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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
..................
FORM 10Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended December 31, 1997 Commission file number 0-15389
GROUP 1 SOFTWARE, INC.
Incorporated in Delaware IRS EI No. 52-1483562
4200 Parliament Place, Suite 600, Lanham, MD 20706-1844
Telephone Number: (301) 918-0400
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Shares Outstanding Effective
Class February 13, 1998
- ---------------------------- 4,293,697
Common Stock, $.01 par value
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
1997 1997
(UNAUDITED) (AUDITED)
------------------------ ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 707 $ 1,500
Trade and installment accounts receivable,
less allowance of $2,669 and $3,208 27,434 32,460
Deferred income taxes 2,190 2,438
Prepaid expenses and other current assets 3,430 4,047
---------------- -------------
Total current assets 33,761 40,445
Installment accounts receivable, long-term 4,429 6,170
Property and equipment, net 3,201 3,472
Computer software, net 23,719 22,185
Other assets 2,152 2,275
---------------- -------------
Total assets $ 67,262 $ 74,547
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 5,083 $ 7,097
Accounts payable 1,669 2,833
Current portion of long-term debt 179 164
Accrued expenses 3,165 5,731
Accrued compensation 3,071 3,577
Current deferred revenues 15,171 16,170
Due to parent company 1,463 1,719
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Total current liabilities 29,801 37,291
Long-term debt, net of current portion 419 303
Deferred revenues, long-term 4,045 4,606
Deferred income taxes 3,979 3,288
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Total liabilities 38,244 45,488
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Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $0.01 par value 1,000 shares
authorized - none issued and outstanding - - - - - -
Common stock, $0.01 par value 10,000 shares
authorized, 4,293 issued and outstanding 43 43
Capital contributed in excess of par value 5,189 5,189
Retained earnings 23,690 23,476
Cumulative foreign currency translation 96 351
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Total stockholders' equity 29,018 29,059
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Total liabilities and stockholders' equity $ 67,262 $ 74,547
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See notes to consolidated financial statements.
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
FOR THE THREE MONTH PERIOD ENDED FOR THE NINE MONTH PERIOD
DECEMBER 31, ENDED DECEMBER 31,
-------------------------------- ---------------------------------
1997 1996 1997 1996
(FY98) (FY97) (FY98) (FY97)
------------ ------------- ------------- ----------------
Revenue:
Software licenses and related revenue $ 8,988 $ 8,376 $ 22,425 $ 20,911
Maintenance and service revenue 6,871 6,255 20,670 17,501
---------- ----------- ----------- ------------
Total revenue 15,859 14,631 43,095 38,412
Costs and expenses:
Software licenses expense 2,774 2,293 7,569 5,507
Maintenance and service expense 2,920 3,271 9,540 9,430
Research, development and indirect support 822 574 2,099 1,863
Selling and marketing 5,210 5,447 15,576 14,488
General and administrative 1,850 1,668 5,206 4,538
Provision for doubtful accounts receivable 1,000 475 2,105 1,311
---------- ----------- ----------- ------------
Total costs and expenses 14,576 13,728 42,095 37,137
---------- ----------- ----------- ------------
Operating earnings 1,283 903 1,000 1,274
Non-operating expense, net (168) (162) (556) (379)
---------- ----------- ----------- ------------
Earnings before provision for income taxes 1,115 741 444 896
Provision for income taxes 411 264 230 316
---------- ----------- ----------- ------------
Net earnings $ 704 $ 477 $ 214 $ 580
========== =========== =========== ============
Basic earnings per share $ 0.16 $ 0.11 $ 0.05 $ 0.13
========== =========== =========== ============
Diluted earnings per share $ 0.16 $ 0.11 $ 0.05 $ 0.13
========== =========== =========== ============
Basic weighted average number of common
shares outstanding 4,294 4,294 4,294 4,294
Diluted weighted average number of common
and common equivalent shares outstanding 4,300 4,310 4,300 4,315
See notes to consolidated financial statements.
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
FOR THE NINE MONTH
PERIOD ENDED DECEMBER 31,
--------------------------------------------
1997 1996
(FY98) (FY97)
---------------- -----------------
Cash flows from operating activities:
Net earnings $ 214 $ 580
Adjustments to reconcile earnings (loss) from operations
to net cash from operating activities:
Amortization expense 5,297 4,448
Depreciation expense 761 704
Provision for doubtful accounts receivable 2,105 1,311
Deferred income taxes 939 (5,011)
Loss on disposal of assets 13 ---
Change in assets and liabilities:
(Increase) decrease in accounts receivable 4,662 (5,011)
(Increase) decrease in prepaid expenses and other current assets 617 (280)
Decrease in other assets 24 119
Increase (decrease) in accounts payable (1,164) 1,333
Decrease in accrued expenses and compensation (3,072) (2,955)
Decrease in due to parent company (256) (103)
Decrease in deferred revenues (1,560) (1,052)
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Net cash provided by (used in) operating activities 8,580 (54)
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Cash flows from investing activities:
Purchase and development of computer software (6,697) (7,896)
Purchase of equipment and improvements (538) (727)
Purchase of marketable securities - - - (3,984)
Sale of marketable securities - - - 5,965
---------------- -----------------
Net cash used in investing activities (7,235) (6,642)
---------------- -----------------
Cash flows from financing activities:
Proceeds from short-term borrowings 11,854 18,865
Reduction of short-term borrowing (13,868) (11,365)
Proceeds from acquisition of debt 199 - - -
Reduction of long-term debt (68) (552)
---------------- -----------------
Net cash provided by (used in) financing activities (1,883) 6,948
---------------- -----------------
Net decrease in cash and cash equivalents (538) (252)
Effect of exchange rate changes on cash and cash equivalents (255) 2
Cash and cash equivalents at beginning of period 1,500 1,716
---------------- -----------------
Cash and cash equivalents at end of period $ 707 $ 1,970
================ =================
See notes to consolidated financial statements.
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GROUP 1 SOFTWARE, INC.
Notes to Consolidated Financial Statements
1. The financial statements for the three and nine months ended December 31,
1997 and 1996, and as of December 31, 1997, are unaudited. In the opinion
of management, all adjustments considered necessary for a fair
presentation have been included. Limited footnote information is
presented in accordance with quarterly reporting requirements. The
results of operations for the three and nine months ended December 31,
1997, are not necessarily indicative of the results for the year ending
March 31, 1998. The information contained in the audited financial
statements and the notes thereto for the year ended March 31, 1997,
should be referred to in connection with the unaudited interim financial
information.
2. Research and development expense, before the capitalization of computer
software development costs, amounted to approximately $9,549,000 and
$8,983,000 for the nine months ended December 31, 1997 and 1996,
respectively.
3. The Financial Accounting Standards Board issued SFAS No. 128 regarding
earnings per share, which the Company has adopted for the presentation of
earnings per share. Prior periods have also been restated. Earnings per
share of common stock in the accompanying financial statements have been
computed on the net earnings to stockholders. Basic earning per share of
common stock have been computed using the weighted average number of
common shares outstanding during the respective periods. Diluted earnings
per share of common stock have been computed using the weighted average
number of common and dilutive common equivalent shares outstanding during
the respective periods. Common equivalent shares result from the dilutive
effect of stock options calculated under the treasury stock method.
4. Subsequent to December 31, 1997, Group 1 granted an exclusive license to
Datatech Enterprises, Inc. (Datatech) for the distribution of certain of
Group 1's PC based products for a period of 60 months. Group 1 will
receive certain guaranteed payments as well as contingent royalties
during the 60 month period. The royalties are payable on a graduated
scale once sales of the PC products exceed $2,000,000 during any year.
Additionally, Datatech assumed the software maintenance and technical
support obligations for existing customers of the licensed products and
assumed certain accounts receivable and inventories associated with those
products. Ownership of the licensed products will transfer to Datatech at
the end of the 60 month period or upon payment of $2,600,000 in
royalties, whichever occurs first.
5. Certain prior year amounts have been reclassified to conform with the
current year presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Any statements in this quarterly report on Form 10-Q concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; together with other statements
that are not historical facts, are "forward-looking statements" as that term is
defined under the Federal Securities Laws. Forward-looking statements are
subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from those stated in such statements. Such risks,
uncertainties and factors include, but are not limited to, changes in currency
exchange rates, changes and delays in new product introduction, customer
acceptance of new products, changes in government regulations, changes in
pricing or other actions by competitors and general economic conditions, as
well as other risks detailed in the Company's filings with the Securities and
Exchange Commission.
For the quarter ended December 31, 1997, the Company's revenues of $15.9
million increased 8% from the $14.6 million reported for the comparable period
the prior year. Net earnings for the quarter ended December 31, 1997, were $0.7
million or $0.16 per share compared with net earnings of $0.5 million or $0.11
per share in fiscal 1997. For the nine months ended December 31, 1997, the
Company's revenue was $43.1 million, an increase of 12% over revenue of $38.4
million the prior year. The Company's net earnings for the nine month period
were $0.2 million or $0.05 per share compared with earnings of $0.6 million or
$0.14 per share the prior year. The decline in profitability for the nine month
period was due to first quarter fiscal 1998 losses arising from increased sales
and marketing, general and administrative and maintenance and professional
services costs, partially offset by an increase in revenue. The increase in net
earnings for the quarter was primarily due to higher revenue partially offset
by higher royalty and bad debt expenses.
Software license fees and related revenues of $9.0 million for the third fiscal
quarter increased 7% over the prior year. Third quarter software license and
related revenue was 57% of total revenue in both fiscal 1998 and fiscal 1997.
For the nine month period, software license fees and related revenues of $22.4
million were 7% above the prior year. For the nine month period, software
license and related revenue was 52% of total revenue in fiscal 1998 compared
with 54% in fiscal 1997.
License fees increased in all market areas except Mailing Efficiency. License
fees from Customer Information Management Systems software for the fiscal third
quarter increased $242,000 over the prior year and for the nine month period,
were $487,000 above the comparable period in the prior year. The increases were
due to increased sales of NADIS products partially offset by lower sales of the
WorldTrak product.
License fees from Database Marketing Systems increased 115% for the fiscal
third quarter versus the prior year. For the nine month period ended December
31, 1997, revenues increased 94% over the comparable period the prior year. The
increase resulted from higher sales of Model 1 and Geographic Coding products
partially offset by lower sales of our DataDesigns products.
Licensing of Electronic Document Systems increased 221% in the fiscal third
quarter. For the nine month period ended December 31, 1997, Electronic Document
Systems license fees increased 40% over the comparable period the prior year.
The increases were due to higher sales of our DOC1 product in both the U.S. and
Europe.
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The Company's core Mailing Efficiency software license fees for the fiscal
third quarter decreased 44% compared with the same period the prior year. For
the nine months ended December 31, 1997, revenues decreased 18% over the
comparable period in the prior year. The decrease was primarily due to lower
sales of our mainframe and PC products partially offset by higher sales of our
Open Systems product suite.
Maintenance and other revenue of $6.9 million for the quarter increased 10%
over the prior year. For the nine month period, maintenance and other revenue
of $20.7 million was 18% above the comparable period in the prior year.
Maintenance and other revenue accounted for 43% and 48% of total revenue for
the quarter and nine months ended December 31, 1997, compared with 43% and 46%,
respectively in the prior year. Recognized maintenance fees included in
maintenance and other revenue above, were $5.4 million and $15.8 million for
the quarter and nine months ended December 31, 1997, increases of 21% and 19%
over the comparable periods of the prior year. Professional and educational
service revenues of $1.5 million and $4.8 million for the quarter and nine
months ended December 31, 1997, represented a decrease of 18% for the quarter
and an increase of 17% for the nine month period. The decrease in revenue in
the third quarter of fiscal 1998 was due to lower professional services revenue
for the mailing efficiency and database marketing products. The increase year
over year is due to higher professional services revenue for the Electronic
Document Systems products during the first six months of fiscal 1998.
Effective September 5, 1997, Group 1 granted an exclusive license to InterTrak
Corporation for the distribution of the WorldTrak products for a period of 36
months. At the end of the 36 month period, ownership of the product will pass
to InterTrak. Group 1 will receive a 30% royalty on all sales of the WorldTrak
product during the 36 month period. In addition, Group 1 has contracted with
InterTrak for the maintenance and support of all existing WorldTrak customers
during the remaining terms of the maintenance contracts.
During the fiscal third quarter, total operating costs of $14.6 million
amounted to 92% of revenue compared with $13.7 million or 94% of revenue during
the same period the prior year. For the nine months ended December 31, 1997,
total operating costs of $42.1 million were 98% of revenue as compared with
$37.1 million or 97% of revenue in the prior year.
Software license expense increased to $2.8 million for the three months ended
December 31, 1997, from $2.3 million in the comparable prior year period,
representing 31% and 27% of software license and related revenues,
respectively. For the nine months ended December 31, 1997 and 1996, software
license expense represented 34% and 26% of software license and related revenue
respectively. The increased expense primarily relates to higher royalty costs
from increased sales of Database Marketing products and Customer Information
Management Systems in fiscal 1998.
Maintenance and service expense decreased to $2.9 million from $3.3 million in
fiscal 1997, representing 43% and 52% of maintenance and service revenue,
respectively. For the nine months ended December 31, 1997 and 1996, maintenance
and service expense represented 46% and 54% of maintenance and service revenue,
respectively. The decrease in expense as a percent of revenue reflects higher
margins in both maintenance and service, as described below.
Included in maintenance and service expense above are professional and
educational service costs of $1.2 million which were 80% of professional
services revenue for the third quarter compared with $1.3 million and 73% for
the comparable quarter in the prior year. For the nine months ended December
31, 1997, professional and educational service costs were $3.9 million and 81%
of professional service revenue compared with $3.4 million and 82% in the prior
year. The company expects these margins to increase as professional services
revenue grows.
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Costs of maintenance were $1.7 million for the third quarter of fiscal 1998,
representing 32% of maintenance revenue compared with costs of $2.0 million and
44% of maintenance revenue in the third quarter of fiscal 1997. For the nine
months ended December 31, 1997, maintenance costs of $5.6 million were 35% of
maintenance revenue compared with $6.0 million and 45% in the comparable period
of the prior year. The lower cost as a percentage of maintenance revenue
reflects economies of scale achieved with maintenance support costs spread over
a larger revenue base, as well as cost reductions primarily in fulfillment.
Research, development and indirect support expenses (after capitalization of
certain development costs) totaled $0.8 million in the third quarter of fiscal
1998 and $0.6 million in the same quarter the prior year, representing 5% and
4% of total revenue respectively. For both the nine month periods ended
December 31, 1997 and 1996, research, development and indirect support expenses
were 5% of total revenue. The Company anticipates that these costs, as a
percentage of revenue, will increase due to expanded product offerings.
Selling and marketing expenses totaled $5.2 million or 33% of total revenue in
the third quarter of fiscal 1998 and $5.4 million or 37% of total revenue in
the prior year. For the nine month periods ending December 31, 1997 and 1996,
selling and marketing expenses were 36% and 38% of total revenue respectively.
The Company believes these costs, as a percentage of revenue, will remain
around these levels.
General and administrative expenses were $1.9 million or 12% of total revenue
compared with $1.7 million or 11% of total revenue for the three months ended
December 31, 1997 and 1996, respectively. For the nine month period ended
December 31, 1997, general and administrative expenses were $5.2 million or 12%
of total revenue compared with $4.5 million which also represents 12% of total
revenue in the prior year.
For the three and nine months periods ended December 31, the provision for
doubtful accounts was $1.0 million and $2.1 million in fiscal 1998 as compared
with $0.5 million and $1.3 million in fiscal year 1997. The increase in the
current year provision is based upon higher revenues and specific accounts
identified by management whose collectability has become doubtful.
Net non-operating expense was $0.2 million for the third quarter and $0.6
million for the nine months ended December 31, 1997 as compared with net
non-operating expense of $0.2 million and $0.4 million, respectively, for the
comparable periods in fiscal year 1997. These differences reflect higher net
interest expense in all quarters of fiscal 1998 verses fiscal 1997. The Company
expects interest expense to decrease in future periods because of lower
borrowings under its line of credit.
The Company's effective tax rate was 52% and 35% for the nine month periods
ending December 31, 1997 and 1996, respectively. The higher rate in fiscal 1998
reflects a lower benefit from cumulative domestic taxable losses offset by
foreign taxable income. The current year's rate is the net effect of a 25%
effective tax rate on domestic taxable net loss and a 33% effective tax rate on
foreign taxable net income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $4.0 million at December 31, 1997, as
compared with $3.2 million at March 31, 1997. The current ratio was 1.1 to 1
at both December 31, 1997 and March 31, 1997.
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The Company provides for its cash requirements through cash funds generated
from operations. Additionally, Group 1 maintains a two year $10,000,000 line of
credit arrangement with Crestar Bank, expiring August 31, 1998. As amended,
effective September 30, 1997, the line of credit bears interest at the bank's
prime rate, or Libor plus 175 basis points at Group 1's option. The line of
credit is collateralized by trade accounts receivable and maintenance renewal
accounts receivable (excluding installment accounts receivable) and among other
things, requires Group 1 to maintain an EBIT (earnings before interest and
taxes) to interest ratio of at least 1.5 to 1 through March 31, 1998, and at
least 2.0 to 1 thereafter. The arrangement also requires Group 1 to maintain a
total liabilities to EBITDA (earnings before interest, taxes, depreciation and
amortization) ratio of no more than 5.0 to 1 through March 31, 1998, and no
more than 4.0 to 1 thereafter. At December 31, 1997, borrowings outstanding
under the line of credit were $5.1 million; at March 31, 1997, borrowings were
$7.1 million. Aggregate borrowings under the arrangement are limited to the
lesser of $10,000,000 or 85% of the trade accounts receivable (excluding
installment accounts receivable) and 50% of the maintenance renewal accounts
receivable.
For the nine months ended December 31, 1997, net earnings of $0.2 million plus
non-cash expenses of $9.1 million provided a total of $9.3 million cash from
operating activities. This amount was reduced by cash used for working capital
items totaling $0.6 million resulting in a net cash increase by operating
activities of $8.6 million. The cash decrease from working capital items
includes a $4.7 million decrease in accounts receivable offset by a $1.6
million decrease in deferred revenue, a $3.1 million decrease in accrued
expenses and a $1.2 million decrease in accounts payable. The decrease in
accounts receivable is due to increased cash collections along with the sale of
certain receivables to a third party financier. Investment in purchased and
developed software of $6.7 million and capital equipment of $0.5 million
resulted in a $7.2 million use by investing activities. $1.9 million was used
in financing activities, primarily reduction of short-term borrowings under the
Company's credit facility.
Group 1's practice of accepting license agreements under installment payment
arrangements substantially increases its working capital requirements.
Generally, these arrangements are for a period of one to five years after a
minimum down payment of 10% to 20% of the principal amount of the contract.
Interest currently ranges from 10% to 12%. Installment receivables included in
accounts receivable were $8.6 million and $11.9 million at December 31, 1997
and March 31, 1997, respectively. The installment receivable balance, in
addition to Group 1's policy of offering competitive trade terms for payment,
make it difficult to accurately portray a relationship between the outstanding
accounts receivable balance and the current period revenues.
Group 1 continually evaluates the credit and market risks associated with
outstanding receivables. In the course of this review, Group 1 considers many
factors specific to the individual client as well as the concentration of
receivables within industry groups. Group 1's installment receivables are
predominately with service bureau clients who provide computer services to the
direct marketing industry. Many of these clients have limited capital and
insufficient assets to secure their liability with the Company. The service
bureaus are highly dependent on Group 1's software and services to offer their
customers the economic benefits of postal discounts and mailing efficiency. To
qualify for the U.S. Postal Service and Canada Post Corporation postal
discounts, service bureaus require continuous regulatory product updates
(including the new software releases associated with the postal
reclassification regulations issued July 1, 1996) from Group 1. The service
bureau industry is also highly competitive and subject to general economic
cycles as they impact advertising and direct marketing expenditures. Service
bureau clients represent approximately $5.3 million, or 62% of the installment
receivables at December 31, 1997. Group 1 is aware of no current market risk
associated with the installment receivables.
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As of December 31, 1997, the Company's capital resource commitments consisted
primarily of non-cancelable operating lease commitments for office space and
equipment. The Company believes that its current debt services, minimum lease
obligations and other short-term liquidity needs can be met from cash flows
from operations and current credit facilities. The Company believes that its
long-term liquidity needs, principally for continuing investment in capitalized
software development costs, can be funded from operations and current credit
facilities. Historically, the Company has been able to negotiate capital
leases for its acquisition of equipment.
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PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
NONE
ITEM 2. Changes in Securities
NONE
ITEM 3. Defaults Upon Senior Securities
NONE
ITEM 4. Submission of Matters to a Vote of Security Holders
NONE
ITEM 5. Other Information
NONE
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit 11
No filings on Form 8-K have been made during the quarter
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PART IV
Listing of Exhibits
11.0 Computation of earnings per share.
-------------------------------------------
Filed herewith
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EXHIBIT 11
GROUP 1 SOFTWARE, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
FOR THE THREE MONTH PERIOD FOR THE NINE MONTH PERIOD
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------------- ---------------------------------
1997 1996 1997 1996
(FY98) (FY97) (FY98) (FY97)
------------ -------------- -------------- --------------
Net earnings $ 704 $ 477 $ 214 $ 580
Basic earnings (A) 704 477 214 580
========== =========== ========== ==========
Diluted earnings (B) $ 704 $ 477 $ 214 $ 580
========== =========== ========== ==========
Weighted average shares outstanding for basic
earnings per share (C) 4,294 4,294 4,294 4,294
Dilutive common stock equivalents for diluted
earnings per share 6 16 6 21
---------- ----------- ---------- ----------
Weighted average shares and common equivalent
shares for diluted earnings per share (D) 4,300 4,310 4,300 4,315
========== =========== ========== ==========
Earnings per share
Basic (A)/(C) $ 0.16 $ 0.11 $ 0.05 $ 0.13
========== =========== ========== ==========
Diluted (B)/(D) $ 0.16 $ 0.11 $ 0.05 $ 0.13
========== =========== ========== ==========
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Group 1 Software, Inc.
Date: February 17, 1998
/s/ Mark Funston
Mark Funston
Chief Financial Officer
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Index of Exhibits
Page
Number
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11.0 Computation of earnings per share. 11
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