1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [ X ] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended May 31, 1997 -------------------------- [ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT For the transition period from to --------------- ------------- Commission File No. 0-5954 --------------------------------- COMPUTER RESEARCH, INC. ------------------------------------------------------------------ (Exact name of small business issuer as specified in its charter) Pennsylvania 25-1201499 ------------------------------- ------------------ (State or other jurisdiction of I.R.S. Employer incorporation or organization) Identification No. Cherrington Corporate Center, Building 200, Coraopolis, Pennsylvania 15108 ----------------------------------------------------------------------------- (Address of principal executive offices) (412) 262-4430 --------------------------- (Issuer's telephone number) - ----------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 4,037,255 (As of May 31, 1997) 2 PART I - FINANCIAL STATEMENTS ITEM I A. COMPUTER RESEARCH, INC. BALANCE SHEET May 31, 1997 (Unaudited) and August 31, 1996 (Audited) ASSETS MAY 31, AUGUST 31, 1997 1996 ---------- ----------- CURRENT ASSETS Cash and Cash Equivalents $1,211,530 $1,486,924 Short-Term Investments 1,288,838 741,146 Accounts Receivable - Trade (net of allowance for doubtful accounts of $40,000 and $30,000 at 5/31/97 and 8/31/96 respectively) 915,423 831,421 Inventories (first-in, first-out) or market 62,537 41,958 Prepaid Expenses 39,803 64,411 ---------- ---------- Total Current Assets 3,518,131 3,165,860 ---------- ---------- EQUIPMENT and LEASEHOLD IMPROVEMENTS - At Cost Data Processing Equipment 4,429,988 4,355,558 Data Processing Equipment Under Capital Leases 143,615 143,615 Other 850,542 813,221 ---------- ---------- 5,424,145 5,312,394 Less Accumulated Depreciation and Amortization 5,170,481 5,019,740 ---------- ---------- 253,664 292,654 ---------- ---------- $3,771,795 $3,458,514 ========== ========== The accompanying notes are an integral part of these financial statements. 2 3 A. COMPUTER RESEARCH, INC. BALANCE SHEET - CONT'D. May 31, 1997 (Unaudited) and August 31, 1996 (Audited) LIABILITIES AND STOCKHOLDERS' EQUITY MAY 31, AUGUST 31, 1997 1996 ---------- ---------- LIABILITIES CURRENT LIABILITIES Current Portion of Long-Term Obligations $ 22,106 $ 64,731 Accounts Payable 98,743 128,232 Accrued Payroll 225,630 232,112 Accrued Income Taxes 99,021, 272,000 Accrued Vacation 321,864 301,614 Customer Deposits 93,800 88,450 Accrued Rent 15,715 163,642 Accrued Lease Obligation 7,438 13,952 Other Liabilities 8,833 5,911 ---------- ---------- Total Current Liabilities 893,150 1,170,644 LONG-TERM OBLIGATIONS -0- 12,019 ACCRUED LEASE OBLIGATION -0- 3,953 ---------- ---------- Total Liabilities 893,150 1,186,616 ---------- ---------- COMMITMENTS -0- -0- ---------- ---------- STOCKHOLDERS' EQUITY - -------------------- Common Stock - No Par Value; $.0008 Stated Value; 5,000,000 Shares Authorized; 4,037,255 Shares Issued and Outstanding Each Year 3,230 3,230 Additional Paid-In Capital 744,342 744,342 Retained Earnings 2,131,073 1,524,326 ---------- ---------- Total Stockholders' Equity 2,878,645 2,271,898 ---------- ---------- $3,771,795 $3,458,514 ========== ========== The accompanying notes are an integral part of these financial statements. 3 4 B. COMPUTER RESEARCH, INC. CAPITALIZATION AND STOCKHOLDERS' EQUITY May 31, 1997 (Unaudited) DEBT AMOUNT ---- ------ Short-Term Loans, Notes $ -0- Long-Term Debt (Including $22,106 due within one year) 22,106 ------- Total Debt $22,106 ======= STOCKHOLDERS' EQUITY - -------------------- SHARES ISSUED AMOUNT ------------- ------ Preferred Stock -0- $ -0- Common Stock 4,037,255 3,230 Capital in Excess of Par Value 744,342 Retained Earnings - Balance at Beginning of Current Fiscal Year 1,524,326 Net Income for Period 606,747 ---------- $2,131,073 ---------- Total Stockholders' Equity $2,878,645 ========== The accompanying notes are an integral part of these financial statements. 4 5 C. COMPUTER RESEARCH, INC. STATEMENT OF INCOME For the Nine Months Ended May 31, 1997 and 1996 1997 1996 ---- ---- REVENUES -------- Sales of Services $5,605,866 $5,463,468 Sales of Equipment, Software and Supplies 101,714 48,971 Rental Income From Operating Leases 14,730 28,205 Other Income 105,065 63,761 ---------- ---------- 5,827,375 5,604,405 ---------- ---------- COSTS AND EXPENSES ------------------ Operating Expenses 3,250,781 3,029,025 Selling and Administrative Expenses 1,378,382 1,392,315 Depreciation and Amortization 150,741 116,087 Cost of Equipment, Software and Supplies Sold 73,196 37,347 Interest Expense 6,528 9,824 --------- ---------- 4,859,628 4,584,598 --------- ---------- INCOME BEFORE INCOME TAXES 967,747 1,019,807 LESS: PROVISION FOR INCOME TAXES 361,000 210,000 ---------- ---------- NET INCOME $ 606,747 $ 809,807 ========== ========== Average Number of Shares Outstanding 4,037,255 4,014,300 ---------- ---------- EARNINGS PER COMMON SHARE $ .15 $ .20 ========== ========== DIVIDENDS PER COMMON SHARE $ -- $ -- ========== ========== The results for the period ended May 31, 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 nine months ended May 31, 1997 and 1996. The accompanying notes are an integral part of these financial statements. 5 6 C. COMPUTER RESEARCH, INC. STATEMENT OF INCOME For the Fiscal Third Quarter Ended May 31, 1997 and 1996 1997 1996 ---- ---- REVENUES -------- Sales of Services $1,829,640 $1,784,830 Sales of Equipment, Software and Supplies 76,238 29,375 Rental Income From Operating Leases 4,110 7,565 Other Income 36,780 24,613 ---------- ---------- 1,946,768 1,846,383 ---------- ---------- COSTS AND EXPENSES ------------------ Operating Expenses 1,075,026 1,055,769 Selling and Administrative Expenses 421,515 458,262 Depreciation and Amortization 52,250 46,949 Cost of Equipment, Software and Supplies Sold 55,355 23,391 Interest Expense 1,899 3,072 ---------- ---------- 1,606,045 1,587,443 ---------- ---------- INCOME BEFORE INCOME TAXES 340,723 258,940 LESS: PROVISION FOR INCOME TAXES 123,000 60,000 ---------- ---------- NET INCOME $ 217,723 $ 198,940 ========== ========== Average Number of Shares Outstanding 4,037,255 4,014,300 ---------- ---------- EARNINGS PER COMMON SHARE $ .05 $ .05 ========== ========== DIVIDENDS PER COMMON SHARE $ -- $ -- ========== ========== The results for the period ended May 31, 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 May 31, 1997 and 1996. The accompanying notes are an integral part of these financial statements. 7 7 D. COMPUTER RESEARCH, INC. STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MAY 31, 1997 AND 1996 1997 1996 ---- ---- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net Income $ 606,747 $ 809,807 ----------- ---------- ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and Amortization 150,741 116,087 Provision for Losses on Doubtful Accounts 25,114 15,000 Change in Assets and Liabilities: Accounts Receivable (109,116) (143,068) Inventories (20,579) 31,114 Prepaid Expenses 24,608 29,151 Other Assets -0- 1,341 Accounts Payable, Accrued Expenses and Other Current Liabilities (233,705) 239,120 Customer Deposits 5,350 57,588 Accrued Lease Obligation (10,467) (15,153) ----------- ---------- Total Adjustments (168,054) 331,180 ----------- ---------- Net Cash Provided by Operating Activities 438,693 1,140,987 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to Equipment and Leasehold Improvements (111,751) (89,221) Short-Term Investment Maturities 1,020,000 -0- Additions to Short-Term Investments (1,567,692) -0- ----------- ---------- Net Cash (Used In) Investing (659,443) (89,221) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Stock -0- 28,620 Payments on Capital Lease Obligations (54,644) (44,653) Payments on Line of Credit -0- (25,000) ----------- ---------- Net Cash (Used In) Financing Activities (54,644) (41,033) ----------- ---------- Net Increase (Decrease) in Cash 1,010,733 (275,394) Cash and Cash Equivalents at August 31, 1996 and 1995 1,486,924 873,508 ----------- ---------- Cash and Cash Equivalents at May 31, 1997 and 1996 $ 1,211,530 $1,884,241 ----------- ---------- CASH PAID DURING THE PERIOD 5/31/97 5/31/96 ----------- ---------- Interest $ 6,528 $ 9,824 =========== ========== Income Taxes $ 533,979 $ 22,500 =========== ========== Supplemental Schedule of Noncash Investing and Financing Activities For the nine months ended May 31, 1996, the Company entered into a capital lease for the purchase of new equipment for $57,692. The accompanying notes are an integral part of these financial statement. 8 8 COMPUTER RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS NINE MONTHS ENDED MAY 31, 1997 NOTE A - COMPANY'S ANNUAL REPORT UNDER FORM 10-KSB The accompanying financial information should be read in conjunction with the Company's 1996 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. 9 9 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS 1. "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. 2. 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. The clients served could be subject to 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 service 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. REVENUES The total revenues for the first nine months of the current year ended May 31, 1997, were $5,827,375 which is approximately 4% higher than the comparable period for the previous year. The primary reason for the increase is due to additional service revenues generated during the current year. 10 10 The revenues for the fiscal third quarter of the current year were $1,946,768 or an increase of approximately 5% over the previous year. In March of 1996, the Company and Wachovia Operational Services Corporation, an affiliate of a major service client that accounts for more than 10% of the consolidated revenues of the Company, entered into an agreement to convert the Company's production software (Instant System) from its existing hardware platform to operate on an IBM AS/400 configuration. Upon successful completion of this project, which is scheduled to occur at the end of the current fiscal year, the Company intends to begin licensing the software to third parties for in-house utilization. The licensing of the software to Wachovia Operational Services Corporation will result in a reduction of service fees from the major client in the 1998 fiscal year. However, Management of the Company believes that the conversion of its existing software to the IBM AS/400 configuration should enhance the ability to secure software license revenues. Management also believes that while the revenues for the first half of fiscal year 1998 may be negatively impacted, the ability to generate software license revenues and continued growth in recurring service revenues from existing clients and potential new clients should serve to offset any decrease in revenues for the 1998 fiscal year. COSTS AND EXPENSES The total costs and expenses for the first nine months of the current year increased approximately 6% over the comparable period of the previous year. This is primarily attributable to increased equipment costs, travel and living costs associated with transferring some existing clients to the ongoing Company product line (Instant System) from a processing system that will be terminated during the current year (BID/BOA System) as well as an increase in payroll costs due to staffing requirements in support of modifying the Company's software to accurately process transactions beginning with the year 2000. The total costs and expenses for the fiscal third quarter of the current year increased approximately 1% over the comparable period of the previous year. The primary reasons for these increases are consistent with what is defined for the first six months of the current year. 11 11 NET INCOME The net income for the first nine months of the current fiscal year was $606,747 or $.15 per share compared to $809,807 or $.20 per share for the comparable period of the previous year. While pretax revenues for the period decreased approximately 5% from the previous year, the net income reduction of approximately 25% is attributable to the fact the Company is now on a fully taxed basis as opposed to the previous year when tax loss carry forward was utilized to reduce income taxes payable. The net income for the fiscal third quarter of the current year was $217,723 or $.05 per share as opposed to $198,940 or $.05 per share for the comparable period of the previous year. 3. CAPITAL RESOURCES AND LIQUIDITY The Company had approximately $2.5 million in cash, cash equivalents and short- term investments as of the end of May 1997. In addition, a $750,000 unused line of credit is available. This, along with funds generated by operations, should adequately support the operating needs of the Company in the near term. During the third quarter, the Company entered into a lease, which will become effective during the fourth quarter of this year, for approximately $160,000 of computer equipment. In addition, the Company plans to enter into a lease for additional computer equipment during the 1998 fiscal year. 12 12 PART II - OTHER INFORMATION Not applicable. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPUTER RESEARCH, INC. --------------------------------------- (Registrant) Date 7/9/97 /s/ James L. Schultz -------------------------- --------------------------------------- James L. Schultz, President & Treasurer 13