<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 September 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 October 31, 1997
--------------------- -----------------
$0.01 par value 14,422,511 shares
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COMPUTER LANGUAGE RESEARCH, INC.
FORM 10-Q
September 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 ............. 5-6
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................... 7-12
PART II. OTHER INFORMATION
1 LEGAL PROCEEDINGS ...................................... 12-14
6 EXHIBITS AND REPORTS ON FORM 8-K ....................... 14
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COMPUTER LANGUAGE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
September 30 December 31
--------------------- -----------
1997 1996 1996
-------- -------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ........... $ 5,326 $ 5,925 $ 2,928
Accounts receivable, less allowance
for doubtful accounts of $872 at
September 30, 1997, $910 at
September 30, 1996, and $800 at
December 31, 1996 .................. 15,627 16,053 27,104
Income taxes receivable ............. 3,757 3,506 --
Other current assets ................ 3,183 3,832 5,042
-------- -------- --------
Total current assets .............. 27,893 29,316 35,074
-------- -------- --------
PROPERTY AND EQUIPMENT, AT COST:
Land ................................ 2,584 2,584 2,584
Buildings and improvements .......... 16,972 16,861 16,866
Data processing equipment ........... 31,327 33,382 33,933
Furniture, fixtures, and equipment .. 7,752 8,937 9,086
-------- -------- --------
58,635 61,764 62,469
Less accumulated depreciation ....... 39,618 40,250 41,581
-------- -------- --------
Net property and equipment ........ 19,017 21,514 20,888
-------- -------- --------
OTHER NONCURRENT ASSETS:
Software, net of accumulated amorti-
zation of $33,296 at September 30,
1997, $26,230 at September 30, 1996,
and $28,694 at December 31, 1996 ... 26,286 24,715 23,868
Intangibles and other assets, net of
accumulated amortization of $10,625
at September 30, 1997, $7,685 at
September 30, 1996, and $8,952
at December 31, 1996 ............... 17,861 20,286 19,107
-------- -------- --------
Total other noncurrent assets ..... 44,147 45,001 42,975
-------- -------- --------
Total assets ..................... $ 91,057 $ 95,831 $ 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)
September 30 December 31
--------------------- -----------
1997 1996 1996
-------- -------- -----------
(Unaudited)
CURRENT LIABILITIES:
Notes payable ....................... $ -- $ -- $ 2,000
Accounts payable .................... 1,469 1,116 3,124
Accrued compensation, payroll taxes,
and benefits ....................... 6,952 7,590 7,950
Deferred revenue .................... 10,395 11,006 9,619
Accrued support ..................... 463 1,709 1,264
Other current liabilities ........... 4,947 5,977 5,634
Current portion of long-term debt ... 375 750 750
-------- -------- --------
Total current liabilities ......... 24,601 28,148 30,341
-------- -------- --------
NONCURRENT LIABILITIES:
Long-term debt ...................... -- 375 188
Other liabilities ................... 4,778 4,950 5,700
Deferred income taxes ............... 706 1,446 706
-------- -------- --------
Total noncurrent liabilities ...... 5,484 6,771 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;
15,232 shares issued at Septem-
ber 30, 1997, 15,077 shares issued
at September 30, 1996, and 15,084
shares issued at December 31, 1996 . 152 150 150
Capital in excess of par value ...... 40,616 34,333 34,378
Retained earnings ................... 30,465 31,699 32,744
Treasury stock at cost, 810 shares .. (5,268) (5,270) (5,270)
Deferred compensation ............... (4,993) -- --
-------- -------- --------
Total shareholders' equity ........ 60,972 60,912 62,002
-------- -------- --------
Total liabilities and
shareholders' equity ............ $ 91,057 $ 95,831 $ 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 Nine Months Ended
September 30 September 30
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenues ......................... $ 28,009 $ 27,434 $ 97,799 $ 90,167
-------- -------- -------- --------
Costs and expenses:
Cost of revenues ................ 16,830 14,400 52,195 47,244
Selling, general, and
administrative ................. 13,892 14,723 42,877 42,032
Charge for purchased research
and development ................. -- -- -- 3,498
-------- -------- -------- --------
Total costs and expenses ...... 30,722 29,123 95,072 92,774
-------- -------- -------- --------
Operating income (loss) .......... (2,713) (1,689) 2,727 (2,607)
Interest income .................. 145 150 380 501
Interest expense ................. 4 16 41 66
Other loss, net .................. (13) (12) (12) (29)
-------- -------- -------- --------
Income (loss) before income taxes (2,585) (1,567) 3,054 (2,201)
Provision (benefit) for income
taxes ........................... (1,176) (548) 1,023 (770)
-------- -------- -------- --------
Net income (loss) ................ $ (1,409) $ (1,019) $ 2,031 $ (1,431)
======== ======== ======== ========
Earnings (loss) per share ........ $ (0.10) $ (0.07) $ 0.14 $ (0.10)
======== ======== ======== ========
Dividends per share .............. $ 0.10 $ 0.10 $ 0.30 $ 0.30
======== ======== ======== ========
Weighted average number of common
and common equivalent shares
outstanding ..................... 14,413 14,257 14,477 14,207
======== ======== ======== ========
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)
Nine Months Ended
September 30
------------------
1997 1996
-------- --------
OPERATING ACTIVITIES:
Net income (loss) ...................................... $ 2,031 $ (1,431)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation expense ................................. 5,288 4,668
Amortization expense ................................. 10,773 9,082
Amortization of deferred compensation ................ 298 --
Charge for purchased research and development ........ -- 3,498
Other loss, net ...................................... 12 29
Changes in assets and liabilities, net of effect
of acquisitions ..................................... 2,940 4,120
-------- --------
Net cash provided by operating activities .......... 21,342 19,966
-------- --------
INVESTING ACTIVITIES:
Capital expenditures ................................... (3,484) (5,210)
Additions to software .................................. (6,388) (6,211)
Cash paid for acquisitions ............................. (3,210) (12,508)
Disposals of property and equipment .................... 60 15
-------- --------
Net cash used in investing activities .............. (13,022) (23,914)
-------- --------
FINANCING ACTIVITIES:
Payments on line of credit note payable ................ (2,000) --
Payments on long-term debt ............................. (563) (562)
Proceeds from exercise of common stock options ......... 949 1,059
Payments of dividends .................................. (4,310) (4,265)
Issuance of treasury stock ............................. 2 --
-------- --------
Net cash used in financing activities .............. (5,922) (3,768)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .... 2,398 (7,716)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........ 2,928 13,641
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 5,326 $ 5,925
======== ========
See accompanying Notes to Consolidated Financial Statements (unaudited).
4
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COMPUTER LANGUAGE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine-month
periods ended September 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 were 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.
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 nine months ended September 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
5
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COMPUTER LANGUAGE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1997
(Unaudited)
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 Nine Months Ended
(In thousands, except per share amounts) September 30, 1996
---------------------------------------- ------------------
Pro forma revenue $ 94,736
Pro forma net loss $ (2,369)
Pro forma loss per share $ (0.17)
3. INCOME TAXES
The provision (benefit) for income taxes reflects management's best estimate
of the effective tax rate expected for the year. The effective tax rate for
the nine months ended September 30, 1997, is approximately 34% and reflects
the Research and Experimentation Credit reinstated by Congress in August 1997.
This is comparable to the rate for the nine months ended September 30, 1996,
of 35%.
4. DIVIDENDS
On August 29, 1997, the Company paid a $1.4 million dividend at the rate of
$0.10 per share to shareholders of record on August 14, 1997. There were 14.4
million shares issued and outstanding on August 14, 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.
Company common stock options have been granted at an exercise price less than
the fair market value of the underlying stock on the grant date. As a result,
deferred compensation has been recognized in shareholders' equity on the
balance sheet and is being amortized over nine years.
Rent Roll common stock options have been 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.
6
<PAGE>
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Selected Third Quarter Results Expressed as a Percentage of Revenues:
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
1997 1996 Chg 1997 1996 Chg
------ ------ ------ ------ ------ ------
Cost of revenues .......... 60.1 % 52.5 % 7.6 % 53.4 % 52.4 % 1.0 %
Selling, general, and
administrative ........... 49.6 % 53.7 % (4.1)% 43.8 % 46.6 % (2.8)%
Charge for purchased re-
search and development ... -- % -- % -- % -- % 3.9 % (3.9)%
Total costs and expenses .. 109.7 % 106.2 % 3.5 % 97.2 % 102.9 % (5.7)%
Operating income (loss) ... (9.7) % (6.2) % (3.5)% 2.8 % (2.9)% 5.7 %
Provision (benefit) for
income taxes ............. (4.2) % (2.0) % (2.2)% 1.0 % (0.8)% 1.8 %
Net income (loss) ......... (5.0) % (3.7) % (1.3)% 2.1 % (1.6)% 3.7 %
COMPANY ACTIVITIES
The Company acquired The Omega Tax System business (Omega) from Price Waterhouse
LLP (PW) in June of the current year. (For additional information, see Note 2
in the Notes to Consolidated Financial Statements.) This acquisition is
expected to have minimal effects on operations until after 1998 when positive
results are expected. 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 OPERATIONS
For the three month period ended September 30, 1997, the Company (on a
consolidated basis) incurred an operating loss of $(2.7) million, compared with
an operating loss of $(1.7) million for the same period in the prior year.
Year-to-date, the Company achieved operating income of $2.7 million exceeding
the Company's performance for the same period in 1996 which was an operating
loss of $(2.6) million.
The fluctuations in operating income (loss) are due primarily 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. This conversion had a positive effect on year-
to-date revenues and a negative effect on third quarter revenues. Increased
product sales and the timing of Rent Roll acquisitions in the prior year also
positively affected 1997 revenues. In addition, reserves for customer credits
which decreased slightly during the third quarter and increased year-to-date
contributed to the overall fluctuation in revenues during 1997.
Current year acquisition charges were lower 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
increased software development expense and an increase in Rent Roll operating
expenses due to the timing of 1996 acquisitions.
7
<PAGE>
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company currently anticipates that 1997 revenue will increase 8% to 9% over
1996 levels. In addition, the Company anticipates that operating margins
(before acquisition related charges) will be approximately 10% to 12% (see Safe
Harbor Statement below). These estimates are slightly lower than previously
reported due to recent indications from the government that a contract expected
in the fourth quarter of this year will be delayed until 1998. Third quarter
results are not indicative of the results expected in the fourth quarter 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):
Third Quarter
---------------------------------------------------------------------
Fast-Tax Rent Roll Corporate Total
---------------- ---------------- ----------- -----------------
1997 1996 Chg 1997 1996 Chg 1997 1996 1997 1996 Chg
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Revenues $23.2 $23.7 $(0.5) $ 4.8 $ 3.7 $ 1.1 $ -- $ -- $28.0 $27.4 $ 0.6
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Opera-
tions 21.0 20.2 0.8 6.2 5.5 0.7 1.2 1.0 28.4 26.7 1.7
Acquisition
related 1.4 1.2 0.2 0.9 1.2 (0.3) -- -- 2.3 2.4 (0.1)
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total
operating
expenses 22.4 21.4 1.0 7.1 6.7 0.4 1.2 1.0 30.7 29.1 1.6
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Operating
income
(loss) $ 0.8 $ 2.3 $(1.5) $(2.3)$(3.0)$ 0.7 $(1.2) $(1.0) $(2.7)$(1.7) $(1.0)
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
Year-to-Date
---------------------------------------------------------------------
Fast-Tax Rent Roll Corporate Total
---------------- ---------------- ----------- -----------------
1997 1996 Chg 1997 1996 Chg 1997 1996 1997 1996 Chg
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Revenues $84.8 $79.6 $ 5.2 $13.0 $10.6 $ 2.4 $ -- $ -- $97.8 $90.2 $ 7.6
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Opera-
tions 65.8 65.8 -- 18.8 13.0 5.8 3.8 3.7 88.4 82.5 5.9
Acquisition
related 3.7 3.6 0.1 3.0 6.7 (3.7) -- -- 6.7 10.3 (3.6)
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total
operating
expenses 69.5 69.4 0.1 21.8 19.7 2.1 3.8 3.7 95.1 92.8 2.3
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Operating
income
(loss) $15.3 $10.2 $ 5.1 $(8.8)$(9.1)$ 0.3 $(3.8) $(3.7) $ 2.7 $(2.6) $ 5.3
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
8
<PAGE>
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Fast-Tax Business
- -----------------
Year-to-date Fast-Tax business revenue increased $5.2 million to $84.8 million
in 1997 from $79.6 million in 1996, whereas third quarter revenue decreased $0.5
million to $23.2 million in 1997 from $23.7 million in 1996. The increase in
year-to-date revenues and the decrease in third quarter revenues is primarily
attributable to the previously discussed conversion of the TMS client base which
resulted in earlier recognition of revenue for the corporate tax group in the
current year. The decrease in third quarter revenue for this group, however,
was partially offset by increased sales of the Windows(R)-based tax product,
InSource(R), and a reduction in credit reserves due to improved customer
collections. The bank tax group experienced improved revenues for the third
quarter and year-to-date due to continued success with its 1099 tax software and
services. The accounting tax group's ACE(TM) Practice product released in late
1996 continues to strengthen the group's revenues; however, overall revenue for
the group decreased for both the quarter and year-to-date due to increased
reserves for customer credits.
Year-to-date Fast-Tax business operating expenses increased $0.1 million to
$69.5 million in 1997 from $69.4 million in 1996. In addition, third quarter
operating expenses increased $1.0 million to $22.4 million in 1997 from $21.4
million in 1996. These increases are due primarily to charges incurred as a
result of an early termination of a consulting agreement associated with the TMS
acquisition, as well as increases in net software development expense. These
increases were offset by amortization of previously accrued support costs,
synergies achieved in connection with the acquisition of TMS, and lower customer
service expense.
The increase in net software development expense is due to increased
amortization of previously capitalized costs and increased expense for projects
that have not reached technological feasibility. The increase in amortization
is 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, integration of current products, and continued
development and enhancement of Windows-based client/server software. (See table
below for further analysis.)
Fast-Tax Business
Software Development Three Months Ended Nine Months Ended
(In millions) September 30 September 30
-------------------- --------------------- ---------------------
1997 1996 Chg 1997 1996 Chg
------ ------ ----- ------ ------ -----
Costs $ 7.9 $ 7.3 $ 0.6 $ 22.8 $ 22.8 $ --
Capitalization (1.7) (2.0) 0.3 (4.9) (5.7) 0.8
Amortization 1.4 1.1 0.3 4.1 2.6 1.5
------ ------ ----- ------ ------ -----
Net expense $ 7.6 $ 6.4 $ 1.2 $ 22.0 $ 19.7 $ 2.3
====== ====== ===== ====== ====== =====
9
<PAGE>
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Rent Roll Business
- ------------------
Year-to-date revenue increased $2.4 million to $13.0 million in 1997 from $10.6
million in 1996. In addition, third quarter revenue increased $1.1 million to
$4.8 million in 1997 from $3.7 million in 1996. The increase in revenue is the
result of acquisitions completed by Rent Roll in 1996, as well as training
sessions developed to assist in implementation of the Rent Roll software
products, offset by increased reserves for customer credits established during
1997. A majority of the increase in revenue is specifically attributable to the
Renter Index, Inc. and A&M Software, Inc. acquisitions completed in March and
August of 1996, respectively.
Year-to-date operating expenses increased $2.1 million to $21.8 million in 1997
from $19.7 million in 1996. Third quarter operating expenses increased $0.4
million to $7.1 million in 1997 from $6.7 million in 1996. 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.
Total software development costs for the third quarter of 1997 are $0.7 million,
compared with $0.8 million for the same period in 1996. Year-to-date software
development costs are $2.4 million for 1997, compared with $1.7 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 Fast-Tax
business. Increased year-to-date 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 in recent years. 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
======== ========= ======== ========= =======
10
<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 nine month period. Following is a summary of the primary items
accounting for these changes (in millions):
Third Quarter Year-To-Date
------------- ------------
(i) Fast-Tax business increase (decrease)
in operating income (loss) (net of
software development expense) ........ $ (0.1) $ 7.5
(ii) Increased net expense of software
development costs .................... (1.2) (2.3)
(iii) Rent Roll business increase in
operating loss, before acquisition
charges .............................. 0.4 (3.4)
(iv) Decrease in acquisition related
amortization and other charges ....... 0.1 3.6
(v) Corporate (increase) in total
operating expenses ................... (0.2) (0.1)
------- ------
Total increase (decrease) in
operating income (loss) .............. $ (1.0) $ 5.3
======= ======
PROVISION (BENEFIT) FOR TAXES
The provision (benefit) for income taxes reflects management's best estimate of
the effective tax rate expected for the year. The effective tax rate for the
nine months ended September 30, 1997, is approximately 34% and reflects the
Research and Experimentation Credit reinstated by Congress in August 1997. This
is comparable to the rate for the nine months ended September 30, 1996, of 35%.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow for the first nine months of 1997 saw a net increase in cash and cash
equivalents of $2.4 million, compared with a net decrease of $7.7 million in
1996. The increase was primarily due to (in millions):
(i) Decrease in cash paid for acquisitions ...................... $ 9.3
(ii) Higher level of capital expenditures and software
additions in 1996 .......................................... 1.5
(iii) Increase in cash provided by operating activities, due to
acquisition related activity and working capital changes
in the ordinary course of business ......................... 1.4
(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 ................. $ 10.1
======
11
<PAGE>
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company made investments of $3.5 million in property and equipment during
the first nine months of 1997, compared with $5.2 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 was
originally set to expire in December 1997 and December 2000, respectively. The
Company's lenders have agreed to extend the expiration of the credit/term
facility to December 1998 and December 2001. During the first quarter of 1997,
the Company repaid the $2.0 million line of credit note payable outstanding at
December 31, 1996.
At its October 30, 1997, meeting, the Board of Directors declared a dividend for
the fourth quarter of 1997 at a rate of $0.10 per share totaling $1.4 million.
The dividend is payable December 2, 1997, to shareholders of record on November
13, 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.
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 three 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 including all design and
development documents. 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
12
<PAGE>
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. The Court conducted an
evidentiary hearing on the source code issue on October 14, 15 and 16, 1997.
The outcome of such 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 May 10, 1996, the Internal Revenue Service (IRS) served on the Company a
summons, pursuant to IRC Section 6503(k), related to a designated summons issued
to Brunswick Corporation on May 7, 1996, which sought production of the
Company's computer software programs (formerly owned by Price Waterhouse LLP
(PW)). Executable versions of these programs were used by Brunswick to produce
its federal income tax returns for three 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
same IRS legal theories as in the Caltex matter. The Company did not concur and
declined to comply, while continuing to discuss the matter with the IRS. On
February 13 and 14, 1997, Brunswick, the Company and the IRS engaged in a formal
mediation. 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 software used by Brunswick to prepare the
returns under audit, subject to certain restrictions on use, copying, and
dissemination. On May 19 and 20, 1997, the parties again engaged in mediation,
this time regarding IRS access to the summoned source code. The parties were
not successful in reaching an agreement with regard to IRS access to the
summoned source code. On September 22, 1997, the IRS filed a Petition to
Enforce Internal Revenue Service Summonses, thus initiating United States of
America v. Brunswick Corporation, Price Waterhouse, LLP, and Computer Language
Research, Inc. (Civil Action No. 97-C-6659, in the United States District Court
of the Northern District of Illinois, Eastern Division). On October 1, 1997,
the IRS obtained, on an ex parte basis, an Order to Show Cause why Brunswick,
PW, and the Company should not be compelled to comply with the IRS summonses.
On October 1, 1997, the United States District Judge to whom the case had been
assigned ordered that Brunswick and the Company would have until January 15,
1998, to file their responses to the Order to Show Cause.
On March 6, 1997, Micro Database Systems, Inc. (MDBS) filed suit against the
Company 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.
On October 30, 1997, the Company and MDBS entered into a Settlement Agreement
and Release of All Claims which settled, on non-material terms satisfactory to
the Company, all issues brought in the litigation. Pursuant to the Settlement
Agreement, a Stipulation for Dismissal with Prejudice was filed on October 30,
1997, in the matter of Micro Data Base Systems, Inc. v. Computer Language
Research, Inc., Cause No. 4:97CV-07-AS, in the United States District Court for
the Northern District of Indiana, Hammond Division at Lafayette.
13
<PAGE>
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
defense to the Plaintiff's allegations against the Company. As of the date of
this report, the parties were engaged in discovery. 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On October 8, 1997, the Company filed Items 4 and 7 on Form 8-K
dated October 6, 1997, with the Securities and Exchange
Commission to report the resignation of Ernst & Young LLP as the
Company's principal accountant.
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: November 7, 1997 By Brian Healy
--------------------------------------------
M. Brian Healy
Group Vice President, Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
14
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
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