<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-12311
COMPUTER LANGUAGE RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1297386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2395 Midway Road, Carrollton, Texas 75006
(Address of principal executive offices) (Zip Code)
(972) 250-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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
--- ---
Outstanding at
Class of Common Stock July 31, 1997
--------------------- -----------------
$0.01 par value 14,409,511 shares
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COMPUTER LANGUAGE RESEARCH, INC.
FORM 10-Q
June 30, 1997
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I. FINANCIAL INFORMATION
1 FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets ....................... 1-2
Consolidated Statements of Operations ............. 3
Consolidated Statements of Cash Flows ............. 4
Notes to Consolidated Financial Statements ........ 5-7
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............... 8-14
PART II. OTHER INFORMATION
1 LEGAL PROCEEDINGS ................................. 15-16
4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS .................................. 16-17
6 EXHIBITS AND REPORTS ON FORM 8-K .................. 17
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COMPUTER LANGUAGE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
June 30 December 31
--------------------- -----------
1997 1996 1996
-------- -------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ........... $ 7,747 $ 12,183 $ 2,928
Accounts receivable, less allowance
for doubtful accounts of $922 at
June 30, 1997, $970 at June 30, 1996,
and $800 at December 31, 1996 ...... 22,002 18,354 27,104
Other current assets ................ 4,895 6,588 5,042
-------- -------- --------
Total current assets .............. 34,644 37,125 35,074
-------- -------- --------
PROPERTY AND EQUIPMENT, AT COST:
Land ................................ 2,584 2,584 2,584
Buildings and improvements .......... 16,972 16,857 16,866
Data processing equipment ........... 30,537 34,837 33,933
Furniture, fixtures, and equipment .. 7,392 8,553 9,086
-------- -------- --------
57,485 62,831 62,469
Less accumulated depreciation ....... 38,437 41,423 41,581
-------- -------- --------
Net property and equipment ........ 19,048 21,408 20,888
-------- -------- --------
OTHER NONCURRENT ASSETS:
Software, net of accumulated amortiza-
tion of $30,854 at June 30, 1997,
$24,066 at June 30, 1996, and
$28,694 at December 31, 1996 ....... 26,395 23,985 23,868
Intangibles and other assets, net of
accumulated amortization of $11,354
at June 30, 1997, $6,817 at
June 30, 1996, and $8,952
at December 31, 1996 ............... 19,209 18,038 19,107
-------- -------- --------
Total other noncurrent assets ..... 45,604 42,023 42,975
-------- -------- --------
Total assets ..................... $ 99,296 $100,556 $ 98,937
======== ======== ========
See accompanying Notes to Consolidated Financial Statements (unaudited).
1
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COMPUTER LANGUAGE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
June 30 December 31
--------------------- -----------
1997 1996 1996
-------- -------- -----------
(Unaudited)
CURRENT LIABILITIES:
Notes payable ....................... $ -- $ -- $ 2,000
Accounts payable .................... 1,727 1,723 3,124
Accrued compensation, payroll taxes,
and benefits ....................... 6,451 6,887 7,950
Deferred revenue .................... 14,724 14,420 9,619
Accrued support ..................... 599 1,837 1,264
Other current liabilities ........... 4,031 4,938 5,634
Current portion of long-term debt 563 750 750
-------- -------- --------
Total current liabilities ......... 28,095 30,555 30,341
-------- -------- --------
NONCURRENT LIABILITIES:
Long-term debt ...................... -- 563 188
Other liabilities ................... 6,893 4,757 5,700
Deferred income taxes ............... 706 1,446 706
-------- -------- --------
Total noncurrent liabilities ...... 7,599 6,766 6,594
-------- -------- --------
COMMITMENTS AND CONTINGENCIES ........ -- -- --
SHAREHOLDERS' EQUITY:
Preferred stock, $1 per share par
value, 10,000 shares authorized;
none outstanding ................... -- -- --
Common stock, $0.01 per share par
value, 40,000 shares authorized;
15,219 shares issued at June 30,
1997, 15,057 shares issued at
June 30, 1996, and 15,084 shares
issued at December 31, 1996 ......... 152 150 150
Capital in excess of par value ...... 39,631 34,206 34,378
Retained earnings ................... 33,315 34,145 32,744
Treasury stock at cost, 810 shares .. (5,270) (5,266) (5,270)
Deferred compensation ............... (4,226) -- --
-------- -------- --------
Total shareholders' equity ........ 63,602 63,235 62,002
-------- -------- --------
Total liabilities and shareholders'
equity .......................... $ 99,296 $100,556 $ 98,937
======== ======== ========
See accompanying Notes to Consolidated Financial Statements (unaudited).
2
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COMPUTER LANGUAGE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenues ......................... $ 24,796 $ 26,886 $ 69,790 $ 62,733
-------- -------- -------- --------
Costs and expenses:
Cost of revenues ................ 15,696 14,149 35,365 32,844
Selling, general, and
administrative ................. 14,769 14,722 28,985 27,309
Charge for purchased research
and development ................ -- -- -- 3,498
-------- -------- -------- --------
Total costs and expenses ...... 30,465 28,871 64,350 63,651
-------- -------- -------- --------
Operating income (loss) .......... (5,669) (1,985) 5,440 (918)
Interest income .................. 156 186 235 351
Interest expense ................. 12 26 37 50
Other gain (loss), net ........... (1) 2 1 (17)
-------- -------- -------- --------
Income (loss) before income taxes (5,526) (1,823) 5,639 (634)
Provision (benefit) for income
taxes ........................... (2,155) (638) 2,199 (222)
-------- -------- -------- --------
Net income (loss) ................ $ (3,371) $ (1,185) $ 3,440 $ (412)
======== ======== ======== ========
Earnings (loss) per share ........ $ (0.23) $ (0.08) $ 0.24 $ (0.03)
======== ======== ======== ========
Dividends per share .............. $ 0.10 $ 0.10 $ 0.20 $ 0.20
======== ======== ======== ========
Weighted average number of common
and common equivalent shares
outstanding ..................... 14,395 14,214 14,577 14,182
======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements (unaudited).
3
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COMPUTER LANGUAGE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30
------------------
1997 1996
-------- --------
OPERATING ACTIVITIES:
Net income (loss) ...................................... $ 3,440 $ (412)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation expense ................................. 3,528 3,072
Amortization expense ................................. 7,028 5,843
Amortization of deferred compensation ................ 163 --
Charge for purchased research and development ........ -- 3,498
Other (gain) loss, net ............................... (1) 17
Changes in assets and liabilities, net of effect
of acquisitions ..................................... 3,954 5,621
-------- --------
Net cash provided by operating activities .......... 18,112 17,639
-------- --------
INVESTING ACTIVITIES:
Capital expenditures ................................... (1,739) (3,866)
Additions to software .................................. (4,023) (3,998)
Cash paid for acquisitions ............................. (3,210) (8,979)
Disposals of property and equipment .................... 57 22
-------- --------
Net cash used in investing activities .............. (8,915) (16,821)
-------- --------
FINANCING ACTIVITIES:
Payments on line of credit note payable ................ (2,000) --
Payments on long-term debt ............................. (375) (374)
Proceeds from exercise of common stock options ......... 866 936
Payment of dividends ................................... (2,869) (2,838)
-------- --------
Net cash used in financing activities .............. (4,378) (2,276)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .... 4,819 (1,458)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........ 2,928 13,641
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 7,747 $ 12,183
======== ========
See accompanying Notes to Consolidated Financial Statements (unaudited).
4
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COMPUTER LANGUAGE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (SEC) for interim financial information. Accordingly, they do
not include all of the information and footnote disclosure required by
generally accepted accounting principles for complete financial statements.
During interim periods, the Company follows the accounting policies set
forth in its Annual Report on Form 10-K filed with the SEC. Users of
financial information produced for interim periods are encouraged to refer
to the footnotes in the Annual Report on Form 10-K when reviewing interim
financial results.
In the opinion of management, the accompanying financial statements include
all material adjustments necessary (consisting only of normal recurring
accruals except for the charge for purchased research and development in
1996) for a fair presentation of the Company's consolidated financial
position and results of operations. Results of operations for the three-
and six-month periods ended June 30, 1997, are not necessarily indicative of
those expected for the full year. Certain prior period amounts have been
reclassified to be consistent with the presentation in the current period
statements.
2. ACQUISITIONS
On June 30, 1997, the Company acquired substantially all of the assets of
The Omega Tax System business (Omega) from Price Waterhouse LLP. Omega
licenses fiduciary tax return software to bank trust departments. The
acquisition was accounted for under the purchase method, and accordingly,
the results of its operations will be included in the Company's Consolidated
Financial Statements beginning July 1, 1997. The purchase price was
approximately $5.8 million, consisting of $3.2 million in cash and $2.6
million in liabilities. The majority of the liabilities arose from the
Exclusive License Agreement between Omega Fiduciary Systems, Inc. and Price
Waterhouse LLP assumed by the Company as a result of the acquisition. The
purchase price was allocated based on estimated fair values of assets and
obligations acquired at the date of acquisition, including $2.7 million of
cost in excess of fair value of net assets to be amortized over five years.
5
<PAGE>
COMPUTER LANGUAGE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
June 30, 1997
(Unaudited)
During 1996, the Company completed nine acquisitions at a total cost of
approximately $18.4 million, consisting of $12.7 million in cash and $5.7
million in liabilities. The following unaudited pro forma summary presents
consolidated results of operations for the six months ended June 30, 1996,
as if the acquisitions had occurred as of the beginning of the period
presented, after giving effect to certain adjustments which include
amortization of acquired assets, decreased interest income due to
acquisition costs, and related income tax effects. These pro forma results
have been prepared for comparative purposes only. They are not necessarily
indicative of what actual results of operations would have been had the
acquisitions been made as of those dates, nor do they purport to represent
future operations of the Company.
Pro Forma Results of 1996 Acquisitions
(In thousands, except per share amounts) June 30, 1996
---------------------------------------- -------------
Pro forma revenue $ 66,284
Pro forma net income (loss) $ (1,211)
Pro forma earnings (loss) per share $ (0.09)
3. INCOME TAXES
Estimated provision (benefit) for income taxes for the first six months of
1997 increased to 39.0% of income (loss) before income taxes from 35.0% in
1996. The lower tax rate in 1996 is due to the Research and Experimentation
Credit regulation in effect in 1996. The benefit from this regulation is
expected to be substantially lower in 1997, depending on, if and when,
Congress extends the regulation which expired in May. Additionally, the
state income tax expense in 1997 is anticipated to be higher than in the
prior year.
4. DIVIDENDS
On May 30, 1997, the Company paid a $1.4 million dividend at the rate of
$0.10 per share to shareholders of record on May 15, 1997. There were 14.4
million shares issued and outstanding on May 15, 1997.
5. STOCK OPTIONS
In May 1997, shareholders approved 1997 Stock Incentive Plans for both the
Company and its wholly-owned subsidiary, Rent Roll, Inc. (Rent Roll). The
plans allow for each company's respective common stock to be granted to
members of management and key nonmanagement employees. Total shares
approved for future grants were 1,000,000 and 2,000,000 shares for the
Company and Rent Roll plans, respectively.
6
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COMPUTER LANGUAGE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
June 30, 1997
(Unaudited)
Company common stock options were granted at an exercise price representing
50% of the fair market value of the underlying stock on the grant date.
Applicable deferred compensation has been recognized in stockholders' equity
on the balance sheet and is being amortized over nine years.
Rent Roll common stock options were granted at an exercise price above the
fair market value of the underlying stock on the grant date. As a result,
no compensation expense is required.
6. CONTINGENCIES
See Part II, Item 1, for information regarding certain litigation.
7
<PAGE>
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Selected Second Quarter Results Expressed as a Percentage of Revenues:
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ---------------------
1997 1996 Chg 1997 1996 Chg
------ ------ ------ ------ ------ ------
Cost of revenues ............. 63.3 % 52.6 % 10.7 % 50.7% 52.4 % (1.7)%
Selling, general, and
administrative .............. 59.6 % 54.8 % 4.8 % 41.5% 43.5 % (2.0)%
Charge for purchased research
and development ............. -- % -- % -- % --% 5.6 % (5.6)%
Total costs and expenses ..... 122.9 % 107.4 % 15.5 % 92.2% 101.5 % (9.3)%
Operating income (loss) ...... (22.9)% (7.4)% (15.5)% 7.8% (1.5)% 9.3%
Provision (benefit) for
income taxes ................ (8.7)% (2.4)% (6.3)% 3.2% (0.3)% 3.5%
Net income (loss) ............ (13.6)% (4.4)% (9.2)% 4.9% (0.7)% 5.6%
COMPANY ACTIVITIES
On June 30, 1997, the Company acquired the assets of The Omega Tax System
business (Omega) from Price Waterhouse LLP (PW). Omega licenses fiduciary tax
return software to bank trust departments and is part of the Company's bank
business group. (For additional information, see Note 2 in the Notes to
Consolidated Financial Statements.) In addition, the Company is continuing its
efforts in assimilating the 12 acquisitions completed in 1995 and 1996. These
acquisitions continue to distort reported performance and impact the
comparability of financial results. (See details of the acquisitions in the
Company's Annual Report on Form 10-K.)
RESULTS OF OPERATING INCOME (LOSS)
For the three-month period ended June 30, 1997, the Company (on a consolidated
basis) incurred an operating loss of $(5.7) million, compared with an operating
loss of $(2.0) million for the same period in the prior year. Year-to-date, the
Company achieved operating income of $5.4 million exceeding the Company's
performance for the same period in 1996 which was an operating loss of $(0.9)
million.
Second quarter revenues decreased and year-to-date revenues increased primarily
due to conversion of the Tax Management Software (TMS) client base (acquired
from PW) to the Company's historical January annual contract renewal cycle and,
to a lesser degree, the recognition of revenue deferred in 1996 pending receipt
of executed contracts with some TMS clients. Acquisition charges were lower for
the second quarter and year-to-date attributable to the Rent Roll business which
incurred a $3.5 million charge for purchased research and development in the
first quarter of 1996; however, the improvement was offset by an increase in
Rent Roll operating expenses in the current year due to the timing of 1996
acquisitions.
8
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Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company currently anticipates that 1997 revenue will increase 10% to 12%
over 1996 levels. In addition, the Company anticipates that operating margins
(before acquisition related charges) will be approximately 12% to 14% (see Safe
Harbor Statement below). Second quarter results are not indicative of the
results expected in the third and fourth quarters since revenues from tax
products and services are seasonal with a larger percentage realized in the
first and fourth quarters. For additional information on seasonality, see the
1996 Annual Report on Form 10-K.
Business Results (in millions):
- -------------------------------
2nd Quarter
---------------------------------------------------------
Fast-Tax Rent Roll Corporate
------------------ ----------------- -----------
1997 1996 Chg 1997 1996 Chg 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
Revenues $20.7 $23.1 $(2.4) $ 4.1 $ 3.8 $ 0.3 $ -- $ --
---- ---- ---- ---- ---- ---- ---- ----
Operations 20.8 21.2 (0.4) 6.2 4.2 2.0 1.3 1.3
Acquisition related 1.2 1.2 -- 1.0 1.0 -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total operating
expenses 22.0 22.4 (0.4) 7.2 5.2 2.0 1.3 1.3
---- ---- ---- ---- ---- ---- ---- ----
Operating income
(loss) $(1.3) $ 0.7 $(2.0) $(3.1) $(1.4) $(1.7) $(1.3) $(1.3)
==== ==== ==== ==== ==== ==== ==== ====
Total
------------------
1997 1996 Chg
---- ---- ----
Revenues $24.8 $26.9 $(2.1)
---- ---- ----
Operations 28.3 26.7 1.6
Acquisition related 2.2 2.2 --
---- ---- ----
Total operating
expenses 30.5 28.9 1.6
---- ---- ----
Operating income
(loss) $(5.7) $(2.0) $(3.7)
==== ==== ====
9
<PAGE>
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Year-to-Date
---------------------------------------------------------
Fast-Tax Rent Roll Corporate
------------------ ----------------- -----------
1997 1996 Chg 1997 1996 Chg 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
Revenues $61.6 $55.9 $ 5.7 $ 8.2 $ 6.8 $ 1.4 $ -- $ --
---- ---- ---- ---- ---- ---- ---- ----
Operations 44.8 45.6 (0.8) 12.7 7.5 5.2 2.6 2.6
Acquisition related 2.3 2.4 (0.1) 2.0 5.5 (3.5) -- --
---- ---- ---- ---- ---- ---- ---- ----
Total operating
Expenses 47.1 48.0 (0.9) 14.7 13.0 1.7 2.6 2.6
---- ---- ---- ---- ---- ---- ---- ----
Operating income
(loss) $14.5 $ 7.9 $ 6.6 $(6.5) $(6.2) $(0.3) $(2.6) $(2.6)
==== ==== ==== ==== ==== ==== ==== ====
Total
------------------
1997 1996 Chg
---- ---- ----
Revenues $69.8 $62.7 $ 7.1
---- ---- ----
Operations 60.1 55.7 4.4
Acquisition related 4.3 7.9 (3.6)
---- ---- ----
Total operating
Expenses 64.4 63.6 0.8
---- ---- ----
Operating income
(loss) $ 5.4 $(0.9) $ 6.3
==== ==== ====
FAST-TAX BUSINESS
Second quarter tax business revenue decreased to $20.7 million in 1997 from
$23.1 million in 1996. Year-to-date revenue, however, increased to $61.6
million from $55.9 million. The fluctuations in revenue are attributable
primarily to the previously discussed conversion of the TMS client base and, in
the second quarter, to higher customer credits.
The corporate tax group produced increased year-to-date revenues from the
release of its Windows(R)-based tax product, InSource(R). The bank tax group
also experienced higher revenues resulting from continued success with its 1099
tax software and services. Revenue for the accounting tax group declined due to
fluctuations in customer credits. However, the accounting tax group recognized
higher comparative revenues for ACE (TM) Practice released in late 1996.
10
<PAGE>
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Second quarter tax business operating expenses decreased to $22.0 million in
1997 from $22.4 million in 1996. Year-to-date operating expenses also decreased
to $47.1 million from $48.0 million. These decreases are primarily due to
amortization of accrued support and cost savings achieved subsequent to the
acquisition of TMS, offset by TMS consulting costs and higher software
development expenses.
The Company incurred charges in the 1997 second quarter to reflect an early
termination of a consulting agreement associated with the TMS acquisition. This
was offset, in part, by greater amortization of previously accrued support
costs. The increase in software development expenses is due primarily to the
amortization of previously capitalized costs for InSource, GoSystem(R) for
Windows, and TrustEase(R) products released in 1997. Costs currently being
capitalized as software development are related to remote server systems,
maintenance and integration of current products, and continued development and
enhancement of Windows-based client/server software. (See table below for
further analysis.)
Tax Business
Software Development Three Months Ended Six Months Ended
(In millions) June 30, 1997 June 30, 1997
-------------------- ---------------------- ----------------------
1997 1996 Chg 1997 1996 Chg
------ ------ ------ ------ ------ ------
Costs $ 7.0 $ 7.3 $(0.3) $14.9 $15.5 $(0.6)
Capitalization (1.7) (1.9) 0.2 (3.2) (3.6) 0.4
Amortization 1.4 0.7 0.7 2.7 1.5 1.2
------ ------ ------ ------ ------ ------
Net expense $ 6.7 $ 6.1 $ 0.6 $14.4 $13.4 $ 1.0
====== ====== ====== ====== ====== ======
RENT ROLL BUSINESS
Second quarter Rent Roll revenue increased to $4.1 million in 1997 from $3.8
million in 1996. Year-to-date revenue also increased to $8.2 million from $6.8
million. The increase in revenue is the result of acquisitions completed by
Rent Roll in 1996, offset by increased credit reserves established during 1997.
A majority of the increase is specifically attributable to the Renter Index,
Inc. and A&M Software, Inc. acquisitions completed in March and August of 1996,
respectively.
Second quarter operating expenses increased to $7.2 million in 1997 from $5.2
million in 1996. Year-to-date operating expenses also increased to $14.7
million from $13.0 million. The increases in operating expenses are due to the
timing of acquisitions completed in the prior year, offset in part, by the
decrease in year-to-date acquisition expenses, due to the $3.5 million charge
for purchased research and development incurred in the first quarter of 1996.
11
<PAGE>
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Total software development costs for the second quarter of 1997 are $0.8
million, compared with $0.5 million for the same period in 1996. Year-to-date
software development costs are $1.8 million for 1997, compared with $1.0 million
for 1996. The Company is currently expensing all software development costs
incurred by Rent Roll since this business is newer and technological feasibility
is less certain than development undertaken in the more mature tax business.
Increased development costs are attributable to Windows client/server and
Internet development and expenses incurred to maintain and integrate products
marketed by acquired companies.
ACQUISITION RELATED AMORTIZATION AND CHARGES
The Company has made numerous acquisitions since 1991. The portion of the
purchase prices allocated to intangibles has an average amortization life of
five years. Amortization of intangibles and software, and other acquisition
related charges for the years 1996 through 2002 (based on existing
acquisitions), are as follows (in millions):
Amortization R&D Write-off
-------------------- --------------------
Year Fast-Tax Rent Roll Fast-Tax Rent Roll Total
------ -------- --------- -------- --------- -------
1996 $ 4.7 $ 4.9 $ -- $ 3.5 $ 13.1
1997 5.1 3.8 -- -- 8.9
1998 5.3 3.0 -- -- 8.3
1999 4.9 2.5 -- -- 7.4
2000 3.5 1.8 -- -- 5.3
2001 1.5 0.7 -- -- 2.2
2002 0.6 -- -- -- 0.6
-------- --------- -------- --------- -------
Total $ 25.6 $ 16.7 $ -- $ 3.5 $ 45.8
======== ========= ======== ========= =======
12
<PAGE>
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
OPERATING INCOME (LOSS)
The net impact on the Company of all of the above was to increase the operating
loss for the comparable three-month period and increase operating income for the
comparable six-month period. Following is a summary of the primary items
accounting for these changes (in millions):
2nd Qtr YTD
------- -------
(i) Fast-Tax business increase (decrease) in
operating income (loss) (net of software
development expense) ........................... $ (1.4) $ 7.5
(ii) Increased net expense of software development
costs .......................................... (0.6) (1.0)
(iii) Rent Roll business increase in operating loss,
before acquisition charges ..................... (1.7) (3.8)
(iv) Decrease in acquisition related amortization
and other charges .............................. -- 3.6
------- -------
Total increase (decrease) in operating
income (loss) .................................. $ (3.7) $ 6.3
======= =======
PROVISION (BENEFIT) FOR TAXES
Estimated provision (benefit) for income taxes for the first six months of 1997
increased to 39.0% of income (loss) before income taxes from 35.0% in 1996.
The lower tax rate in 1996 was due to the Research and Experimentation Credit
regulation in effect in 1996. The benefit from this regulation is expected to
be substantially lower in 1997, depending on, if and when, Congress extends the
regulation which currently expired in May. Additionally, the state income tax
expense in 1997 is anticipated to be higher than in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow for the first six months of 1997 saw a net increase in cash and cash
equivalents of $4.8 million, compared with a net decrease of $1.5 million in
1996. The increase was primarily due to (in millions):
(i) Decrease in cash paid for acquisitions ............... $ 5.8
(ii) Higher level of capital expenditures and
software additions in 1996 .......................... 2.1
(iii) Increase in cash provided by operating
activities, due to acquisition related
activity and working capital changes in
the ordinary course of business ..................... 0.5
(iv) Payments on the line of credit note payable .......... (2.0)
(v) Decrease in proceeds from exercise of common
stock options ....................................... (0.1)
-------
Total increase in cash and cash equivalents .......... $ 6.3
=======
13
<PAGE>
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company made investments of $1.7 million in property and equipment during
the first six months of 1997, compared with $3.9 million during the same period
in 1996. The decrease is primarily a result of timing in expenditures. It is
anticipated that the Company's investments in property and equipment will be
approximately $6.5 million in 1997.
The Company has a $20.0 million revolving credit/term facility which will expire
in December 1997 and may be extended at the lender's option. During the first
quarter of 1997, the Company repaid the $2.0 million note payable outstanding at
December 31, 1996.
At its July 31, 1997, meeting, the Board of Directors declared a dividend for
the third quarter of 1997 at a rate of $0.10 per share totaling $1.4 million.
The dividend is payable August 29, 1997, to shareholders of record on August
14, 1997.
The funds generated from operations, together with the availability of the line
of credit, are expected to be sufficient for liquidity requirements and capital
needs of the Company.
SAFE HARBOR
All Company statements, other than historical facts, are subject to risks and
uncertainties that may cause actual events or future results to vary. Some of
the risks and uncertainties that could occur are described in the Annual Report
on Form 10-K - Item 7.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On May 10, 1996, the Internal Revenue Service (IRS) served a summons on the
Company in the matter of Caltex Petroleum Corporation which sought production of
the Company's computer software programs (formerly owned by Price Waterhouse
LLP(PW)). These programs computed Caltex's foreign tax credit limitations for
its federal income tax returns for four calendar tax years. The summons also
demanded printed and machine readable copies of the software's source code,
along with a long list of ancillary materials. The summons was based on the
IRS's contention that the summoned materials were taxpayers' books, records, and
other data under Section 7602 of the Internal Revenue Code. The Company did not
concur and declined to comply, while continuing to discuss the matter with the
IRS. On September 27, 1996, the IRS initiated United States of America v.
Caltex Petroleum Corp., Price Waterhouse LLP, and Computer Language Research,
Inc. (Civil Action No. 3:96-CV-2726-X, in the United States District Court of
the Northern District of Texas, Dallas Division), by filing a Petition to
Enforce Internal Revenue Service Summonses against Caltex and the Company. On
September 30, 1996, the IRS obtained, on an ex parte basis, an Order to Show
Cause showing why Caltex, PW, and the Company should not be compelled to comply
with prior IRS summonses, including the summons served on May 10th. The United
States Magistrate to whom the case had been assigned ordered mediation for
February 13 and 14, 1997. The mediation produced an Agreed Partial Judgment and
Protective Order Regarding Software Access pursuant to which the IRS currently
has access to an executable version of the PW/Caltex software, subject to
certain restrictions on use, copying, and dissemination. On May 19 and 20,
1997, representatives of the Company, Caltex, and the IRS engaged in intensive
mediation regarding IRS access to the summoned source code which proved
unsuccessful. It is anticipated that the Court will conduct an Evidentiary
Hearing on the source code issue beginning on October 15, 1997, before a
magistrate. The likely outcome of such a hearing on the IRS's ability to use
Section 7602 summons powers to seize and use the Company's proprietary source
code is unknown at this time.
On March 6, 1997, Micro Database Systems, Inc. (MDBS) filed suit against the
Company in the Northern Indiana Federal District Court alleging various claims
related to certain software licensed by MDBS to the Company and seeking
unspecified damages and costs, including attorneys' fees, and the impounding of
certain software during the pendency of the suit. This litigation, now in its
prediscovery stage, will be vigorously fought by the Company. The Company is
aware that MDBS has filed a number of other suits against other companies in the
same court related to its software. While the Company is unable to estimate any
future liability, continued use of the MDBS software is not material to the
Company's products and services.
On April 29, 1997, an individual purporting to be the assignee of certain
alleged copyrights filed suit against the Company and Price Waterhouse LLP (PW)
in United States District Court in Chicago, alleging various infringements from
the Company's distribution of certain software products purchased from PW. The
Company tendered defense of this matter to PW pursuant to the indemnity
provisions of a December 2, 1995, Agreement for the Purchase and Sale of Certain
Assets. In July 1997, PW accepted the tender and is currently providing the
15
<PAGE>
PART II. OTHER INFORMATION (Continued)
defense to the Plaintiff's allegations against the Company. While future
liability is unknown, the Company does not believe, given the meritorious
defenses apparently available, that any such liability will have a material
adverse effect on the Company's operations or financial condition, especially
given its contractual protections pursuant to the Agreement for the Purchase and
Sale of Certain Assets.
The Company is involved in other litigation matters which are normal in the
course of its operations. The results of these matters cannot be predicted with
certainty; however, management believes, based on the advice of legal counsel,
the final outcomes will not have a materially adverse effect on the Company's
consolidated financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 1, 1997.
Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934 and there was no solicitation in opposition to
management's solicitations.
The following proposals were adopted by the margins indicated:
1. To elect a Board of Directors to hold office until the next annual
meeting of shareholders or until their successors are duly elected
and qualified.
Number of Shares
------------------------
For Withheld
---------- --------
Francis W. Winn 13,662,163 436,253
Stephen T. Winn 13,662,163 436,253
David L. Winn, M.D. 13,662,163 436,253
James R. Dunaway, Jr. 13,662,163 436,253
Merle J. Volding 13,659,591 438,825
Max D. Hopper 13,659,591 438,825
Jefferey T. Leeds 13,659,558 438,858
Walter V. Smiley 13,659,591 438,825
2. To approve the Computer Language Research, Inc. 1997 Stock Incentive
Plan, providing a maximum of 1,000,000 shares of the Company's common
stock for issuance thereunder.
For 12,049,878
Against 577,274
Abstain 19,039
Broker Non-Votes 1,452,225
16
<PAGE>
PART II. OTHER INFORMATION
3. To approve the Rent Roll, Inc. 1997 Stock Incentive Plan, providing a
maximum of 2,000,000 shares of Rent Roll, Inc. common stock for issuance
thereunder.
For 11,683,546
Against 914,074
Abstain 48,571
Broker Non-Votes 1,452,225
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
During the quarter ended June 30, 1997, the Company was not required to file a
Form 8-K with the Securities and Exchange Commission.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUTER LANGUAGE RESEARCH, INC.
DATE: August 7, 1997 By M. Brian Healy
---------------------------------------------
M. Brian Healy
Group Vice President, Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS PRESENTED IN THE SECOND QUARTER 1997 10-Q AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
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<RECEIVABLES> 22,924
<ALLOWANCES> 922
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<CURRENT-ASSETS> 34,644
<PP&E> 57,485
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<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 5,639
<INCOME-TAX> 2,199
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