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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 June 30, 1998 Commission file number 0-15389
GROUP 1 SOFTWARE, INC.
Incorporated in Delaware IRS EI No. 52-1483562
4200 Parliament Place, Suite 600, Lanham, MD 20706-1860
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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Class Shares Outstanding Effective
- ---------------------------- August 4, 1998
Common Stock, $.01 par value 4,293,697
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 30, March 31,
1998 1998
(Unaudited) (Audited)
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ASSETS
Current assets:
Cash and cash equivalents $ 8,862 $ 3,670
Trade and installment accounts receivable, less
allowance of $3,352 and $3,603 19,147 27,233
Deferred income taxes 3,399 3,320
Prepaid expenses and other current assets 2,638 2,659
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Total current assets 34,046 36,882
Installment accounts receivable, long-term 3,812 3,810
Property and equipment, net 3,145 3,333
Computer software, net 22,975 23,316
Other assets 1,895 2,121
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Total assets $ 65,873 $ 69,462
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 2,335 2,019
Current portion of long-term debt 197 157
Accrued expenses 4,094 5,932
Accrued compensation 3,066 4,267
Current deferred revenues 16,930 17,484
Due to parent 1,362 1,149
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Total current liabilities 27,984 31,008
Long-term debt, net of current portion 275 389
Deferred revenues, long-term 3,274 3,653
Deferred income taxes, net 3,929 4,014
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Total liabilities 35,462 39,064
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Commitments and contingent liabilities
Stockholders' equity:
Common stock $.01 par value; 10,000 shares authorized -
4,294 issued and outstanding 43 43
Preferred stock, 6% cumulative convertible, $.01 par
value; 1,000 shares authorized; none issued and
outstanding --- ---
Capital contributed in excess of par value 5,189 5,189
Retained earnings 24,929 24,879
Accumulated other comprehensive income 250 287
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Total stockholders' equity 30,411 30,398
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Total liabilities and stockholders' equity $ 65,873 $ 69,462
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See notes to consolidated financial statements.
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(in thousands, except per share data)
Unaudited
For the Three-Month Period
Ended June 30,
---------------------------------------------
1998 1997
(FY99) (FY98)
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Revenue:
Software licenses and related revenue $ 4,575 $ 5,062
Maintenance and service revenue 7,354 6,808
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Total revenue 11,929 11,870
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Costs and expenses:
Software licenses expenses 2,060 2,000
Maintenance and service expenses 2,833 3,330
Research, development and indirect support 571 647
Selling and marketing 4,325 5,187
General and administrative 1,697 1,741
Provision for doubtful accounts 380 380
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Total costs and expenses 11,866 13,285
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Operating income (loss) 63 (1,415)
Non-operating income (loss), net 15 (208)
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Earnings (loss) before provision for income taxes
78 (1,623)
Provision (benefit) for income taxes 28 (529)
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Net earnings (loss) $ 50 $ (1,094)
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Basic earnings (loss) per share of common stock $ 0.01 $ (0.25)
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Diluted earnings (loss) per share of common stock $ 0.01 $ (0.25)
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Basic weighted average number of common shares
outstanding 4,294 4,294
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Diluted weighted average number of common and
common equivalent shares outstanding 4,339 4,294
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See notes to consolidated financial statements.
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GROUP 1 SOFTWARE, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Unaudited
Three-months Ended June 30,
---------------------------------
1998 1997
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Net earnings (loss) available to common stockholders
$ 50 $ (1,094)
Other comprehensive income:
Foreign currency translation adjustment (37) (41)
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Comprehensive income (loss) $ 13 $ (1,135)
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See notes to consolidated financial statements.
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
For the Three-Month
Period Ended June 30,
--------------------------------
1998 1997
(FY99) (FY98)
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Cash flows from operating activities:
Net earnings (loss) $ 50 $ (1,094)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Amortization expense 1,962 1,604
Depreciation expense 297 256
Provision for doubtful accounts receivable 380 380
Deferred income taxes (165) 542
Change in assets and liabilities:
Decrease in accounts receivable 7,693 5,488
Decrease in prepaid expenses and other
current assets 193 246
Decrease in other assets 180 62
Increase in accounts payable 318 857
Decrease in accrued expenses (2,914) (4,055)
Decrease in deferred revenues (1,230) (676)
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Net cash provided by operating activities 6,764 3,610
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Cash flows from investing activities:
Purchase and development of computer software (1,584) (2,795)
Purchase of equipment and improvements (139) (160)
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Net cash used by investing activities (1,723) (2,955)
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Cash flows from financing activities:
Proceeds from short-term borrowings --- 2,415
Reduction of short-term borrowings --- (3,479)
Proceeds from debt --- 199
Payments of long-term debt (74) (10)
Increase (decrease) in due to parent 213 (293)
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Net cash provided by (used in) financing activities 139 (1,168)
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Net increase (decrease) in cash and cash equivalents 5,180 (513)
Effect of currency translation on cash 12 (37)
Cash and cash equivalents at beginning of period 3,670 1,500
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Cash and cash equivalents at end of period $ 8,862 $ 950
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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 months ended June 30, 1998
and 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 months ended June 30,
1998, are not necessarily indicative of the results for the year ending March
31, 1999. The information contained in the audited financial statements and the
notes thereto for the year ended March 31, 1998 should be referred to in
connection with the unaudited interim financial information. Unless otherwise
indicated in the discussion in these statements, the term "Company" will refer
to the operations of Group 1 Software, Inc. and its subsidiaries.
2. Research anddevelopment expense, before the capitalization of
computer software development costs, amounted to approximately $2.1 million and
$3.3 million for the three months ended June 30, 1998 and 1997, respectively.
3. Earnings per share
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, issued by the Financial Accounting Standards Board ("FASB") in
February 1997, requiring dual presentation of basic and diluted per share
earnings on the face of the income statement. Basic earnings per share is based
on the weighted average number of shares of common stock outstanding. On a
diluted basis, shares outstanding are adjusted for stock options for each year
presented. The adoption of SFAS No. 128 did not have a material effect on the
Company's financial statements. Prior years' presentations of earnings per share
have been restated to conform to the guidelines of SFAS No. 128.
Calculation of dilutive earnings per share (in thousands):
Reconciliation of denominator Quarter Ended June 30,
- ----------------------------- -----------------------------------
1998 1997
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Weighted shares outstanding - basic 4,294 4,294
Effect of dilutive securities
Stock options 45 ---
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Adjusted denominator 4,339 4,294
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There were 4,000 additional potentially dilutive stock options in
1997, which were not included in the loss per share calculation due to their
anti-dilutive effect.
4. Recent Accounting Pronouncements
During the quarter, the Company adopted FASB Statement No. 130,
"Reporting Comprehensive Income". Statement No. 130 requires the reporting of
comprehensive income in addition to net earnings. Comprehensive income is a
more inclusive financial reporting methodology that includes changes in the
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balances of items that are reported directly as a separate component of
Stockholders' Equity.
U.S. and international withholding taxes have not been provided on
undistributed earnings of foreign subsidiaries. The Company remits only those
earnings which are considered to be in excess of the reasonably anticipated
working capital needs of the foreign subsidiaries with the balance considered to
be permanently reinvested in the operations of such subsidiaries. It is
impractical to estimate the total tax liability, if any, until such distribution
is made.
The following are included as components of accumulated other comprehensive
income:
For the three months ended June 30, 1998
Foreign
Currency
Translation
(in thousands)
--------------
Beginning balance, April 1, 1998 $ 287
Current-period change (37)
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Ending balance, June 30, 1998 $ 250
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In the first fiscal quarter of fiscal 1998, the Company adopted
Statements of Position ("SOP") 97-2, "Software Revenue Recognition," as amended
by SOP 98-4, which provide guidance on applying generally accepted accounting
principles in recognizing revenue on software. The adoption of the SOP's, may
in the future result in the deferral of software license revenues that would
have been recognized upon delivery of the related software under the preceding
accounting standard, SOP 91-1. The adoption of SOP 97-2 did not have a material
effect during the quarter and the Company does not expect there to be a
material impact on the Company's financial condition or results of operations
in future periods.
The Financial Accounting Standards Board has issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
became effective for reporting periods beginning after December 15, 1997.
Interim reporting is not required under SFAS No. 131 prior to adoption. SFAS No.
131 requires financial and descriptive information with respect to 'operating
segments' of an entity based on the way management disaggregates the entity for
making internal operating decisions. The Company will begin making the
disclosures required by SFAS No. 131 with financial statements for the period
ending March 31, 1999.
5. Certain prior year amounts have been restated 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 quarters ending June 30, 1998 and 1997 the Company had revenues of $11.9
million. Net earnings for the quarter ended June 30, 1998, was $50,000 or $0.01
diluted earnings per share compared with a net loss of $1.1 million or $(0.25)
diluted loss per share in the same quarter of fiscal 1998. The increase in
profitability is primarily due to lower royalty expense by reason of fewer sales
of third party products along with savings associated with the new licensing
arrangements for the WorldTrak and PC products which resulted in lower selling
and marketing and administrative costs.
Software license fees and related revenues of $4.6 million for the first fiscal
quarter decreased 10% over the prior year. As a percent of total revenue, first
quarter software license and related revenue was 38% in fiscal 1999 compared
with 43% in fiscal 1998. The decrease was due to lower license revenue from
Mailing Efficiency and Database Marketing products partially offset by higher
license revenues from our Electronic Document System products.
License fees from Electronic Document Systems increased 115% in the fiscal first
quarter. Sales of these products increased in both international and domestic
markets.
License fees from Database Marketing Products decreased by $1.0 million compared
to the same period in the prior year. The decrease was due to lower sales
throughout the product line.
Group 1's large systems Mailing Efficiency software license fees for the fiscal
first quarter decreased 16% over the same period the prior year. This decrease
was primarily due to lower sales of Open Systems products.
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Maintenance and other revenue of $7.4 million for the quarter increased 8% over
the prior year. Maintenance and other revenue accounted for 62% of total revenue
for the quarter ended June 30, 1998 compared with 57% for the same period in the
prior year. Recognized maintenance fees were $5.6 million for the quarter ended
June 30, 1998, an increase of 9% over the comparable period the prior year.
Maintenance fees were up across all product lines. Professional and educational
service revenues of $1.7 million for the quarter ended June 30, 1998 were 5%
higher than the same period of the prior year primarily from higher fees
associated with Electronic Document systems.
During the quarter, total operating costs of $11.9 amounted to 99% of revenue
compared with $13.3 or 112% of revenue during the same period the prior year.
The decrease in operating costs is due to lower spending associated with the
WorldTrak and Micro Product distribution agreements, lower royalty expense and
other cost saving measures taken since the first fiscal quarter of 1998.
Software license expense increased to $2.1 million for the three months ended
June 30, 1998, from $2.0 million the prior year period, representing 45% and 40%
of software license and related revenues, respectively. The increase in costs is
due to higher amortization expense partially offset by lower royalty costs
associated with lower sales of third party products. The increase in license
expense as a percentage of software license expense is primarily due to the
decrease in software license revenue discussed above.
Maintenance and service expense decreased to $2.8 million in the current quarter
from $3.3 million the comparable period in fiscal 1998, representing 39% and 49%
of maintenance and service revenue, respectively. The decrease in expense can be
primarily attributed to the new distribution agreement for the Micro products.
Included in maintenance and service expense above are professional and
educational service costs of $1.2 million which were 70% of professional service
and education revenue for the first quarter compared with $1.4 million and 87%
for the comparable period in the prior year. The decrease in expense as a
percent of revenue can be attributed to lower costs due to the WorldTrak
licensing arrangement and the completion of a low margin contract during fiscal
1998.
Costs of maintenance were $1.6 million for the first fiscal quarter of 1999
representing 29% of maintenance revenue. Costs of maintenance for the same
quarter in the prior year were $1.9 million or 37% of maintenance revenue. The
lower cost as a percentage of revenue reflects economies of scale achieved with
maintenance support costs spread over a larger revenue base along with savings
associated with the licensing agreements for the Micro and WorldTrak products.
Research, development and indirect support expenses (after capitalization of
certain development costs) totaled $0.6 million for the first fiscal quarter
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of 1999 and 1998. The Company expects these costs to remain relatively close to
their current levels.
Selling and marketing expenses totaled $4.3 million or 36% of revenue in the
first quarter of fiscal 1999 and $5.2 million or 44% in the prior year same
period. The decrease in cost as a percent of revenue in the quarter versus the
prior year period was due to lower incentive compensation associated with the
lower license revenue as well as the Micro and WorldTrak licensing arrangements
and other cost saving measures implemented during fiscal 1998.
General and administrative expenses were $1.7 million or 14% of total revenue
compared with $1.7 million or 15% of revenue for the three months ended June 30,
1998 and 1997, respectively. The decrease in expense is due to lower costs
associated with the new licensing agreements for the WorldTrak and Micro
products.
The provision for doubtful accounts was $0.4 million for the first fiscal
quarter of both 1999 and 1998, and represented 3% of revenue in both periods.
Net non-operating income was $15,000 for the period ended June 30, 1998 as
compared with net non-operating expense of $208,000 for the same period the
prior year. This increase represents lower interest expense due to no borrowings
under Group 1's line of credit in the current quarter versus the same quarter of
the prior year along with higher interest income from higher cash reserves
compared to the first quarter of fiscal 1998.
The Company's effective tax rate was 36% and (33%) for the three month period
ending June 30, 1998 and 1997, respectively. The current years rate is the net
effect of a 34% effective tax rate on foreign taxable income and a (33%)
effective rate on domestic taxable loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $6.1 million at June 30, 1998, as
compared with $5.9 million at March 31, 1998. The current ratio was 1.2 to 1 at
June 30, 1998 and at March 31, 1998.
The Company provides for its cash requirements through cash funds generated from
operations. Additionally, the Company maintains a two year $10 million line of
credit arrangement with Crestar Bank, expiring August 31, 1998. 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 and renewal accounts receivable (excluding
installment accounts receivable) and among other things, required Group 1 to
maintain an EBIT 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
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through March 31, 1998, and no more than 4.0 to 1 thereafter. At June 30, 1998,
and at March 31, 1998 there were no borrowings outstanding under the line of
credit.
For the three months ended June 30, 1998 net earnings of $50,000 plus non-cash
expenses of $2.45 million provided a total of $2.5 million cash from operating
activities. This amount was increased by cash provided by working capital items
totaling $4.3 million resulting in net cash provided by operating activities of
$6.8 million. The cash provided by working capital items includes a $7.7 million
decrease in accounts receivable, offset by a $1.2 million decrease in deferred
revenue, a $2.9 million decrease in accrued expenses and $0.7 million provided
by other working capital items. The decrease in accounts receivable is due to
increased cash collections along with lower sales as compared to the prior
quarter. Investment in purchased and developed software of $1.6 million, and
capital equipment of $0.1 million, resulted in $1.7 million used by investing
activities. $0.1 million was provided by financing activities.
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 three years after a
minimum down payment of 20% of the principal amount of the contract. Interest
currently ranges from 10% to 12%. Installment receivables included in accounts
receivable were $7.5 million and $8.0 million at June 30, 1998 and March 31,
1998, respectively. The installment receivable balance, in addition to Group 1's
policy of offering competitive trade terms for payment, make it difficult to
portray accurately 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 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 $4.7 million, or
63% of the installment receivables at June 30, 1998. Group 1 is aware of no
current market risk associated with the installment receivables.
As of June 30, 1998 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 service, minimum lease
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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.
OTHER MATTERS
The Year 2000 Issue
The year 2000 issue affects virtually all companies and organizations. Many
existing computer programs and digital systems used by, and sold by, Group 1
Software, use only two digits to identify a year in the data field. These
programs and systems were designed and developed without considering the impact
of the upcoming change in the century.
In 1997, we formed two special task forces:
The first task force was established to identify and evaluate our
internal systems and applications that may be affected by the year 2000 issue;
modify or replace those systems and applications so they will work properly in
the year 2000, and communicate with our suppliers to make sure they are prepared
for the year 2000.
The second task force was established to evaluate the products sold
by us, to ensure they will function as designed after the Year 2000.
We have identified and evaluated all of our systems and applications
that may be affected by the Year 2000 issue, and have developed plans to ready
these systems and applications for the century change. Modification and
replacement projects are currently under way. We plan to have our internal
systems and applications ready for the year 2000 by mid-1999 and to have all of
the products sold by us Year 2000 compliant by December 1998. We do not expect
the costs to address the year 2000 issue to be material.
Recent Accounting Pronouncements
During the quarter, the Company adopted FASB Statement No. 130,
"Reporting Comprehensive Income". Statement No. 130 requires the reporting of
comprehensive income in addition to net earnings. Comprehensive income is a more
inclusive financial reporting methodology that includes changes in the balances
of items that are reported directly as a separate component of Stockholders'
Equity.
In the first fiscal quarter of fiscal 1998, the Company adopted
Statements of Position ("SOP") 97-2, "Software Revenue Recognition," as amended
by SOP 98-4, which provide guidance on applying generally accepted accounting
principles in recognizing revenue on software. The adoption of the SOP's, may in
the future result in the deferral of software license revenues
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that would have been recognized upon delivery of the related software under the
preceding accounting standard, SOP 91-1. The adoption of SOP 97-2 did not have a
material effect during the quarter and the Company does not expect there to be a
material impact on the Company's financial condition or results of operations in
future periods.
The Financial Accounting Standards Board has issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
became effective for reporting periods beginning after December 15, 1997.
Interim reporting is not required under SFAS No. 131 prior to adoption. SFAS No.
131 requires financial and descriptive information with respect to 'operating
segments' of an entity based on the way management disaggregates the entity for
making internal operating decisions. The Company will begin making the
disclosures required by SFAS No. 131 with financial statements for the period
ending March 31, 1999.
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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
No filings on Form 8-K have been made during the quarter
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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: August 14, 1998
/s/ Mark Funston
Mark Funston
Chief Financial Officer
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