach". The management approach is based on the way the chief operating decision-maker organizes segments within a Company for making operating decisions and assessing performance. This statement had no impact on the Company's disclosures. SFAS 132 requires revision of certain footnote disclosure requirements related to pension and other retiree benefits. This statement had no impact on the Company's disclosures. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement had no impact on the Company's disclosures. NOTE B - NOTE PAYABLE TO BANK Note payable to bank represents borrowings from a line of credit of up to the lesser of $750,000 or a specified percentage of eligible accounts receivable and inventory as defined in the note agreement. The line of credit, which expires January 29, 2000, bears interest at the prime interest rate plus I percent (or 9.5% at August 31, 1999). The line of credit is primarily collateralized by accounts receivable, equipment and inventory. Restrictive covenants in the note agreement, among other things, require the Company to maintain certain financial ratios. The Company borrowed and subsequently repaid $200,000 from the line of credit during 1999. No borrowings under the line of credit were made during 1998. 23 24 COMPUTER RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED AUGUST 31, 1999 AND 1998 NOTE C - LONG-TERM OBLIGATIONS Long-term obligations at August 31, 1999 and 1998 consist of obligations under capital leases for various data processing equipment. The leases, which expire on various dates through 2003, provide for monthly payments ranging from $1,417 to $6,211. Equipment under the capital leases had a cost of $446,000 and $256,000 and accumulated amortization of $172,000 and $107,000 as of August 31, 1999 and 1998, respectively. Commitments for future minimum payments under these obligations are as follows: 2000 $ 98,753 2001 84,451 2002 74,532 2003 18,633 -------- Net minimum lease payments 276,369 Less amount representing interest (34,031) -------- Present value of minimum lease payments 242,338 Less current portion (81,072) -------- $161,266 ======== NOTE D - LEASE COMMITMENTS The Company has several operating lease agreements for automobiles, equipment, and office space. Certain of the leases contain escalation clauses and require the Company to pay for taxes, utilities and other operating expenses of the lessor. Rental expense charged to operations was $677,000 for the years ended August 31, 1999 and 1998. As of August 31, 1999, the Company is obligated to pay the following minimum annual rentals on operating leases. YEAR ENDING AUGUST 31, AMOUNT ---------- ---------- 2000 $ 525,127 2001 479,314 2002 364,276 2003 63,456 ---------- $1,432,173 ========== 24 25 COMPUTER RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED AUGUST 31, 1999 AND 1998 NOTE E - EQUIPMENT UNDER OPERATING LEASES TO CUSTOMERS The Company leases minicomputers and data processing equipment, as lessor, under operating leases that have one-year or two-year initial lease terms. Customers may terminate these leases during the initial term only by purchasing or leasing equipment of equal or greater value from the Company. Property leased and property held for lease had a cost of $6,000 at August 31, 1998. These properties were substantially depreciated in each year. NOTE F - STOCK OPTIONS In fiscal year 1996, the Board of Directors approved a resolution to reserve 400,000 shares of common stock for issuance to key employees, directors and other advisors of the Company under a new stock incentive plan. As of August 31, 1999, the new plan had not yet been finalized and no options had been granted. No options were outstanding during 1999 or 1998. The Financial Accounting Standards Board issued Statement 123, "Accounting for Stock-Based Compensation" (SFAS 123), in October 1995. This statement established a "fair value based method" of financial accounting and related reporting standards for stock-based employee compensation plans. SFAS 123 became effective for the year ended August 31, 1997. As the Company has no options outstanding at August 31,1999, this statement has no impact on the Company. NOTE G - INCOME TAXES The Company has recorded reduced provisions for income taxes for years prior to August 31, 1999, 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: 1999 1998 ---- ---- Expected statutory rate 34.0% 34.0% State income taxes, net of federal benefit 1.9 1.3 Permanent nondeductible expenditures 4.0 4.3 Change in valuation allowance (8.2) (4.2) Other (1.9) 0.4 ---- ---- 29.8% 35.8% ==== ==== 25 26 COMPUTER RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED AUGUST 31, 1999 AND 1998 NOTE G - INCOME TAXES (CONTINUED) At August 31, 1999, the Company has state net operating loss carryforwards of approximately $4,000, which expire in fiscal year 2001. The utilization of the state net operating loss carryforwards could be subject to limitations in the future. All federal net operating loss carryforwards have been utilized during prior years. Deferred tax assets and liabilities at August 31,1999 and 1998 consist of the following: 1999 1998 -------- --------- Temporary differences related to: Accrued expenses and allowances $121,000 $ 124,000 Depreciation (20,000) (3,000) Net operating loss carryforwards (1,000) 8,000 Valuation allowance (75,000) (129,000) -------- --------- NET DEFERRED TAXES $ 25,000 $ -- ======== ========= As a result of the uncertainty as to the ultimate recovery of its deferred tax assets, the Company had previously established a valuation allowance to fully reserve against the deferred tax assets. However, given the Company's net earnings in fiscal 1999 and 1998, and its estimates of future earnings, the Company believes it will be able to realize some of the benefits associated with the deferred tax assets in future periods. Therefore, the Company recorded $25,000 of the current year deferred tax asset on the financial statements. The valuation allowance against these deferred tax assets decreased by $54,000 and $50,000 for the years ended August 31, 1999 and 1998, respectively. NOTE H - EMPLOYEE BENEFIT PLAN The Company has a qualified profit-sharing plan, which includes a salary reduction, deferred compensation feature under Section 401(k) of the Internal Revenue Code. Substantially, all employees are eligible to participate in this plan. Employer contributions to the plan are determined annually by the Board of Directors. Employer contribution expense for the years ended August 31, 1999 and 1998 was $98,000 and $54,000, respectively. 26 27 COMPUTER RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED AUGUST 31, 1999 AND 1998 NOTE I - MAJOR CUSTOMERS The primary business of the Company consists of providing data processing and accounting services to banks, security broker/dealers and other financial institutions. Sales to three major customers amounted to approximately 20.0%, 11.6% and 10.4% of total revenues during the fiscal year ended August 31, 1999. Sales to two major customers amounted to approximately 16.7% and 12.0% of total revenues during the fiscal year ended August 31, 1998. Subsequent to August 31, 1999, one of the Company's major customers (which comprised 11.6% of total revenues during fiscal year 1999) was acquired by a third party. As a result of this purchase, the Company will lose this customer effective March 2000. 27 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000201511 COMPUTER RESEARCH, INC. 1 U.S. DOLLARS YEAR AUG-31-1999 SEP-01-1998 AUG-31-1999 1 449,699 2,439,882 1,093,998 35,000 7,152 4,008,420 2,977,169 2,249,900 4,804,687 893,646 81,071 0 0 3,230 3,907,811 4,804,687 75,684 7,828,303 58,211 7,087,702 26,606 5,000 13,528 655,784 195,132 460,651 0 0 0 460,651 .11 .11
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