ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
The company was founded in 1964 and incorporated in Texas in February 1969 as Computer Language Research, Inc. (CLR), known together with all subsidiaries as the "Company." Headquartered in Carrollton, Texas (a suburb of Dallas, Texas), the Company also maintains sales and support facilities throughout the United States. In May 1983, the Company made its initial public offering of common stock which trades on the Nasdaq National Market under the symbol: CLRI. Based upon the products and services provided today, the Company's Standard Industrial Classification is 7372 - Prepackaged Software.
In its beginning, the Company's primary business was processing federal individual income tax returns for tax preparers as a computer service bureau. Since that time, the Company has expanded its product offerings to include almost every type of tax return available. The Company has also been on the leading edge of technological advances in the computer industry providing five generations of computer automation technology. See also (c) Products and Services below.
In 1994, the Company undertook a new strategy: to provide software and services that generate recurring revenue in vertical market segments, leveraging the Company's technological, marketing, and sales expertise. This strategy has led the Company into new and specialized markets with the Company making significant progress toward its goals through acquisitions completed during the period from December 1994 through October 1996.
In December 1994, the Company completed an acquisition from Prentice-Hall Professional Software, Inc. (PHPS) and acquired audit and practice management software for accounting firms and property management software for the multifamily housing industry. Then in April 1995, the Company expanded the professional audit software through the acquisition of the ACE (Automated Client Engagement)(R) software line from Sequel/McGladrey Software. In January 1996, the Company acquired additional practice management and write-up software from E.F. Haskell & Associates, Inc. Since the acquisitions, the Company has integrated, expanded, and upgraded the line and in April 1996, launched a suite of fully-integrated, easy-to-use Windows(R) software (see also (e) Product Development, below). The software is marketed through the unincorporated ACE division of the Company and its financial results are included in the Fast-Tax business.
In June 1995, the Company expanded on the property management software that it acquired from PHPS with the acquisition of the property management software from the Dallas-based company, Rent Roll, Inc. In December 1995, CLR incorporated its own wholly-owned subsidiary, Rent Roll, Inc. (Rent Roll). Then in 1996, Rent Roll completed seven strategic acquisitions (see list below) which have added product functionality and increased market share. Rent Roll is now an industry leading provider of multifamily property management software, able to offer the most complete line of property management tools available.
In December 1995, the Company expanded its tax business through the acquisition of the tax compliance software business (formerly known as TMS) of the Tax Technology Group of Price Waterhouse LLP. The Company is in the process of integrating the products to develop a "best-of-the-best" combination of features found in TMS and in its own Windows-based tax product, InSource(R). See also (e) Product Development, below.
Over the past few years, the Company has evolved into a business application software company expanding well beyond providing the original tax automation systems upon which the Company was founded.
1996 Acquisitions: (For additional details see Item 8 - Note 3 in the Notes to Consolidated Financial Statements)
January - practice management and write-up software for the accounting industry, from E.F. Haskell & Associates, Inc. January - applicant screening and other information services, and the capital stock of Credit Interfaces, Inc. January - affordable housing property management software, from Project Data Systems, Inc. March - fixed asset management software for corporations, from Axtell Development Corporation March - applicant screening and other information services, from Renter Index, Inc. March - bar code scanning and information processing technology, from Crystal Solutions, LLC August - affordable housing property management software, from A&M Software, Inc. September - eviction database service, from Automated Research Technology Inc. October - rural housing software, from Castle Lake Software, Inc.
(b) FUNCTIONAL BUSINESS GROUPS
FAST-TAX BUSINESS - - ----------------- The Company, through its unincorporated ACE division, offers accounting software to public accounting firms throughout the United States which range in size from the large regional and national firms to sole practitioners.
The Company offers its tax products and services to four primary groups of clients, ranked in order of relative revenue concentration: Accounting, Corporate, Bank, and Government.
ACCOUNTING: Public accounting firms in the United States and abroad comprise this group. These firms have complex tax processing needs and range in size from the largest multinational accounting firms to sole practitioners.
CORPORATE: Clients consist of corporations that process complex, consolidated federal tax returns and a variety of state and local tax returns. The corporations range in size from the Fortune 500 multinational corporations to small corporations with small internal tax departments. In addition, the Company has two sub-groups which market specialized software products that fit the unique requirements of insurance and utility companies. The Company also provides automated tax processing services to partnerships, primarily large syndications and master limited partnerships.
BANK: Large- and medium-sized banks and trust companies that offer trust services use the Company's tax return processing products and services to process both federal (1041) and state fiduciary income tax returns, 1099s, and other beneficiary information.
GOVERNMENT: The Company's wholly-owned subsidiary, Electronic Tax Systems, Inc., provides an automated international tax audit and review system to the U.S. Internal Revenue Service (IRS). The system, called STAR (System for Tax Audit and Review), is designed to assist IRS international examiners in reviewing the international tax compliance activities of American corporations.
Rent Roll Business - - ------------------ Rent Roll provides multifamily property management software to a client group of property management and owner/operator companies ranging in size from the largest publicly and privately held in the industry to the smallest of companies managing a single property. The client group provides management for both conventional and government-subsidized affordable housing properties.
(c) PRODUCTS AND SERVICES
SOFTWARE AND SYSTEMS: Since 1965, the Company has successively implemented five generations of software technology:
First Generation: Service Bureau Tax Processing Second Generation: On-Line Tax Processing Third Generation: Client Data Input and Print Tax Processing Fourth Generation: Client In-House, Microcomputer-based Tax Processing Fifth Generation: Microsoft(R) Windows-based Tax Automation Systems
The Company has evolved to become primarily a supplier of microcomputer-based software and related services, although all five generations of technology are still offered today. The systems available today enable clients to use the Company's software (tax, accounting, and property management) while performing the tasks in their own offices.
The fifth generation of technology for automating tax-related activities for accounting firms, corporate tax departments, and bank trust tax departments is reflected in products such as GoSystem(R) for Windows, InSource(R), and TrustEase(R), respectively. It is also reflected in the ACE suite of accounting software released this year and in the Windows-based property management software that is currently being developed. These products are intended to improve the efficiency and productivity of the tasks performed and will continue to evolve as the technology and needs of the clients do. For example, the Company is currently in the process of developing Windows client/server-based versions of many of its tax products.
TAX PROCESSING OPERATIONS: The Company's tax processing operations consist of tax return production (including data entry), computing, printing, data communications, and distribution.
ELECTRONIC FORMS MANAGEMENT: ACE Forms (formerly known as E-Form), initially introduced in 1992, is the first complete tax form service available on a single CD-ROM disk. ACE Forms was incorporated into the ACE suite of products which were introduced in 1996. ACE Forms includes more than 25,000 pages of tax- related forms and instructions. With ACE Forms, forms can be viewed and filled
in on-screen, and then printed either blank or completed. ACE Forms is available in both Microsoft Windows and DOS formats. The Company also has a contract to supply a private label electronic form product to a major supplier of tax information.
PROPERTY MANAGEMENT SYSTEMS AND SERVICES: The software systems currently offered by Rent Roll are DOS-based with Windows-based products currently under development. In addition to the software provided by Rent Roll, they also provide applicant screening services (background checks including eviction, criminal history, and subsidy compliance) to multifamily property management companies.
(d) SALES AND MARKETING
Company-employed sales personnel located throughout the United States market the Company's products and services. The Company also markets its products through advertising in trade publications, direct mail, trade shows, telemarketing, road show campaigns, and public relations activities. The Company has entered into a number of joint marketing agreements whereby companies and partnerships have agreed to market the Company's products and services to their clients and customers.
Tax processing and ACE products for accounting firms are generally licensed to individual offices rather than on a multiple-office basis; however, some national and large local accounting firms traditionally enter into firm-wide site-licenses for all of their offices. Tax processing products for corporations are generally licensed for use in corporate tax departments.
Property management software products are generally licensed to the property owner or a fee management company who then installs them at the individual property site. However, some products are licensed to the corporate office on a multiple-user basis when utilized for the evaluation of a portfolio or multiple properties rather than a single site.
The Company maintains, at its headquarters, a support center to support the Company's tax software and services with assistance and support for the tax activities available through a toll free number and also available at Fast-Tax locations throughout the country. Support for the ACE accounting software is available through a toll free number with staff located in our offices in Atlanta, Ga., while support for the multifamily property management products is available through toll free numbers on the East Coast (Atlanta, Ga. and Burlington, Vt.), Centrally (Carrollton, Texas), and on the West Coast (Petaluma, Calif.). The real estate applicant screening center provides the necessary support and services to clients and is located at the Company's headquarters.
The Company's World Wide Web site is an important vehicle for communicating product information to clients and prospective clients. The site is located at http://www.clr.com, and includes general company information as well as detailed information about its products.
(e) PRODUCT DEVELOPMENT
The software business requires a continuing high level of expenditures for the development, maintenance, and updating of systems and services due to the rapid technological changes and changes in accounting and government regulations
(federal, state, and local). The Company also incurs substantial expenditures to update, enhance, and maintain its existing systems and products by adding features and functions. Due to these changes, there is no assurance that the Company's development efforts will always result in successful products. Risks exist in developing new products, adopting new technology, and converting new products into profitable operations.
For details of the Company's expenditures related to product development, see Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations.
Among the new products and services developed and acquired by the Company during the year were:
InSource CS. InSource CS, announced in 1995 and released in the fourth quarter of 1996, is an advanced 32-bit Windows-based tax processing system available today for corporate tax departments. Designed to take full advantage of the client/server platform, InSource CS offers greater levels of performance and flexibility. The server side of InSource CS operates on a Windows NT server, while the client side operates on Windows 95 or Windows NT Workstation. InSource CS currently offers client/server applications for Property Tax, Domestic Income Tax, 1099 processing, and Fixed Asset Management. Plans for including other products in the CS family during 1997 include software for Provisions, Insurance Income Tax, International Income Tax , and Utility Fixed Asset Management.
Corporate Domestic Income Tax Options. As a result of the December 1995 acquisition of TMS software from Price Waterhouse LLP, a variety of options (all part of the InSource family) are now available for processing of domestic income tax returns. InSource, the original file server-based Windows product, uses a tax accounting methodology. InSource TMS, also a file server-based Windows product, is the successor to TMS for Windows and uses the workpaper-based methodology pioneered in the Price Waterhouse system. InSource Express remains the system of choice for tax departments requiring a return-preparation-only system without the more sophisticated features of InSource and InSource TMS. InSource CS -- Domestic Income Tax, discussed above, will evolve during 1997 to become the "best-of-the-best" product envisioned at the time of the TMS acquisition.
Utility Industry Group. In 1996 the Company announced the formation of a new specialized industry sub-group within the Corporate group of the tax business. This new group will develop and market software products designed to meet the unique requirements of the utility industry. This approach was highly successful in developing income tax, premium tax, and 1099 compliance products specifically designed for the insurance industry. The utility company group will begin by releasing InSource CS - Utility Fixed Asset Management Systems (UFAMS) software in 1997.
ACE. In April 1996, the Company announced the formation of a new division called Automated Client Engagement, or "ACE" to develop, market, and support a fully-integrated, easy-to-use Windows-based accounting software product. The released product line incorporates software acquired from PHPS, Sequel/McGladrey, and E.F. Haskell and includes applications for accounting, client write-up, trial balance, time and billing, practice management, document management, and electronic forms. In 1997, all ACE applications will be enhanced to provide a uniform interface and tighter integration which will automate the flow of information between applications, including Fast-Tax
GoSystem software. In addition, beginning in late 1997, ACE products will be available over the Internet.
Rent Roll. Rent Roll is a comprehensive property management tool, which successfully combines the administrative needs of a multifamily management company with the requirements of accounts receivable reporting, and it puts these functions out on the property site. Rent Roll is also well known for its user-definable security settings. The Company released an enhanced version of its leading DOS-based product in the third quarter of 1996 providing greater functionality for invoice processing, budget management, purchase order control, traffic measuring, and added over 35 new reports to the program. The program was also enhanced to address century clock calculations for date awareness beyond the year 2000.
Improvement of Screening Services. The Company combined the databases of information that were acquired with Credit Interfaces, Renter Index, and Automated Research Technologies, and thereby has been able to improve the amount and quality of information provided regarding eviction records, previous address information, and criminal background investigations.
InSite. During 1997, the Company will begin releasing a product that is currently under development. InSite is a Windows-based integrated suite of property management tools that will allow users to share and report information in a way never before possible. It will enable them to perform more functions at property sites and use the information to manage their properties more effectively. In addition, direct links to the home office will make reporting easy, fast and foolproof.
(f) COPYRIGHTS, TRADEMARKS AND TRADE SECRETS
The Company believes that its software products and attendant intellectual property rights related to the software products are proprietary in nature and of substantial value. Thus, it relies on protection of its computer programs through use of copyright law, trademark law, common law trade secret law, trade secret statutes, internal and external nondisclosure safeguards, as well as restrictions on disclosure, reverse engineering, and transfer that are incorporated into software license agreements. Employees and outside programmers and consultants are required to execute agreements protecting the secrecy and ownership of the Company's intellectual property.
The Company, to date, has had no indication of any material infringement of any of its intellectual property rights. Notwithstanding this, enforcement of intellectual property rights against infringement and unauthorized use is difficult, and the Company can offer no assurances that such infringement or unauthorized use has not occurred. In the event of infringement or unauthorized use, the Company will vigorously defend and enforce its intellectual property rights.
The Company's tax compliance and tax practice management software products are licensed under trademarks such as Fast-Tax(R), GoSystem(R), EasyGo(R), System 5(R), InSource(R), ACE (Automated Client Engagement)(R), SmartBridge(R), TrustEase(R). The Company's real estate software products are licensed under trademarks such as Rent Roll(TM), OnSite(TM), MicroRENT(TM), MicroHUD(R), HUDManager(R), and InSite(TM). (Please note, this is not meant to be a complete list of all Company trademarks.)
On May 10, 1996, the IRS served a summons on the Company in the matter of Caltex Petroleum Corporation. The summons sought production of the Company's computer software programs (which had formerly been owned by Price Waterhouse LLP, "PW") that had computed Caltex's foreign tax credit limitations for its federal income tax returns for the calendar tax years ended December 31, 1987, 1988, 1989, and 1990. The summons also requested a printed copy and a machine readable copy of the source code for such computer software along with a long list of ancillary materials. The summons was based on the government's contention that the summoned materials were taxpayer books, records and other data under Section 7602 of the Internal Revenue Code. The Company did not concur in this theory and declined to comply with the summons, while continuing to discuss the matter with the Internal Revenue Service. 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 for the Northern District of Texas, Dallas Division) by filing a Petition to Enforce Internal Revenue Service Summonses against Caltex, PW 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 the Company. The United States Magistrate to whom the case had been assigned ordered mediation for February 13 and 14, 1997. The mediation occurred and produced an Agreed Partial Judgment and Protective Order Regarding Software Access pursuant to which the Internal Revenue Service will have access to the PW/Caltex software subject to certain restrictions on use, copying and dissemination. Whether an arrangement regarding the summoned source code can be worked out prior to the Hearing of the matter was not known as of the date of filing this document, nor is it possible to assess the likely outcome of the Hearing on an issue of first impression in the federal or state courts.
(g) SEASONALITY
This information is set forth in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(h) WORKING CAPITAL
Working capital requirements of the Company are financed primarily from operations.
(i) CUSTOMERS
During the years ended December 31, 1996, 1995, and 1994, no single customer accounted for 10% or more of the Company's consolidated revenues. The Company provides tax processing services, software, and support to each of the six largest accounting firms in the United States. While the loss of any one of these customers would not have a material adverse consequence to the Company, the loss of more than one of these customers could.
(j) BACKLOG
Because the Company generally ships a major portion of its tax software products prior to the beginning of "tax season" and performs a major portion of its processing services during "tax season," backlog is not meaningful. Backlog is not a material factor for real estate software products as the supply and shipping are able to keep pace with the demand.
(k) GOVERNMENT CONTRACTS
No material portion of the Company's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government.
(l) COMPETITION
The Company cannot precisely determine its relative position in applicable software markets as reliable information is not available as to the total number of tax returns processed, installations of tax, accounting or multifamily property management software, or total revenue derived from licensing such software. The Company's primary competitors are national, regional, and local software publishers which license their tax and accounting software products to individuals, professional firms, and large companies/corporations; and license their property management software products to individual property owners, institutions, corporations, real estate investment trusts, and professional property management companies. In addition, as producers of "low-end" products seek to market more sophisticated products, they can become competitors of the Company.
Some competitors are larger than the Company and have greater financial, marketing, and personnel resources. There are also a number of larger software companies that may have the technological ability to develop products similar to those offered by the Company. Competition is on the basis of price, service, support, reliability, product capability, technology, experience, and commitment to automation. The Company believes that it competes effectively in all of these respects and that it is a leading supplier of: (1) tax automation software and related services to national public accounting firms, corporations, and the banking industry, and (2) multifamily property management software and related services to national, regional, and local entities which engage in the ownership and/or management of multifamily properties.
(m) RESEARCH AND DEVELOPMENT
This information is set forth in Note 2 in the Notes to Consolidated Financial Statements in Item 8.
(n) ENVIRONMENTAL CONTROL
Compliance with environmental regulations does not materially affect the Company's capital expenditures, earnings, or competitive position.
(o) EMPLOYEES
At December 31, 1996, the Company employed 1,095 regular full-time employees. The Company also employs more than 100 temporary employees in operations and customer service functions during its peak tax processing season. None of the Company's employees is represented by a union. The Company considers the relations with its employees to be good.
Item 2.
Item 2. PROPERTIES
The Company owns approximately 41 acres of land in Carrollton, Texas, where its corporate office is located. The facility presently occupies approximately 27 acres and contains approximately 403,000 square feet, which provides for the Company's current and foreseeable future usage requirements.
The Company also owns 19 acres of undeveloped land in Mesquite, Texas.
The Company leases office space in approximately 11 cities throughout the United States, primarily for sales and service personnel. The Company believes that all its facilities are suitable for the types of activities performed. The leases run for various terms with the longest term expiring in 2000.
Item 3.
Item 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 1996.
Note: The information provided pursuant to Item 10 of this Report is deemed to be also included in Part I hereof to the extent required by the rules and regulations of the Securities and Exchange Commission.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICES OF COMMON STOCK
The Company's common stock trades on the Nasdaq National Market under the symbol CLRI. The following stock prices reflect high and low sales prices for 1996 and 1995 as reported by The Nasdaq Stock Market.
- - -------------------------------------------------------------------- 1996 1995 - - -------------------------------------------------------------------- High Low High Low - - -------------------------------------------------------------------- First quarter $ 17 1/2 $ 13 1/4 $ 12 $ 7 1/2 Second quarter 17 12 10 1/2 7 1/4 Third quarter 13 9 1/2 12 3/8 9 1/4 Fourth quarter 13 9 1/2 15 11 1/4 - - --------------------------------------------------------------------
There were 423 and 445 shareholders of record of common stock as of February 28, 1997, and February 23, 1996, respectively.
CASH DIVIDENDS
The Board of Directors of the Company, at its February 1997 meeting, declared a dividend for the first quarter of 1997 at a rate of $0.10 per share. Future dividends may vary depending upon the Company's profit levels and capital requirements as well as financial and other conditions existing at the time.
- - --------------------------------------------- 1996 1995 - - --------------------------------------------- First quarter $ 0.10 $ 0.10 Second quarter 0.10 0.10 Third quarter 0.10 0.10 Fourth quarter 0.10 0.10 - - ---------------------------------------------
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL INFORMATION
Years Ended December 31 - - ------------------------------------------------------------------------------- (In thousands, except per share amounts) 1996 1995 1994 1993 1992 - - ------------------------------------------------------------------------------- INCOME STATEMENT DATA: Revenues $129,243 $110,703 $ 99,068 $ 98,852 $ 97,675 Costs and expenses: Cost of revenues 64,933 56,109 49,608 50,840 57,448 Selling, general, and administrative 59,707 41,162 32,348 33,513 30,866 Charge for purchased research and development 3,498 5,600 -- -- -- - - ------------------------------------------------------------------------------- Total costs and expenses 128,138 102,871 81,956 84,353 88,314 - - ------------------------------------------------------------------------------- Operating income 1,105 7,832 17,112 14,499 9,361 Interest income 567 1,925 1,020 562 334 Interest expense 93 8 330 736 1,159 Other, net (39) (626) 315 (202) (1,876) - - ------------------------------------------------------------------------------- Income from continuing opera- tions before income taxes 1,540 9,123 18,117 14,123 6,660 Provision for income taxes 499 2,264 7,095 5,401 1,964 - - ------------------------------------------------------------------------------- Income from continuing operations 1,041 6,859 11,022 8,722 4,696 Discontinued operations: Income (loss) from dis- continued operations, net of tax -- 76 321 (176) 812 Gain on disposal of dis- continued operations, net of tax -- 4,720 -- -- -- - - -------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Years Ended December 31 - - ------------------------------------------------------------------------------- (In thousands, except per share amounts) 1996 1995 1994 1993 1992 - - ------------------------------------------------------------------------------- Income before extraordinary item and cumulative effect of accounting change 1,041 11,655 11,343 8,546 5,508 Extraordinary gain, net of tax -- -- -- -- 1,084 Cumulative effect of accounting change -- -- -- -- 5,694 - - ------------------------------------------------------------------------------- Net income $ 1,041 $ 11,655 $ 11,343 $ 8,546 $ 12,286 ===============================================================================
Earnings per share from continuing operations $ 0.07 $ 0.48 $ 0.77 $ 0.62 $ 0.34 Earnings (loss) per share from discontinued operations -- 0.33 0.02 (0.01) 0.06 - - ------------------------------------------------------------------------------- Earnings per share before extraordinary item and and cumulative effect of accounting change 0.07 0.81 0.79 0.61 0.40 - - ------------------------------------------------------------------------------- Earnings per share $ 0.07 $ 0.81 $ 0.79 $ 0.61 $ 0.89 ===============================================================================
Dividends per share $ 0.40 $ 0.40 $ 0.36 $ 0.28 $ 0.16 - - ------------------------------------------------------------------------------- Weighted average number of common and common equiva- lent shares outstanding 14,564 14,434 14,280 14,066 13,796 - - -------------------------------------------------------------------------------
December 31 - - ------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 1993 1992 - - ------------------------------------------------------------------------------- BALANCE SHEET DATA: Total assets $ 98,937 $ 99,060 $ 84,093 $ 79,686 $ 73,077 Long-term debt, including current portion $ 938 $ 1,687 $ -- $ 8,494 $ 7,883 Shareholders' equity $ 62,002 $ 65,549 $ 58,319 $ 51,467 $ 46,522 - - --------------------------------------------------------------------------------
See Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - ------------------------------------------------------------------------------- SELECTED RESULTS EXPRESSED AS A PERCENTAGE OF REVENUES - - ------------------------------------------------------------------------------- Years Ended December 31 ----------------------------- 1996 1995 1994 - - ------------------------------------------------------------------------------- Cost of revenues 50.2% 50.7% 50.1% Selling, general, and administrative 46.2% 37.2% 32.6% Charge for purchased research and development 2.7% 5.0% --% Total costs and expenses 99.1% 92.9% 82.7% Operating income 0.9% 7.1% 17.3% Provision for income taxes 0.4% 2.0% 7.2% Income from continuing operations 0.8% 6.2% 11.1% - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- COMPANY ACTIVITIES - - ------------------------------------------------------------------------------- In 1995 and 1996 the Company, together with its wholly-owned subsidiary, Rent Roll, Inc., completed twelve acquisitions at a total cost of $39.6 million. Eight of the acquisitions were made to enhance Rent Roll's business, with the remainder made for the Fast-Tax business. For additional details see Note 3 in the Notes to Consolidated Financial Statements.
These acquisitions have a significant impact on the comparability of financial results. Effects of these acquisitions tend to adversely distort reported performance and may span more than one year before more normalized operating results become evident. The more important of these effects are as follows:
o Charge for purchased research and development (R&D) costs.
o Amortization of purchase price related to the acquired business (see additional details below).
o Deferral of revenue. This is particularly acute where a significant component of revenues from an acquired business is reported ratably (e.g., annual maintenance contracts). It generally takes a full year following an acquisition for there to be a full year of revenue to offset a full year of operating expenses.
o Lost revenue and additional expense incurred during the period in which the new business is being assimilated.
o Increased product development costs of maintaining and integrating the acquired products.
- - ------------------------------------------------------------------------------- 1996 COMPARED WITH 1995 - - ------------------------------------------------------------------------------- RESULTS OF OPERATING INCOME
Operating income for the Fast-Tax business was $17.6 million compared with operating income of $13.5 million in 1995. The operating loss for the Rent Roll business was $11.7 million compared with an operating loss of $0.6 million in 1995.
The changes in operating income are partially attributable to the changes in acquisition charges, including the charge for purchased R&D, with the Fast-Tax charges decreasing $5.6 million and Rent Roll increasing $7.5 million (see additional details below). Additionally, the Company is experiencing a significant increase in operating expenses related to the newly acquired businesses without the benefit of comparable offsetting revenues. Current year revenues are higher than 1995, due to acquisitions, but the growth has occurred at a lower rate than the increase in operating costs and expenses related to acquired companies. These expenses include a higher level of expenditures necessary to achieve a smooth assimilation of the acquisitions which have been completed in 1995 and 1996.
The Company currently anticipates that revenue will increase in excess of 10% in 1997 and that operating margins will trend toward more historical levels (see Safe Harbor Statement below).
Business Results (in millions): - - -------------------------------
Fast-Tax Rent Roll Corporate --------------------- --------------------- ------------ 1996 1995 Chg 1996 1995 Chg 1996 1995 ------ ------ ----- ------ ----- ------ ----- ----- Revenues $113.2 $107.1 $ 6.1 $ 16.0 $ 3.6 $ 12.4 $ -- $ -- ------ ------ ----- ------ ----- ------ ----- ----- Operations 90.9 83.3 7.6 19.3 3.3 16.0 4.8 5.1 Acquisition related 4.7 10.3 (5.6) 8.4 0.9 7.5 -- -- ------ ------ ----- ------ ----- ------ ----- ----- Total operating expenses 95.6 93.6 2.0 27.7 4.2 23.5 4.8 5.1 ------ ------ ----- ------ ----- ------ ----- ----- Operating income (loss) $ 17.6 $ 13.5 $ 4.1 $(11.7) $(0.6) $(11.1) $(4.8) $(5.1) ====== ====== ====== ====== ===== ====== ===== =====
Total --------------------- 1996 1995 Chg ------ ------ ----- Revenues $129.2 $110.7 $18.5 ------ ------ ----- Operations 115.0 91.7 23.3 Acquisition related 13.1 11.2 1.9 ------ ------ ----- Total operating expenses 128.1 102.9 25.2 ------ ------ ----- Operating income (loss) $ 1.1 $ 7.8 $(6.7) ====== ====== =====
Fast-Tax Business - - ----------------- The increase in profit for the year is primarily due to the acquisition of the tax compliance software business acquired from Price Waterhouse LLP in December 1995 (TMS acquisition). Revenue related to TMS increased by $8.6 million with operating expenses, including acquisition and consulting agreement charges, increasing $5.3 million. The acquisition charges related to TMS decreased $5.8 million mostly due to the 1995 charge for purchased R&D of $5.6 million.
The increase in operating income is also due in part to an increase in profit from both the bank and accounting tax businesses totaling approximately $1.5 million. The bank business revenue increased due to new contracts and continued product success and the accounting tax business was able to decrease operating expenses.
Increased product development costs noted in the following table are attributable to Windows client/server and remote/server development and expenses incurred to maintain and integrate products acquired through the TMS acquisition.
Product Development (in millions) ------------------- 1996 1995 Chg ------ ------ ------ Costs $ 32.2 $ 28.5 $ 3.7 Portion capitalized (7.1) (7.1) -- Amortization 3.7 3.1 0.6 ------ ------ ------ Net expense $ 28.8 $ 24.5 $ 4.3 ====== ====== ======
Rent Roll Business - - ------------------ Increased revenue of $12.4 million was primarily attributable to the acquisitions discussed above under Company Activities and in Note 3 of the Notes to Consolidated Financial Statements.
Increased operating expenses of $23.5 million is partially due to the $7.5 million increase in amortization of capitalized acquisition costs and the charge for purchased R&D (see Note 3 in the Notes to Consolidated Financial Statements). The remaining increase is attributable to the increase in operating expenses related to acquired companies, the integration of these acquisitions, and product development.
Total software development costs were $2.5 million compared with $1.0 million for 1995. 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, and the portion of the purchase prices that was allocated to intangibles has an average amortization life of 4.9 years. As discussed above, these acquisitions have a significant impact on the comparability of financial results. Amortization of intangibles (including software) and other acquisition related charges for the years 1995 through 2000 and thereafter (based on existing acquisitions), are as follows (in millions):
Amortization R&D Write-off ---------------------- ---------------------- Year Fast-Tax Rent Roll Fast-Tax Rent Roll Total ------ -------- --------- -------- --------- ------ 1995 $ 4.7 $ 0.9 $ 5.6 $ -- $ 11.2 1996 4.7 4.9 -- 3.5 13.1 1997 4.5 3.7 -- -- 8.2 1998 4.1 3.0 -- -- 7.1 1999 3.7 2.5 -- -- 6.2 2000 2.3 1.8 -- -- 4.1 Thereafter 0.3 0.7 -- -- 1.0 -------- --------- -------- --------- ------ Total $ 24.3 $ 17.5 $ 5.6 $ 3.5 $ 50.9 ======== ========= ======== ========= ======
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
The net impact on the Company of all of the above was to decrease income from continuing operations before income taxes. Following are the primary items accounting for this decrease (in millions):
(i) Increase in acquisition related amortization and other charges ............................................. $ 1.9 (ii) Increase in operating losses related to newly acquired businesses (before acquisition charges) - Rent Roll ............................................... 3.6 - TMS ..................................................... 0.6 (iii) Accrual related to TMS consulting services contract ........ 1.9 (iv) Increased profit from the bank and accounting tax businesses ................................................ (1.5) (v) Decrease in interest income due to lower levels of cash equivalents .......................................... 1.4 (vi) Decrease in expense due to less property and equipment sales/write-offs .......................................... (0.6) ------ Total of above ............................................. $ 7.3 ====== Total decrease in income from continuing operations before income taxes ....................................... $ 7.6 ======
PROVISION FOR TAXES
The income tax provision for 1996 was $0.5 million compared to $2.3 million in 1995. For an analysis of income taxes, see Note 9 in the Notes to Consolidated Financial Statements.
DISCONTINUED OPERATIONS
On June 23, 1995, the Company sold substantially all of the assets of its wholly-owned subsidiary, Electronic Form Systems Incorporated (EFS), reported previously as the electronic form systems business segment. For additional information, see Note 11 in the Notes to Consolidated Financial Statements.
- - ------------------------------------------------------------------------------- 1995 COMPARED WITH 1994 - - ------------------------------------------------------------------------------- Revenues increased $11.6 million or 12% to $110.7 million in 1995 from $99.1 million in 1994. Acquisitions, which are discussed below, accounted for approximately 80% of the increase accompanied by an 8% increase in bank market revenues due to continued product success. The increases were offset by a decrease in revenue from: (i) national accounting firms due to competitive pressures and continued price erosion, and (ii) the government business, because the renewal options of a contract awarded in 1994, affected revenues to a lesser extent in the current year.
Cost of revenues were $56.1 million or 50.7% of revenues in 1995 compared to $49.6 million or 50.1% of revenues in 1994. The increase is primarily attributable to acquisitions made in 1995, along with increases in net product development (see below). The increases were offset by a decrease in maintenance expense from outsourcing the maintenance service, as previously discussed in the 1995 first quarter Form 10-Q.
Total product development expenditures increased by $6.9 million to $29.5 million in 1995 from $22.6 million in 1994. Approximately 40% of the increase was capitalized, with the net expense increasing by $4.1 million. The increase is due to the Company's commitment to increase its product development related to InSource and the conversion of certain tax applications to a Microsoft Windows client/server platform.
Selling, general and administrative expenses were $41.2 million or 37.2% of revenues in 1995 compared to $32.3 million or 32.6% of revenues in 1994. As with cost of revenues, the increase is primarily attributable to acquisitions made in 1995, along with a comparative increase in administrative expenses as a result of the allocation of certain administrative expenses to the EFS business segment in 1994.
Acquisitions accounted for 95% of the increase in cost of revenues and selling, general, and administrative expenses from 1994 to 1995.
In December 1995, the Company expensed a $5.6 million charge for purchased R&D identified from the TMS acquisition. It was determined that the R&D had not reached technological feasibility and had no alternative future use; therefore, it was charged to operations at the time of acquisition.
The TMS business acquired in the fourth quarter of 1995 reduced operating profits by a total of $10.7 million, of which $5.1 million is a result of the deferral of TMS revenue into 1996 pursuant to the Company's revenue recognition practices, and the accrual of certain fees associated with the acquisition. The remaining $5.6 million is related to the charge for purchased R&D described above.
Operating profits decreased by $9.3 million to $7.8 million in 1995 from $17.1 million in 1994. The decrease is primarily due to the $10.7 million of losses and charges from the TMS business as described above. To a lesser extent, the decrease was affected by the inability to allocate administrative expenses to the EFS segment, decreased profit from a government contract, and from corporations. These decreases were offset by increased profits from banks and regional accounting firms and profits from other acquisitions made in 1994 and 1995.
Interest income increased from 1994 primarily due to higher balances of cash equivalents and short-term investments. Interest expense declined due to the reduced average debt level.
The income tax provision for 1995 was $2.3 million compared to $7.1 million in 1994. For an analysis of income taxes, see Note 9 in the Notes to Consolidated Financial Statements.
The Company's operating results from discontinued operations, net of income tax effect, was income of $76,000 for 1995, as compared to $321,000 for 1994. A portion of the operating expenses allocated to this business segment in the past continue to be reported by the Company. A gain of $4.7 million, net of income taxes, on the sale of EFS was recorded during the second quarter of 1995. For additional information, see Note 11 in the Notes to Consolidated Financial Statements.
- - ------------------------------------------------------------------------------- OTHER INFORMATION - - ------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES
Cash flow for 1996 saw a net decrease in cash and cash equivalents of $10.7 million, compared with a net increase of $7.4 million for 1995. The decrease is primarily due to (in millions):
(i) the 1995 conversion of short-term investments to cash ..... $ 16.8 (ii) the 1995 net proceeds from sale of the EFS subsidiary ..... 3.5 (iii) a decrease in cash paid for acquisitions .................. (3.4) (iv) the change in cash provided by operating activities, which is due to acquisition related activity and other working capital changes in the ordinary course of business ....................................... 2.1 (v) an increase in capital expenditures and software .......... 0.7 (vi) the Company's draw on the line of credit netted with payments on long-term debt .......................... (1.8) ------ Total of above ............................................ $ 17.9 ====== Total variance ............................................ $ 18.1 ======
The Company made investments in property and equipment of $6.4 million during 1996 compared to $5.4 million during 1995 and $4.2 million in 1994. At December 31, 1996, the Company had no material capital commitments and it is anticipated that investments in property and equipment will be approximately $6.5 million in 1997.
During 1996 the Company capitalized $7.1 million of software development costs compared to $7.1 million in 1995 and $4.2 million in 1994. The Company expects capitalized software development costs to decrease slightly in 1997. The capitalization is due to the conversion and integration of acquired software products along with the ongoing Windows client/server and Internet development.
On December 21, 1995, the Company entered into a $20.0 million revolving credit/term facility which will expire in December 1997 and may be extended at the lender's option. At December 31, 1996, the Company had a $2.0 million note payable outstanding against the credit/term facility, which was repaid by February 10, 1997.
At its February 27, 1997, meeting, the Board of Directors declared a dividend for the first quarter of 1997 at a rate of $0.10 per share totaling $1.4 million. The dividend is payable March 28, 1997, to shareholders of record on March 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.
SEASONALITY
The Company's revenues from tax products and services are seasonal, with a larger percentage realized in the first and fourth quarters, as shown in the table at the end of this section. This seasonality is attributable to the nature of the tax business, since the primary tax filing dates are in the first half of the year, and clients are preparing for the upcoming tax season in the fourth quarter. Though the Company has continued to transition its clients to site-license agreements under which revenue is recognized evenly over the annual contract period, there continues to be some seasonal variation.
The Company's revenues from real estate software are not materially affected by seasonality.
INFLATION
Certain costs incurred by the Company, such as labor and financing costs, are significantly affected by inflationary factors. Historically, the Company has been able to offset inflationary cost increases through production efficiencies and technological advances.
SAFE HARBOR STATEMENT
Statements in the Company's Securities and Exchange Commission filings which are not historical facts are forward looking statements that are subject to risks and uncertainties which may cause actual future results or events to vary materially from such forward looking statements. Such risks and uncertainties, include, but are not limited to, the following:
o the ability and willingness of licensees of the Company's products to substitute other products for the products of the Company;
o a change in the perceived absolute overall value or comparative relative value (including features, quality and pricing) of the Company's products by current and/or potential licensees;
o the acquisition of electronic tax compliance products by huge, multinational conglomerates such as The Thomson Corporation (SCS Compute) and Wolters Kluwer NV (CCH Incorporated) and the continued publication of electronic tax compliance products by massive international accounting firms;
o the pricing and technology strategies of these and other competitors;
o changes in generally accepted accounting principals and practices;
o difficulties in obtaining and recognizing revenue from clients added through acquisitions;
o changes in tax rates applicable to the Company;
o changes in the Internal Revenue Code and various state tax laws and practices which reduce the complexity of the tax return preparation process, including, without limitation, the risk that one of various "flat tax" proposals will be enacted, could have a negative effect on demand for electronic tax compliance products such as those produced by the Company;
o difficulties in obtaining labor, equipment, supplies, power, and natural resources needed to produce and distribute the Company's products;
o general difficulties, delays, and cost overruns associated with the design, development, testing, and distribution of the Company's new and existing products and changes in platform, including, but not limited to, a failure to complete, test, and ship new products when anticipated;
o the Company's strategic decision to undertake a higher than historical number of acquisitions and the related risks and uncertainties associated with merging business cultures, merging technologies, retaining key employees and consultants, retaining licensees, controlling expenses associated with integrating previously separate businesses, and discovery of unanticipated obligations and liabilities;
o the Company's ability to identify attractive acquisition targets, to negotiate mutually acceptable terms, conditions and purchase prices, and to obtain the funds necessary to effectuate a transaction;
o the costs and other potential effects associated with legal and administrative proceedings and cases brought by or against the Company; and
o developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses, including, but not limited to, the ability of the Company to obtain appropriate software patents and the need for the Company to obtain software patent licenses in order to produce its products.
- - ------------------------------------------------------------------------------- SELECTED CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED) - - ------------------------------------------------------------------------------- 1996 (A) - - ------------------------------------------------------------------------------- First Second Third Fourth (In thousands, except Quarter Quarter Quarter Quarter Total per share amounts) (B) - - ------------------------------------------------------------------------------- Revenues $35,847 $26,886 $27,434 $39,076 $129,243 Percent of 1996 total revenues 28% 21% 21% 30% 100% Operating income (loss) 1,067 (1,985) (1,689) 3,712 1,105 Net income (loss) 773 (1,185) (1,019) 2,472 1,041 Earnings (loss) per share $ 0.05 $ (0.08) $ (0.07) $ 0.17 $ 0.07 - - -------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------- First Second Third Fourth (In thousands, except Quarter Quarter Quarter Quarter Total per share amounts) (C) (C) (D) (E) - - ------------------------------------------------------------------------------- Revenues $32,233 $21,123 $22,441 $34,906 $110,703 Percent of 1995 total revenues 29% 19% 20% 32% 100% Operating income (loss) 8,849 777 1,117 (2,911) 7,832 Discontinued operations 91 4,705 -- -- 4,796 Net income (loss) 6,276 5,489 1,098 (1,208) 11,655 Earnings (loss) per share $ 0.44 $ 0.38 $ 0.08 $ (0.09) $ 0.81 - - ------------------------------------------------------------------------------- SEE DISCUSSION AT SEASONALITY ABOVE.
(A) During the first quarter of 1996, the Company completed six acquisitions, and completed three more during the rest of 1996. The results of operations related to these acquisitions is included in the Company's Consolidated Financial Statements beginning at their respective acquisition dates. Acquisition related expenses for all acquisitions (including (D) and (E) below) was $13.1 million for 1996, which includes a $3.5 million charge for purchased R&D in the first quarter. For additional details regarding acquisition activity see Note 3 in the Notes to Consolidated Financial Statements.
(B) In the fourth quarter of 1996, the Company accrued $1.9 million reflecting its decision to exercise its option to terminate certain consulting services pursuant to the TMS consulting agreement. See Note 8 in the Notes to Consolidated Financial Statements.
(C) During the second quarter of 1995, the Company sold substantially all of the assets of a wholly-owned subsidiary (Electronic Form Systems Incorporated). The operating results of the subsidiary have been treated as discontinued operations, and previously issued financial statements have been restated to conform to this presentation. Included in second quarter discontinued operations is a gain of $4.7 million, net of taxes. See Note 11 in the Notes to Consolidated Financial Statements.
(D) During the second quarter of 1995, the Company made two acquisitions (Sequel/McGladrey and Rent Roll, Inc.) totaling $6.8 million. The results of their operations have been included in the Company's Consolidated Financial Statements beginning at their respective acquisition dates. See Note 3 in the Notes to Consolidated Financial Statements.
(E) During the fourth quarter of 1995, the Company acquired substantially all of the assets of the corporate tax compliance software business of Price Waterhouse LLP, and accordingly, the results of its operations have been included in the Company's Consolidated Financial Statements beginning in November 1995. The 1995 total operating losses and other acquisition related charges incurred in connection with this acquisition were $10.7 million which includes a $5.6 million charge for purchased R&D. See Note 3 in the Notes to Consolidated Financial Statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPUTER LANGUAGE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS December 31 - - ------------------------------------------------------------------------------- (In thousands) 1996 1995 - - ------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 2,928 $ 13,641 Accounts receivable, less allowance for doubtful accounts of $800 and $608 at December 31, 1996, and 1995, respectively 27,104 26,615 Current deferred taxes 2,421 2,093 Other current assets 2,621 1,584 - - ------------------------------------------------------------------------------- Total current assets 35,074 43,933 - - ------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT, AT COST: Land 2,584 2,584 Buildings and improvements 16,866 16,787 Data processing equipment 33,933 32,010 Furniture, fixtures, and equipment 9,086 8,608 - - ------------------------------------------------------------------------------- 62,469 59,989 Less accumulated depreciation 41,581 39,527 - - ------------------------------------------------------------------------------- Net property and equipment 20,888 20,462 - - ------------------------------------------------------------------------------- OTHER NONCURRENT ASSETS: Software, net of accumulated amortization of $28,694 and $21,874 at December 31, 1996, and 1995, respectively 23,868 20,087 Intangibles and other assets, net of accumulated amortization of $8,952 and $5,219 at December 31, 1996, and 1995, respectively 19,107 14,578 - - ------------------------------------------------------------------------------- Total other noncurrent assets 42,975 34,665 - - ------------------------------------------------------------------------------- Total assets $ 98,937 $ 99,060 ===============================================================================
See accompanying Notes to Consolidated Financial Statements.
COMPUTER LANGUAGE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY December 31 - - ------------------------------------------------------------------------------- (In thousands, except per share amounts) 1996 1995 - - ------------------------------------------------------------------------------- CURRENT LIABILITIES: Notes payable $ 2,000 $ -- Accounts payable 3,124 1,549 Accrued compensation, payroll taxes, and benefits 7,950 8,634 Deferred revenue 9,619 10,296 Accrued support 1,264 2,133 Other current liabilities 5,634 4,737 Current portion of long-term debt 750 750 - - ------------------------------------------------------------------------------- Total current liabilities 30,341 28,099 - - ------------------------------------------------------------------------------- NONCURRENT LIABILITIES: Long-term debt 188 937 Other liabilities 5,700 3,270 Deferred income taxes 706 1,205 - - ------------------------------------------------------------------------------- Total noncurrent liabilities 6,594 5,412 - - ------------------------------------------------------------------------------- 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; 15,084 shares issued and 14,942 shares issued at December 31, 1996, and 1995, respectively 150 149 Capital in excess of par value 34,378 33,271 Retained earnings 32,744 37,395 Treasury stock at cost, 810 shares at December 31, 1996, and 1995 (5,270) (5,266) - - ------------------------------------------------------------------------------- Total shareholders' equity 62,002 65,549 - - ------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 98,937 $ 99,060 ===============================================================================
See accompanying Notes to Consolidated Financial Statements.
COMPUTER LANGUAGE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 - - ------------------------------------------------------------------------------- (In thousands, except per share amounts) 1996 1995 1994 - - ------------------------------------------------------------------------------- Revenues $129,243 $110,703 $ 99,068
Costs and expenses: Cost of revenues 64,933 56,109 49,608 Selling, general, and administrative 59,707 41,162 32,348 Charge for purchased research and development 3,498 5,600 -- - - ------------------------------------------------------------------------------- Total costs and expenses 128,138 102,871 81,956 - - ------------------------------------------------------------------------------- Operating income 1,105 7,832 17,112 Interest income 567 1,925 1,020 Interest expense 93 8 330 Other, net (39) (626) 315 - - ------------------------------------------------------------------------------- Income from continuing operations before income taxes 1,540 9,123 18,117 Provision for income taxes 499 2,264 7,095 - - ------------------------------------------------------------------------------- Income from continuing operations 1,041 6,859 11,022 Discontinued operations: Income from discontinued operations, net of tax -- 76 321 Gain on disposal of discontinued operations, net of tax -- 4,720 -- - - ------------------------------------------------------------------------------- Net income $ 1,041 $ 11,655 $ 11,343 ===============================================================================
Earnings per share from continuing operations $ 0.07 $ 0.48 $ 0.77 Earnings per share from discontinued operations -- 0.33 0.02 - - ------------------------------------------------------------------------------- Earnings per share $ 0.07 $ 0.81 $ 0.79 ===============================================================================
Weighted average number of common and common equivalent shares outstanding 14,564 14,434 14,280 - - -------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
COMPUTER LANGUAGE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended 1996, 1995, and 1994 - - ------------------------------------------------------------------------------- Common Stock ------------ Capital in (In thousands, except Number of Par Excess of Retained Treasury per share amounts) Shares Value Par Value Earnings Stock Total - - ------------------------------------------------------------------------------- Balance at December 31, 1993 14,655 $147 $ 31,559 $ 25,016 $(5,255) $51,467 Net income -- -- -- 11,343 -- 11,343 Dividends ($0.36 per share) -- -- -- (5,007) -- (5,007) Shares exercised under stock options 101 -- 527 -- (11) 516 - - ------------------------------------------------------------------------------- Balance at December 31, 1994 14,756 147 32,086 31,352 (5,266) 58,319 Net income -- -- -- 11,655 -- 11,655 Dividends ($0.40 per share) -- -- -- (5,612) -- (5,612) Shares exercised under stock options 186 2 1,185 -- -- 1,187 - - ------------------------------------------------------------------------------- Balance at December 31, 1995 14,942 149 33,271 37,395 (5,266) 65,549 Net income -- -- -- 1,041 -- 1,041 Dividends ($0.40 per share) -- -- -- (5,692) -- (5,692) Shares exercised under stock options 142 1 1,107 -- (4) 1,104 - - ------------------------------------------------------------------------------- Balance at December 31, 1996 15,084 $150 $ 34,378 $ 32,744 $(5,270) $62,002 ===============================================================================
See accompanying Notes to Consolidated Financial Statements.
COMPUTER LANGUAGE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 - - ------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 - - ------------------------------------------------------------------------------- OPERATING ACTIVITIES: Income from continuing operations $ 1,041 $ 6,859 $ 11,022 Adjustments to reconcile income to net cash provided by operating activities: Depreciation expense 6,407 5,717 6,589 Amortization expense 12,816 7,140 4,047 Other, net 39 626 (315) Charge for purchased research and development 3,498 5,600 -- Changes in assets and liabilities, net of effect of acquisitions and sale of discontinued operations: Decrease (increase) in accounts receivable 858 (6,510) 250 Increase in current deferred taxes (328) (80) (584) Decrease (increase) in other current assets (967) 131 1,409 Decrease in other assets 272 142 194 Increase (decrease) in accounts payable 1,513 (1,503) 875 Increase (decrease) in accrued compensation, payroll taxes, and benefits (818) 1,378 2,130 Increase (decrease) in deferred revenue (677) 6,531 662 Decrease in accrued support (1,469) (2,124) (114) Decrease in other current liabilities (2,887) (2,200) (1,244) Increase (decrease) in deferred income taxes (1,162) (2,708) 678 Increase in other liabilities 1,181 1,094 185 Cash provided by discontinued operations -- 1,318 1,599 - - ------------------------------------------------------------------------------- Net cash provided by operating activities 19,317 21,411 27,383 - - ------------------------------------------------------------------------------- INVESTING ACTIVITIES: Capital expenditures (6,353) (5,426) (4,188) Additions to software (7,627) (7,809) (4,693) Cash paid for acquisitions (12,746) (16,186) (4,300) Net proceeds from sale of discontinued operations -- 3,497 -- Purchases of short-term investments -- (160) (16,771) Proceeds from sale of short-term investments -- 16,821 18,373 Disposals of property and equipment 33 229 1,009 - - ------------------------------------------------------------------------------- Net cash used in investing activities (26,693) (9,034) (10,570) - - -------------------------------------------------------------------------------
COMPUTER LANGUAGE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31 - - ------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 - - ------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from issuance of line of credit note payable 2,000 -- -- Payments on long-term debt (749) (563) (8,494) Proceeds from exercise of common stock options 1,104 1,187 516 Payments of dividends (5,692) (5,612) (5,007) - - ------------------------------------------------------------------------------- Net cash used in financing activities (3,337) (4,988) (12,985) - - ------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,713) 7,389 3,828 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,641 6,252 2,424 - - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,928 $ 13,641 $ 6,252 ===============================================================================
See accompanying Notes to Consolidated Financial Statements.
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Years Ended December 31 - - ------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 - - ------------------------------------------------------------------------------- Cash payments for: Interest (net of amounts capitalized) $ -- $ 8 $ 399 Income taxes (net of refunds) $ 3,400 $ 6,851 $ 7,583 ===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------- NOTE 1. ORGANIZATION
The Company, headquartered in Carrollton, Texas, maintains sales and support facilities throughout the United States and develops and provides tax and accounting software and services to accounting firms, banks, corporations, and partnerships under the trade name Fast-Tax. The Company also develops and markets residential real estate property management software and services to large property management firms and owners of multifamily properties under the trade name Rent Roll.
- - ----------------------------------------------------- NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Computer Language Research, Inc. and all wholly-owned subsidiaries (combined, the "Company"). All intercompany transactions and balances have been eliminated.
USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain amounts for the prior years have been reclassified to conform to the current year's presentation.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company had no cash equivalents at December 31, 1996, and $12.6 million and $4.6 million at December 31, 1995, and 1994, respectively.
DEPRECIATION - Property and equipment are recorded at cost, and depreciation is computed using the straight-line method over the following estimated useful lives:
Buildings and improvements ............ 5-30 years Data processing equipment ............. 1-5 years Furniture, fixtures, and equipment .... 5-10 years
Amortization reported in the Consolidated Statements of Cash Flows includes amortization of software, intangible assets, and assets recorded under capital leases.
SOFTWARE COSTS - Internally developed software costs are capitalized after the establishment of technological feasibility and are amortized over their estimated economic life, generally three years, commencing when each product is available for general release. Internally developed software costs capitalized, including interest, were $7.1 million, $7.1 million, and $4.2 million, in 1996, 1995, and 1994, respectively.
Amortization is based on the greater of a percentage of current product revenues to total estimated product revenues or straight-line over the expected life of the product. The Company recognized amortization expense applicable to internally developed software of $3.7 million, $3.1 million, and $2.6 million, during 1996, 1995, and 1994, respectively.
INTANGIBLE ASSETS - Intangible assets primarily represent costs allocated to customer lists, noncompete agreements, and other specifically identifiable intangibles arising from acquisitions (see Notes 3 and 6). Intangible assets also include cost in excess of fair values of net assets acquired (goodwill) in connection with these acquisitions. These assets are carried at cost less accumulated amortization which is calculated on a straight-line basis over the estimated useful lives of the assets which range from 2.5 to 9 years.
- - ----------------------------------------------------------------- NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Amortization of intangible assets was $4.3 million, $2.3 million, and $1.5 million, for the years ended December 31, 1996, 1995, and 1994, respectively.
The Company periodically reviews intangible assets to assess recoverability, and impairments would be recognized in operating results if a permanent reduction in value were to occur.
INCOME TAXES - The liability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of assets and liabilities, and are measured using the currently enacted tax rates and laws. See also Note 9.
REVENUE RECOGNITION - The Company provides tax and accounting information software and services, and residential real estate property management software and services. Revenues from contracts based on a per return/report charge are recognized during the month in which the services are provided. Revenues from site-license agreements are based on annual fees which include tax processing, software, and support for the client throughout the year. These fees are recognized ratably over the annual contract period. Sales of software and tax processing systems are recognized when shipped. Revenues for maintenance contracts are recognized ratably over the respective contract period.
RESEARCH AND DEVELOPMENT - Research and development costs are expensed as incurred and consist principally of certain software development costs incurred prior to achieving technological feasibility. Research and development expenses were $6.2 million, $3.8 million, and $5.1 million in 1996, 1995, and 1994, respectively.
EARNINGS PER SHARE - Earnings per share are computed based upon the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents represent the dilutive effect of the assumed exercise of outstanding stock options using the treasury stock method. No difference exists between primary and fully diluted earnings per share.
- - ----------------------- NOTE 3. ACQUISITIONS
During 1996 the Company completed nine acquisitions at a total cost of $18.4 million, which consisted of $12.7 million in cash paid at closing and liabilities of $5.7 million.
The acquisitions completed in the first quarter of 1996 were: (i) E.F. Haskell & Associates, Inc. - practice management software, (ii) Axtell Development Corporation - fixed asset management software, (iii) Credit Interfaces, Inc. and Renter Index, Inc. - applicant screening and other information services, (iv) Project Data Systems, Inc. - affordable housing property management software, and (v) Crystal Solutions, LLC - apartment asset management software.
In the third quarter of 1996 the acquisitions completed were: (i) A&M Software, Inc. - affordable housing property management software, and (ii) Automated Research Technology Inc. - apartment eviction database. In the fourth quarter of 1996 the Rural Housing Services assets of Castle Lake Software, Inc. were acquired.
- - ----------------------------------- NOTE 3. ACQUISITIONS (Continued)
Based on appraised value, a portion of the combined purchase price was allocated to purchased research and development (R&D) which had not reached technological feasibility and had no alternative future use. The allocation resulted in a $3.5 million charge to the Company's operations in the first quarter of 1996. The remainder of the combined purchase price was allocated to software, goodwill, and other intangibles of $4.6 million, $3.0 million, and $5.3 million, respectively, with the balance allocated to miscellaneous assets. The software, goodwill, and other intangibles will be amortized over weighted-average lives of 2.4 years, 5.0 years, and 4.6 years, respectively.
During 1995 the Company completed three acquisitions at a total cost of $21.2 million, which consisted of $15.5 million in cash paid at closing, an unsecured note payable of $2.2 million, and liabilities of $3.5 million.
The asset acquisitions completed in April, June, and December 1995, respectively, were: (i) Sequel/ McGladrey Software - auditing software product line, (ii) Rent Roll, Inc. - residential property management software, and (iii) the corporate tax compliance software business of Price Waterhouse, LLP (PW).
Based on appraised value, a portion of the PW purchase price was allocated to purchased R&D which had not reached technological feasibility and had no alternative future use. This allocation resulted in a $5.6 million charge to the Company's operations in the fourth quarter of 1995. The remaining combined purchase price of the 1995 acquisitions was allocated to software, goodwill, and other intangibles of $4.0 million, $3.8 million, and $6.7 million, respectively, with $1.1 million allocated to miscellaneous assets. The software, goodwill, and other intangibles will be amortized over weighted-average lives of 4.4 years, 5.0 years, and 5.0 years, respectively.
All acquisitions were financed from the Company's cash flow (except as noted above) and have been accounted for under the purchase method of accounting. The results of their operations have been included in the Company's Consolidated Financial Statements since their respective acquisition dates.
The following unaudited pro forma summary presents the consolidated results of operations as if the 1996 acquisitions discussed above had occurred as of the beginning of each year presented. In order to provide meaningful pro forma results, comparative financial information for the 1995 acquisitions has also been included. The pro forma results give effect to certain adjustments, including amortization of assets acquired, a reduction of support costs, an increase in consulting expense, reductions in compensation and rent expense, decreased interest income due to acquisition costs, and the related income tax effects. The results do not include the $5.6 million and $3.5 million charges for purchased R&D. These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of what the actual results of operations would have been had the acquisitions been made as of those dates, nor does it purport to represent future operations of the Company.
- - ----------------------------------- NOTE 3. ACQUISITIONS (Continued)
- - ---------------------------------------------------------------------- (In thousands, except per share amounts) 1996 1995 - - ---------------------------------------------------------------------- Pro forma Revenue $133,311 $137,234 Net income from continuing operations 2,233 2,545 Net income 2,233 7,341 Earnings per share from continuing operations $ 0.15 $ 0.18 Earnings per share $ 0.15 $ 0.51 - - ----------------------------------------------------------------------
- - -------------------------------- NOTE 4. MARKETABLE SECURITIES
The Company's cash equivalents were classified as available-for-sale securities. At December 31, 1995, cash equivalents were invested in a money market mutual fund. The investments were carried at fair value as determined by a quoted market price. The cost of securities sold is based on the average cost method. Gross sale proceeds from available-for-sale securities were $91.0 million, $175.0 million, and $103.3 million in 1996, 1995, and 1994, respectively. Realized and unrealized gains/losses were not significant for 1996, 1995, or 1994.
- - ----------------------------- NOTE 5. RISK CONCENTRATION
The Company maintains cash and cash equivalents with various high quality financial institutions. Cash equivalents are invested in a money market mutual fund. The Company's investment policy limits the Company's exposure to concentrations of credit risk. The Company has not incurred losses related to these investments.
The Company has clients that are dispersed across different geographic areas and to a lesser extent among different industries. The Company has a heavy concentration of clients in accounting firms nationwide and maintains an allowance for losses based upon the expected collectibility of all accounts receivable.
No single customer accounted for 10% or more of the Company's consolidated revenues in 1996, 1995, or 1994. The Company provides tax processing services, software, and support to each of the six largest accounting firms in the United States. While the loss of any one of these customers would not have a material adverse consequence to the Company, the loss of more than one of these customers could.
- - --------------------------------------- NOTE 6. INTANGIBLES AND OTHER ASSETS
- - --------------------------------------------------------------------- (In thousands) 1996 1995 - - --------------------------------------------------------------------- Customer lists $ 7,675 $ 7,675 Cost in excess of fair values of net assets acquired (Goodwill) 7,656 4,223 Noncompete agreements 5,449 3,445 Trained workforce 3,997 3,686 Other intangibles 2,000 500 Other assets 1,282 268 - - --------------------------------------------------------------------- 28,059 19,797 Less accumulated amortization 8,952 5,219 - - --------------------------------------------------------------------- $ 19,107 $ 14,578 - - ---------------------------------------------------------------------
For a discussion related to additions, see Note 3.
- - ------------------------------------------- NOTE 7. LONG-TERM DEBT AND NOTES PAYABLE
During 1995 the Company had an unsecured loan agreement which provided a $12.0 million revolving credit loan and letter of credit facility. The available funds were based on eligible receivables and inventory.
On December 21, 1995, the Company entered into an unsecured $20.0 million revolving credit/term facility (the "Facility") which replaced the agreement discussed above. The Facility will be fully revolving for two years, after which time the Company must begin quarterly principal payments equal to one- sixteenth of the outstanding principal balance with all outstanding principal and interest due and payable in full on December 21, 2000. The Facility requires that if the outstanding balance exceeds $10.0 million at the end of a quarter, a $10.0 million portion will convert to a term loan and fully amortize over four years. The Facility also provides for the Company to elect term loan conversions with a $5.0 million minimum, which will fully amortize over four years. The rate of interest payable is the lesser of, at the Company's option, the prime rate or the interbank offering rate plus a margin, which is dependent on the Company's fixed charge coverage ratio and can range from 0.875% to 1.5%.
The Company had borrowings of $2.0 million outstanding under the Facility at December 31, 1996. The rate of interest payable on 1996 borrowings was 8.25% per annum.
At the lender's option, the revolving credit termination date and the Facility expiration date may be extended. The agreement includes customary financial covenants requiring a minimum net worth, debt-to-net worth, debt coverage and current ratios. The agreement also includes customary restrictions upon investments, indebtedness, and the sale of certain assets.
The long-term debt reflected on the balance sheet at December 31, 1996, and 1995, consists of the unsecured note payable executed in connection with the Sequel/McGladrey software acquisition (see Note 3). Under the terms of the
- - ------------------------------------------------------- NOTE 7. LONG-TERM DEBT AND NOTES PAYABLE (Continued)
note, the Company is obligated to make quarterly principal payments of $187,500, plus interest at 9% per annum. The loan is due and payable in full on March 31, 1998.
The carrying amount of the note payable and long-term debt approximates fair value, as the interest rates are not materially different from the prime rate at December 31, 1996, and 1995.
- - ---------------------------------------- NOTE 8. COMMITMENTS AND CONTINGENCIES
Aggregate annual rental commitments at December 31, 1996, under operating leases with initial or remaining noncancelable lease terms greater than one year are:
- - ---------------------------------------- (In thousands) - - ---------------------------------------- 1997 $ 1,636 1998 1,336 1999 882 2000 618 2001 302 Thereafter 36 - - ----------------------------------------- Total minimum lease payments $ 4,810 - - -----------------------------------------
Rent expense was $2.7 million, $2.0 million, and $1.9 million in 1996, 1995, and 1994, respectively.
In December 1995, the Company entered into a five-year consulting services agreement with Price Waterhouse LLP (PW). Under the terms of the agreement, certain PW partners will be made available to the Company on a full-time basis to assist it in integrating the Company's corporate tax software compliance business (see Note 3). At December 31, 1996, the Company is committed to pay PW $5.0 million over the remaining four years of the contract. The Company has accrued a total of $3.1 million ($1.9 million during the fourth quarter of 1996) as a result of its decisions to exercise options allowing for the early termination of a portion of the consulting services.
The Company is from time to time subject to litigation. Management believes that the probable resolution of current litigation will not materially affect the financial position of the Company.
- - ----------------------- NOTE 9. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets as of December 31, 1996, and 1995, are as follows (in thousands):
- - --------------------------------------------------------------------- 1996 1995 - - --------------------------------------------------------------------- Deferred tax assets: Book depreciation in excess of tax depreciation $ 769 $ -- Tax basis in excess of book basis in land 730 730 Cash basis adjustments for reserves 2,689 2,788 Amortization of intangibles 4,162 3,125 Other 512 348 - - --------------------------------------------------------------------- Total deferred tax assets 8,862 6,991 Valuation allowance for deferred tax assets (833) (833) - - --------------------------------------------------------------------- Deferred tax assets 8,029 6,158 - - --------------------------------------------------------------------- Deferred tax liabilities: Tax depreciation in excess of book depreciation -- 456 Software development costs capitalized for book 5,361 4,144 Other 953 670 - - --------------------------------------------------------------------- Deferred tax liabilities 6,314 5,270 - - --------------------------------------------------------------------- Net deferred tax assets $ 1,715 $ 888 - - ---------------------------------------------------------------------
Income tax expense has been allocated to:
- - --------------------------------------------------------------------- 1996 1995 1994 - - --------------------------------------------------------------------- Income from continuing operations $ 499 $ 2,264 $ 7,095 Income from discontinued operations -- 36 197 Gain on disposal of discontinued operations -- 3,052 -- - - --------------------------------------------------------------------- Total $ 499 $ 5,352 $ 7,292 - - ---------------------------------------------------------------------
- - ----------------------------------- NOTE 9. INCOME TAXES (Continued)
Significant components of the provision for income taxes attributable to continuing operations are as follows:
- - --------------------------------------------------------------------- 1996 1995 1994 - - --------------------------------------------------------------------- Current: Federal $ 2,149 $ 3,990 $ 6,014 State (180) 956 959 - - --------------------------------------------------------------------- Total current 1,969 4,946 6,973 - - --------------------------------------------------------------------- Deferred: Federal (1,296) (2,271) 109 State (174) (411) 13 - - --------------------------------------------------------------------- Total deferred (1,470) (2,682) 122 - - --------------------------------------------------------------------- Total current and deferred $ 499 $ 2,264 $ 7,095 - - ---------------------------------------------------------------------
The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rates to income tax expense is:
- - --------------------------------------------------------------------- 1996 1995 1994 - - --------------------------------------------------------------------- Tax at U.S. statutory rates $ 539 $ 3,193 $ 6,325 State taxes (230) 342 597 Purchased R&D with no future tax benefit 476 -- -- R&D tax credit (557) (1,353) -- Meals and entertainment 228 191 131 Goodwill 66 32 9 Increase in valuation allowance -- 203 -- Other (23) (344) 33 - - --------------------------------------------------------------------- Income tax expense $ 499 $ 2,264 $ 7,095 - - ---------------------------------------------------------------------
- - ------------------------ NOTE 10. Stock Options
In 1982, the shareholders of the Company adopted a stock option plan which provides for options to be granted to members of management and key nonmanagement employees of the Company for the purchase of common stock. The term of each option is determined at grant by the Board of Directors' Compensation Committee. The plan, as amended in April 1993, provides that a maximum of 1,500,000 shares are available for grant, and terminates on December 31, 2002.
- - ------------------------------------ NOTE 10. Stock Options (Continued)
In February 1997, the Board of Directors adopted the 1997 Stock Incentive Plan for the Company under which 1,000,000 shares of common stock are available for future grants. The Board of Directors also approved the 1997 Stock Incentive Plan for the Company's wholly-owned subsidiary, Rent Roll, Inc. (Rent Roll), and recommended that the Rent Roll Board of Directors adopt such Plan under which 2,000,000 shares of Rent Roll's common stock are available for future grants. The plans are subject to shareholder approval at the Company's annual meeting of shareholders on May 1, 1997.
In May 1995, the shareholders of the Company approved a stock option plan which provides for options to be granted to non-employee directors of the Company for purchase of common stock. The plan provides that a maximum of 250,000 shares are available for the grant of options and terminates on August 4, 2004.
The exercise price of the options (under the current plans) is determined by the fair market value of the Company's common stock on the date of grant. Stock options currently outstanding under both plans become exercisable in 20% annual installments beginning in the year following the grant. Total options out- standing which were exercisable amounted to 338,353 at December 31, 1996, 270,383 at December 31, 1995, and 260,582 at December 31, 1994.
Information with respect to these plans follows:
Management and Key Nonmanagement Employees - - --------------------------------------------------------------- Price per Number of Options Share Shares - - --------------------------------------------------------------- Balance at Dec. 31, 1993 $ 3.56 - $ 6.25 917,300 1994 Activity: Granted $ 8.25 - $ 9.00 125,000 Canceled $ 3.56 - $ 4.50 57,800 Exercised $ 3.56 - $ 4.50 100,918 - - --------------------------------------------------------------- Balance at Dec. 31, 1994 $ 3.56 - $ 9.00 883,582 1995 Activity: Granted $ 8.00 - $10.25 303,350 Canceled $ 3.56 - $10.25 52,000 Exercised $ 3.56 - $ 9.00 185,499 - - --------------------------------------------------------------- Balance at Dec. 31, 1995 $ 3.56 - $10.25 949,433 1996 Activity: Granted $15.63 - $16.00 160,000 Canceled $ 3.63 - $16.00 197,600 Exercised $ 3.56 - $ 9.00 142,650 - - --------------------------------------------------------------- Balance at Dec. 31, 1996 $ 3.56 - $16.00 769,183 - - --------------------------------------------------------------- Shares reserved for options outstanding and future options at Dec. 31, 1996 906,988 - - ---------------------------------------------------------------
- - ------------------------------------ NOTE 10. Stock Options (Continued)
Non-Employee Directors - - --------------------------------------------------------------- Price per Number of Options Share Shares - - --------------------------------------------------------------- Balance at Dec. 31, 1994 -- -- 1995 Activity: Granted $ 8.00 - $ 9.75 50,000 - - --------------------------------------------------------------- Balance at Dec. 31, 1995 $ 8.00 - $ 9.75 50,000 1996 Activity: Granted $15.75 12,500 - - --------------------------------------------------------------- Balance at Dec. 31, 1996 $ 8.00 - $15.75 62,500 - - --------------------------------------------------------------- Shares reserved for options outstanding and future options at Dec. 31, 1996 250,000 - - ---------------------------------------------------------------
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS123). The new accounting standards prescribed are optional, and the Company has elected to continue accounting for its stock option plans under APB Opinion No. 25, and has adopted the disclosure-only provisions of SFAS123. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost been determined based on the fair value of the options at the grant date for awards in 1995 and 1996, consistent with the provisions of SFAS123, the Company's net earnings and earnings per share would have been the pro forma amounts indicated below:
- - --------------------------------------------------------------------- (In thousands, except per share amounts) 1996 1995 - - --------------------------------------------------------------------- Pro forma net income $ 896 $ 11,601 Pro forma earnings per share $ 0.06 $ 0.81 - - ---------------------------------------------------------------------
Because SFAS123 is applicable only to options and stock-based awards granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1999.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
- - --------------------------------------------------------------------- 1996 1995 - - --------------------------------------------------------------------- Risk-free interest rate 6.2% 6.3% Expected dividend yield 2.5% 3.9% Expected volatility 35.9% 37.2% Expected lives 5.0 yrs 5.0 yrs Weighted average remaining contractual life 5.0 yrs 5.8 yrs - - ---------------------------------------------------------------------
- - ------------------------------------ NOTE 10. Stock Options (Continued)
The weighted average fair value of options granted in 1996 and 1995 was $5.23 and $3.04, respectively.
Weighted average exercise prices are as follows:
- - --------------------------------------------------------------------- 1996 1995 1994 - - --------------------------------------------------------------------- Outstanding at Jan. 1 $ 6.84 $ 4.89 $ 4.19 Granted 15.93 10.06 8.72 Canceled 10.13 5.33 4.03 Exercised 4.57 4.10 3.82 Outstanding at Dec. 31 8.33 6.84 4.89 Excercisable at Dec. 31 5.77 4.62 4.02 - - ---------------------------------------------------------------------
Certain information is being presented based on a range of exercise prices as follows:
- - --------------------------------------------------------------------- $ 3.56- $ 8.00- $ 15.63- $ 6.25 $ 12.00 $ 16.00 - - --------------------------------------------------------------------- Number of shares outstanding 324,833 394,350 112,500 Weighted-average exercise price of shares outstanding $ 4.09 $ 9.66 $ 15.89 Weighted-average remaining contractual life 3.5 yrs 6.0 yrs 6.0 yrs Number of shares exercisable 226,083 109,770 2,500 Weighted-average exercise price of shares exercisable $ 3.94 $ 9.33 $ 15.75 - - ---------------------------------------------------------------------
- - ---------------------------------- NOTE 11. DISCONTINUED OPERATIONS
In June 1995, the Company sold substantially all of the assets of its wholly- owned subsidiary, Electronic Form Systems Incorporated (EFS), to Vanier Graphics Corporation, a wholly-owned subsidiary of American Business Products, Inc. (ABP). The operating results of EFS were treated as discontinued operations. As consideration for the sale, the Company received cash of $3.0 million, shares of ABP common stock valued at $6.0 million and a receivable for $0.8 million, which was paid in full by October 1995. The sale resulted in a gain of $4.7 million, net of taxes of $3.1 million.
The ABP common stock received was subsequently sold on the open market with an immaterial gain, and the proceeds are included in proceeds from sale of short- term investments on the Consolidated Statements of Cash Flows.
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders of Computer Language Research, Inc.
We have audited the accompanying consolidated balance sheets of Computer Language Research, Inc. (the "Company") as of December 31, 1996, and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1996, and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Dallas, Texas February 14, 1997
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Directors of the Company is incorporated herein by reference to the Company's Definitive Proxy Statement for the Company's Annual Meeting of Shareholders. It is expected such Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 1996.
Information concerning the executive officers of the Company is as follows:
EXECUTIVE OFFICER AGE OFFICE SINCE --- -------------------------- --------- Charles A. Cappiccille 50 Group Vice President 1996 Bank Market
James J. Charles 50 Group Vice President 1996 Core Technology
Robert H. Dilworth 50 Vice President, 1995 Business Development and Investor Relations
Lynn J. Finlinson 49 President 1996 Rent Roll, Inc.
Douglas H. Gross 53 Vice President, 1990 Secretary, and General Counsel
G. Allen Harris 46 Group Vice President 1996 Corporate Tax Market
M. Brian Healy 53 Group Vice President, 1989 Finance and Administration and Chief Financial Officer
Charles W. Hill 57 Controller and Treasurer 1987
William T. Lynch 50 Group Vice President 1996 Accounting Tax Market
Francis W. Winn 79 Chairman of the Board 1969
Stephen T. Winn 50 President, Chief Executive 1971 Officer, and Director
Mr. Cappiccille is the Group Vice President of the bank segment with responsibility for sales, marketing, product development, and support. He joined the Company in July 1992 with the acquisition of FTS Corporation. He had been associated with FTS since its inception in 1981 and was with CCH Computax from 1986 until 1992.
Mr. Charles joined the Company in 1983 and has served as the leader of various business units of the Company including bank, corporate, partnership, and product development. Prior to joining the Company (1979 to 1983), he was a founder, partner, and senior vice president of operations for Just Technical Associates (JTA), which provided systems programming and strategic planning to technology related industries. Prior to joining JTA, he was employed by Electronic Data Systems where he served in various technical and managerial positions. Currently he serves on the technical advisory councils of Lotus Development and Sybase Corporations.
Mr. Dilworth joined the Company in May 1975 as a salesman serving in various sales and sales management positions and led the sales and marketing department of the Company's bank segment from June 1982 until January 1993. Mr. Dilworth was elected Vice President of the bank segment in January 1992. In January 1993, Mr. Dilworth became the Vice President of Business Development and began the Company's strategic acquisition program and, in 1994, also assumed Investor Relations responsibilities. Prior to joining the Company, Mr. Dilworth served in various sales and sales management positions in other companies, including ATV Manufacturing, the Sauter Labs division of Hoffmann La-Roche, and EDS.
Mr. Finlinson serves as President of Rent Roll, Inc., which was acquired by CLR in June of 1995 and later incorporated as a wholly-owned subsidiary in December of that year. Mr. Finlinson has over 17 years of experience in the real estate industry including management, property development, investment, and software development. Prior to joining CLR, he was a founding owner and CEO of Rent Roll, Inc., a software and services provider to the multifamily housing management industry, for over eight years.
Mr. Gross joined the Company as General Counsel and was elected Secretary in March 1990; in February 1993, he was elected a Vice President. From September 1987 until joining the Company, he served as General Counsel to Redman Industries, the country's second largest builder of manufactured housing and a manufacturer of building products. From January 1986 until September 1987, he served as General Counsel to MidSouth Pepsi Bottling, Inc., the country's largest, privately held Pepsi-Cola franchisee. Prior to 1986 Mr. Gross served in the law departments of Westinghouse Electric Corporation and PepsiCo, Inc.
Mr. Harris joined the Company in February 1994 and serves as the Group Vice President of the corporate segment with responsibility for product development, sales, marketing, and support for all products delivered to the corporate marketplace. Mr. Harris has more than 23 years of experience in the information technology industry. He was formerly a management consulting partner with Ernst & Young and held a key position with Dun & Bradstreet Software, formerly MSA Software.
Mr. Healy, a Certified Public Accountant, joined the Company in August 1989 as Group Vice President of Finance and Administration and Chief Financial Officer. Prior to joining the Company, he was Senior Vice President and Chief Financial Officer at the Talent Tree Corporation, a temporary help firm, from 1988 to 1989. From 1985 to 1988, Mr. Healy was Vice President, Finance, and Chief Financial Officer for Redman Industries, the country's second largest builder of
manufactured housing and a manufacturer of building products. For eleven years prior to 1985 he held various executive positions with Anthony Industries, Inc., a California-based manufacturer of recreational and industrial products.
Mr. Hill, a Certified Public Accountant, joined the Company in 1987. Prior to joining the Company, he was Senior Vice-President, Finance and Administration, with Peer Services, Inc., a banking data services company, for six years. He has served in various financial management positions in other companies including Audit Partner with Main, Hurdman and Co.
Mr. Lynch joined the Company in October 1978 in a sales and operations position. Since joining the Company, he has served in various sales, marketing, and operational capacities. Prior to joining the Company, he was employed by CCH Computax, Inc. for 10 years in various technical and managerial positions.
Francis W. Winn, the founder of the Company and a Director since 1969, served as its Chairman of the Board and President from February 1969 until May 1977, and continues to serve as Chairman of the Board. Prior to founding the Company, Mr. Winn was employed by various petroleum or petroleum-related companies in research management. Mr. Winn is the father of Stephen T. Winn and Dr. David L. Winn and the father-in-law of James R. Dunaway, Jr., all Directors of the Company.
Stephen T. Winn has served as a Director since 1969 and as President and Chief Executive Officer since May 1977. Mr. Winn served as Executive Vice President from 1971 until his election as President in 1977. Mr. Winn was selected as a Sloan Fellow at Stanford University in 1980 and holds an M.M.S. degree in Management Science from Stanford. He has served as a member of the Stanford University Sloan Advisory Board, American Business Conference, and the American Electronics Association.
All directors hold office until the next annual meeting of the shareholders of the Company and until their successors are elected and qualified. The executive officers are elected annually by the Board of Directors following the annual meeting of the shareholders and serve until their successors are duly elected and qualified.
Based solely on the review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that during 1996 all Section 16 (a) filing requirements applicable to its greater than 10% beneficial owners, directors, and officers were complied with.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's Definitive Proxy Statement for the Company's Annual Meeting of Shareholders except as set forth in such Proxy Statement. It is expected such Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 1996.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's Definitive Proxy Statement for the Company's Annual Meeting of Shareholders except as set forth in such Proxy Statement. It is expected such Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 1996.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's Definitive Proxy Statement for the Company's Annual Meeting of Shareholders except as set forth in such Proxy Statement. It is expected such Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days subsequent to December 31, 1996.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, are set forth in the Index to Financial Statements and Financial Statement Schedules listed on page 46 of this report.
2. Financial Statement Schedules
The consolidated financial statement schedule is set forth in the Index to Financial Statements and Financial Statement Schedules listed on page 46 of this report.
3. Exhibits
The following documents are filed or incorporated by reference as exhibits to this report. The exhibit numbers in the exhibit list correspond to the numbers assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-K:
2.01 Asset Purchase Agreement dated June 23, 1995, between Electronic Form Systems Incorporated, a wholly-owned subsidiary of Registrant, and Vanier Graphics Corporation, a wholly-owned subsidiary of American Business Products, Inc., (incorporated herein by reference to Registrant's Current Report on Form 8-K dated June 30, 1995, filed with the Securities and Exchange Commission).
2.02 Agreement for the Purchase and Sale of Certain Assets dated December 2, 1995, between Registrant and Price Waterhouse LLP, (incorporated herein by reference to Exhibit 2.01 to Registrant's Current Report on Form 8-K dated December 18, 1995, filed with the Securities and Exchange Commission).
3.01 Articles of Incorporation of Registrant filed with the State of Texas on February 26, 1969, (incorporated herein by reference to Exhibit 3.01 to Registrant's Amendment No. 1 to Registration Statement on Form S-1, Registration No. 2-83286, filed with the Securities and Exchange Commission).
3.02 Amendment to Articles of Incorporation of Registrant filed with the State of Texas on September 14, 1982, (incorporated herein by reference to Exhibit 3.02 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission).
3.03 Amendment to Articles of Incorporation of Registrant filed with the State of Texas on September 14, 1982, (incorporated herein by reference to Exhibit 3.03 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission).
3.04 Amendment to Articles of Incorporation of Registrant filed with the State of Texas on April 22, 1983, (incorporated herein by reference to Exhibit 3.04 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission).
3.05 Amendment to Articles of Incorporation of Registrant filed with the State of Texas on May 25, 1983, (incorporated herein by reference to Exhibit 3.05 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission).
3.06 Amendment to Articles of Incorporation of Registrant filed with the State of Texas on June 24, 1988, (incorporated herein by reference to Exhibit 3.06 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission).
3.07 Amended and restated Bylaws of Registrant, effective February 22, 1996, and included herewith.
4.01 Definitive Specimen Stock Certificate representing shares of Common Stock (incorporated herein by reference to Exhibit 4.01 to Registrant's Amendment No. 1 to Registration Statement on Form S-1, Registration No. 2-83286, filed with the Securities and Exchange Commission).
10.01 Registrant's 1982 Stock Option Plan (incorporated herein by reference to Exhibit 10.05 to Registrant's Registration Statement on Form S-1, Registration No. 2-83286, filed with the Securities and Exchange Commission).
10.02 Amendment to Registrant's 1982 Stock Option Plan as of April 28, 1988, (incorporated herein by reference to Exhibit 10.06 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988, filed with the Securities and Exchange Commission).
10.03 Second Amendment to Registrant's 1982 Stock Option Plan as of April 27, 1993, (incorporated herein by reference to Exhibit 10.03 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission).
10.04 Registrant's Non-Employee Directors' 1994 Stock Option Plan (incorporated herein by reference to Exhibit 99.1 to Registrant's Registration Statement on Form S-8, Registration No. 33-61457, filed with the Securities and Exchange Commission).
10.05 Registrant's 1989 Annual Incentive Plan (incorporated herein by reference to Exhibit 10.05 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, filed with the Securities and Exchange Commission).
10.06 Amendment 1 to Registrant's 1989 Annual Incentive Plan as of February 21, 1989, (incorporated herein by reference to Exhibit 10.06 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, filed with the Securities and Exchange Commission).
10.07 Amendment 2 to Registrant's 1989 Annual Incentive Plan as of February 27, 1992, (incorporated herein by reference to Exhibit 10.06 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed with the Securities and Exchange Commission).
10.08 Employment, Confidentiality & Noncompete Agreement dated June 16, 1995, between Registrant and Lynn J. Finlinson (incorporated herein by reference to Exhibit 10.09 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Securities and Exchange Commission).
21.01 Subsidiaries of Computer Language Research, Inc.
23.01 Consent of Ernst & Young LLP, independent auditors.
(b) Reports on Form 8-K. No reports were filed on Form 8-K during the fourth quarter of 1996.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
ITEM 14 (a)
Page ---- CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1996 and 1995 ........ 22
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995, and 1994 ................................ 24
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995, and 1994 .................... 25
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994 .......................... 26
Notes to Consolidated Financial Statements ........................ 27
Report of Independent Auditors .................................... 39
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts ................... 47
All other schedules are omitted as the required information is inapplicable.
SCHEDULE II
COMPUTER LANGUAGE RESEARCH, INC.
VALUATION AND QUALIFYING ACCOUNTS
For Each of the Three Years in the Period Ended December 31, 1996 (In thousands)
Allowance for Doubtful Accounts -------------------------------
Charged to Beginning Costs and Deductions Ending Year Balance Expenses and Other Balance ---- --------- ---------- ---------- -------
1994 $ 989 $ 278 $ 662 $ 605 1995 $ 605 $ 271 $ 268 $ 608 1996 $ 608 $ 187 $ (5) $ 800
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMPUTER LANGUAGE RESEARCH, INC.
By: M. Brian Healy ---------------------------------- M. Brian Healy Group Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer)
Date: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on March 21, 1997.
Francis W. Winn Max D. Hopper - - ---------------------------------- ---------------------------------- Francis W. Winn Max D. Hopper Chairman of the Board Director
Stephen T. Winn Merle J. Volding - - ---------------------------------- ---------------------------------- Stephen T. Winn Merle J. Volding President, Chief Executive Director Officer, and Director (Principal Executive Officer)
M. Brian Healy David L. Winn - - ---------------------------------- ---------------------------------- M. Brian Healy David L. Winn Group Vice President, Finance Director and Administration and Chief Financial Officer (Principal Financial and Accounting Officer)
James R. Dunaway - - ---------------------------------- James R. Dunaway Director