<PAGE> 1
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, 1996 Commission file number 0-6355
COMNET CORPORATION
Incorporated in Delaware IRS EI No. 52- 0852578
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
---------------------------- ------------------------
Shares Outstanding Effective
Class August 26, 1996
- ---------------------------- ----------------------------
Common Stock, $.50 par value 3,343,574
<PAGE> 2
COMNET CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
(Unaudited) (Audited)
ASSETS ----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 554 $ 1,845
Marketable securities 2,000 1,979
Trade and installment accounts receivable,
less allowance of $2,740 and $2,409 24,354 24,489
Deferred income taxes 2,004 1,923
Prepaid expenses and other assets 3,291 2,793
------ ------
Total current assets 32,203 33,029
Installment accounts receivable, long-term 4,915 5,985
Property and equipment, net 3,220 3,269
Computer software, net 23,970 22,426
Other assets 2,426 2,483
------ ------
Total assets $ 66,734 $ 67,192
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-Term Borrowings $ 3,419 $ ---
Accounts payable 2,940 2,483
Current portion of long-term debt 536 565
Accrued expenses 5,098 6,761
Accrued compensation 2,173 3,744
Current deferred revenues 12,646 12,647
------ ------
Total current liabilities 26,812 26,200
Long-term debt, net of current portion 110 320
Deferred revenues, long-term 3,154 4,363
Deferred income taxes 3,668 3,147
Minority interest in net earnings of
consolidated subsidiary 5,697 5,729
------ ------
Total liabilities 39,441 39,759
------ ------
Commitments and contingent liabilities
Stockholders' equity:
6% cumulative convertible preferred stock 2,846 2,846
Common stock, $0.50 par value 10,000 shares
authorized, 3,578 and 3,563 --- ---
issued and outstanding 1,749 1,781
Capital contributed in excess of par value 17,621 17,472
Retained earnings 7,076 7,285
Unrealized losses on investments, net (22) (2)
Cumulative foreign currency translation 38 66
------ ------
29,308 29,448
Less treasury stock at cost, 316 shares (2,015) (2,015)
------ ------
Total stockholders' equity 27,293 27,433
------ ------
Total liabilities and stockholders' equity $ 66,734 $ 67,192
====== ======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
COMNET CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(in thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
For the Three-Month
Period Ended June 30,
-------------------------
1996 1995
(FY97) (FY96)
------ ------
<S> <C> <C>
Revenue:
Software licenses and related revenue $ 5,410 $ 4,717
Maintenance and service revenue 5,310 4,667
------- -------
Total revenue 10,720 9,384
------- -------
Costs and expenses:
Software licenses expenses 1,859 1,779
Maintenance and service expense 2,718 1,927
Research, development and indirect support 710 460
Selling and marketing 4,308 3,034
General and administrative 1,023 1,225
Provision for doubtful accounts 380 236
------- -------
Total costs and expenses 10,998 8,661
------- -------
Operating earnings (loss) (278) 723
Non-operating income, net 44 101
------- -------
Earnings (loss) from operations before provision for income taxes (234) 824
Provision for (benefit from) income taxes (37) 307
Minority interest in net earnings (loss)
of consolidated subsidiary (32) 102
------- -------
Net earnings (loss) (165) 415
Preferred stock dividend requirements 44 44
------- -------
Net earnings (loss) available to
common stockholders $ (209) $ 371
======= =======
Earnings (loss) per share of common stock: $ (0.06) $ 0.12
------- -------
Weighted average number of common and
common equivalent shares outstanding 3,262 3,080
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
COMNET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
<TABLE>
<CAPTION>
For the Three-Month
Period Ended June 30,
---------------------
1996 1995
(FY97) (FY96)
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (165) $ 415
Adjustments to reconcile earnings (loss) from operations
to net cash from operating activities:
Amortization expense 1,367 1,199
Depreciation expense 234 204
Provision for doubtful accounts 380 236
Deferred income taxes 440 219
Minority interest in earnings (loss) of
consolidated subsidiary (32) 102
Change in assets and liabilities:
Decrease in accounts receivable 825 1,266
Increase in prepaid expenses and other current assets (486) (161)
Decrease in other assets 45 23
Decrease in deferred revenues (1,210) 118
Increase (decrease) in accounts payable 457 (892)
Increase (decrease) in accrued expenses (3,278) (2,693)
------ ------
Net cash provided by (used in) operating activities (1,423) 36
------ ------
Cash flows from investing activities:
Purchase and development of computer software (2,901) (1,714)
Purchase of equipment and improvements (195) (290)
Purchase of marketable securities (3,984) (1,032)
Sale of marketable securities 3,943 1,419
------ ------
Net cash used by investing activities (3,137) (1,617)
------ ------
Cash flows from financing activities:
Proceeds from short-term borrowings 5,101 956
Reduction of short-term borrowings (1,682) (956)
Proceeds from exercise of stock options 117 85
Principal payments of long-term debt (239) (200)
------ ------
Net cash provided by (used in) financing activities 3,297 (115)
------ ------
Net decrease in cash and cash equivalents (1,263) (1,696)
Loss on currency translation (28) (3)
Cash and cash equivalents at beginning of period 1,845 1,939
------ ------
Cash and cash equivalents at end of period $ 554 $ 240
====== ======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
COMNET CORPORATION
Notes to Consolidated Financial Statements
1. The financial statements for the three months ended June 30, 1996 and
1995, are unaudited. In the opinion of management, all adjustments (consisting
of recurring accruals) 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, 1996, are not necessarily indicative of the results for
the year ending March 31, 1997. The information contained in the audited
financial statements and the notes thereto for the year ended March 31, 1996,
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 COMNET and its subsidiaries.
2. Research and development expense, before the capitalization of
computer software development costs, amounted to approximately $3,392,000 and
$2,115,000 for the three months ended June 30, 1996 and 1995, respectively.
3. Earnings per share of common stock in the accompanying financial
statements have been computed on the net earnings (loss) to stockholders, after
deducting dividends on preferred stock in fiscal year 1997, determined on the
accrual basis. 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. Certain prior year amounts have been reclassified to conform with the
current year presentation.
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the quarter ended June 30, 1996 the Company's revenues of $10,720,000
increased 14% from the $9,384,000 reported for the comparable period the prior
year. Net loss for the quarter ended June 30, 1996, was $165,000 or $0.06 loss
per share compared with net earnings of $415,000 or $0.12 earnings per share in
fiscal 1995. The decline in profitability was attributed to extraordinary
costs of distribution and service of Group 1's software associated with
implementation of the United States Postal Service's new mail classification
regulations, effective July 1, 1996, in addition to sales and marketing
expenditures resulting from the launch of the recently acquired WorldTrak
software into the market for Customer Information Management Systems. Group
1's international activities also contributed to the profit decline, as
significant orders expected in both Latin America and Europe did not close
during the period.
Software license fees and related revenues of $5,410,000 represented an
increase of 15% over the prior year. As a percent of total revenue, software
license and related revenue was 50% for both fiscal first quarter periods.
License fees from Customer Management Systems Software increased $16,000 over
the prior year due to WorldTrak revenues; Database Marketing System's license
fees decreased $9,000 due to lower demographic and modeling systems, offset
partially by revenue for DataDesigns Systems for which there was no comparable
revenue in the prior first quarter. Licensing of Electronic Document Systems
in the quarter increased $98,000 versus the prior year, with U.S. revenues
offsetting lower sales in Europe. Mailing Efficiency Software revenues
increased $587,000 over the same period the prior year due to continued growth
of the Open Systems product suite; PC revenue was approximately the same as the
prior year.
Maintenance and other revenue in the first quarter was $5,310,000, an increase
of 14% over the prior year. Maintenance and other revenue accounted for 50% of
total revenue for both fiscal first quarters. While recognized maintenance
fees increased $390,000 or 10% over the prior year's first quarter, consulting,
professional and educational service revenues increased $253,000 or 29% versus
the same period the prior year. Group 1 expects maintenance renewal revenue to
grow at a lower percentage than in prior years due to the high rate of
conversion to Open System products, which conversion typically includes
multi-year maintenance agreements. It is also anticipated that the other
service revenues will continue to increase as a percentage of Group 1's
revenue, resulting from the growth of DOC1, WorldTrak and database marketing
systems revenues.
During the quarter, total operating costs of $10,998,000 amounted to 103% of
revenue compared with $8,661,000 or 92% of revenue during the same period the
prior year. Of the increase in cost, approximately $750,000 was related to
DataDesigns, WorldTrak and Latin American operations for which there was no
prior year comparison.
Software license expense increased to $1,859,000 for the three months ended
June 30, 1996, from $1,779,000 in the comparable period in last fiscal year,
6
<PAGE> 7
representing 34% and 38% of software license and related revenues,
respectively. The lower percentage of license revenue reflects license support
costs growing at a lower rate than sales when compared with the prior year.
Maintenance and service expense increased to $2,718,000 in the current period
from $1,927,000 in the comparable period in 1995, representing 51% and 41% of
maintenance and service revenue, respectively. The increase in expenses and
percent of maintenance and service revenue reflects larger professional service
and educational service costs of $359,000, higher freight and product
distribution cost of $246,000 and increased technical support staffing of
$50,000. Group 1 continued to incur higher distribution costs and technical
support expenses, related to its mail classification software, during the
second fiscal quarter in excess of its actual expenditures for the same period
the prior year. Amortization also increased by $130,000 as compared with the
same period the prior year. Certain of these costs were related to the new
DataDesigns and WorldTrak product lines for which there were no comparable
prior year expenditures.
Research, development and indirect support expenses totaled $710,000 in the
first fiscal quarter of 1997 and $460,000 in the same quarter the prior year,
representing 7% and 5% of total revenue, respectively. The increase in the
current quarter as compared with the prior year's first quarter was due to
increased support requirements for Group 1's expanded computer platforms and
internal network systems, as well as expenses for DataDesigns and WorldTrak for
which there were no comparable prior year amounts.
Selling and marketing expenses totaled $4,308,000 or 40% of revenue in the
first quarter of fiscal 1997 and $3,034,000 or 32% in the prior year. The
current year expenses include $478,000 for DataDesigns, WorldTrak and Latin
America, for which there was no comparable prior year amount. Additionally, the
current year expenses reflect higher sales compensation expense associated with
the increased revenue, as well as increased staffing and marketing for the
DOC1, NADIS and Open System products.
General and administrative expenses of $1,023,000 or 10% of total revenue
decreased from $1,225,000 or 13% for the three months ended June 30, 1996 and
1995, respectively. The decrease is primarily due to lower compensation,
property taxes and rent expense.
The provision for doubtful accounts of $380,000 increased from $236,000 for the
same quarter the prior year. The current year provision is based upon the
larger accounts receivable balances at June 30, 1996 as compared with the same
period the prior year.
Net non-operating income was $44,000 for the period ended June 30, 1996 as
compared with net non-operating income of $101,000 for the same period the
prior year. This decrease reflects lower interest income of $61,000 and higher
interest expense of $3,000, offset by other income of $7,000.
The Company's effective tax rate for the period ended June 30, 1996 was a 16%
benefit as compared with a 37% provision for the same period the prior year.
The current year's rate is the net effect of a 38% domestic tax rate on
domestic taxable net income offset by a 25% foreign tax rate on the respective
foreign taxable net loss.
7
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $5,391,000 at June 30, 1996, as
compared with $6,829,000 at March 31, 1996. The decrease in working capital is
due primarily to a decrease in cash and an increase in short-term borrowings as
compared with the March 31, 1996 balances. The current ratio was 1.2 to 1 at
both June 30, 1996, and at March 31, 1996.
The Company provides for its cash requirements through cash funds
generated from operations. Additionally, the Company's Group 1 subsidiary
maintains an uncollateralized $5,000,000 line of credit arrangement with Signet
Bank (Maryland), a major Mid-Atlantic regional bank, with interest at the
bank's prime rate. At June 30, 1996 borrowings outstanding under this line of
credit were $3,419,000; at March 31, 1996, there were no short-term borrowings
under this facility.
Net loss of $165,000 offset by non-cash expenses of $2,389,000
provided a total of $2,224,000 cash from operating activities. Additionally,
the decrease in accounts receivable provided cash of $825,000. Cash was
decreased by a reduction in accrued expenses of $3,278,000; all other working
capital items decreased cash $1,194,000. Cash flows from investing activities
were primarily expenditures for investment in purchased and developed software
and capital equipment of $3,096,000. Short-term borrowings provided cash of
$3,419,000; long term debt was reduced by $239,000.
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% of the principal amount of the
contract. Interest currently ranges from 10% to 12%. Installment receivables
included in accounts receivable were $12,003,000 and $11,769,000 at June
30,1996, and March 31, 1996, respectively. The installment receivable balance,
in addition to Group 1's policy of offering competitive trade terms of
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 clients (service bureaus) who provide computer services to
the direct marketing industry. Many of these clients have limited capital and
insufficient assets to secure their liability with Group 1. 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. Group 1 is aware of no current market risk associated with the
installment receivables. These clients represent approximately $9,331,000, or
76% of the installment receivables at June 30, 1996.
As of June 30, 1996, the Company's capital resource commitments
consisted primarily of non-cancelable operating lease commitments for office
space and
8
<PAGE> 9
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. The Company believes that its long-term liquidity needs are minimal
and no large capital expenditures are anticipated except for continuing
investment in capitalized software development costs which the Company believes
can be funded from operations. Historically, the Company has been able to
negotiate capital leases for its acquisition of equipment.
9
<PAGE> 10
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
10
<PAGE> 11
PART IV
Listing of Exhibits
*11.0 Computation of earnings per share.
- -------------------------------------
Filed herewith
11
<PAGE> 12
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.
<TABLE>
<S> <C>
COMNET Corporation
Date: August 29, 1996
/s/ Charles A. Crew
Charles A. Crew
Executive Vice President
Chief Financial Officer
</TABLE>
12
<PAGE> 13
Index of Exhibits
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
11.0 Computation of earnings per share. 14
</TABLE>
13
<PAGE> 1
EXHIBIT 11
COMNET CORPORATION
Computation of Earnings (Loss) Per Share
(in thousands)
Unaudited
<TABLE>
<CAPTION>
For the Three Month
Period ended June 30,
----------------------
1995 1995
(FY96) (FY96)(2)
------ ------
<S> <C> <C> <C>
Net earnings (loss) $ (165) $ 415
Less: Preferred Stock dividend (44) (44)
------ ------
Primary earnings (loss) (A) (209) 371
Plus: Preferred Stock dividend 44 44
Plus: Excess funding, net of
income taxes - - - 96
------ ------
Fully diluted earnings (loss) (B) $ (209) $ 511
------ ------
Weighted average shares outstanding (C) 3,262 3,080
Dilutive common stock equivalents for
primary earnings (loss) per share - - -(1) - - -
------ ------
Weighted average shares and common equivalent shares outstanding
for primary earnings (loss) per share 3,262 3,080
====== ======
Additional equivalent shares assuming
full dilution - - - 148
------ ------
Weighted average shares and common equivalent shares for fully
diluted earnings (loss) per share (D) 3,262 3,228
------ ------
Earnings (loss) per share
Primary (A)/(C) $ (0.06) $ 0.12
====== ======
Fully Diluted (2) (B)/(D) $ (0.06) $ 0.12
====== ======
</TABLE>
(1) Common stock equivalents not presented in computation of loss per
share in the period ending June 30, 1996, due to anti-dilutive effect.
(2) Not presented on the Consolidated Statements of Earnings because fully
diluted earnings per share had a differential less than 3% of primary
earnings per share.
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JAN-30-1996
<CASH> 554,000
<SECURITIES> 2,000,000
<RECEIVABLES> 32,009,000
<ALLOWANCES> 2,740,000
<INVENTORY> 0
<CURRENT-ASSETS> 32,208,000
<PP&E> 8,038,000
<DEPRECIATION> 4,818,000
<TOTAL-ASSETS> 66,739,000
<CURRENT-LIABILITIES> 26,817,000
<BONDS> 0
0
2,846,000
<COMMON> 1,749,000
<OTHER-SE> 22,698,000
<TOTAL-LIABILITY-AND-EQUITY> 66,739,000
<SALES> 10,720,000
<TOTAL-REVENUES> 10,720,000
<CGS> 5,287,000
<TOTAL-COSTS> 4,308,000
<OTHER-EXPENSES> 1,023,000
<LOSS-PROVISION> 380,000
<INTEREST-EXPENSE> 25,700
<INCOME-PRETAX> (234,000)
<INCOME-TAX> (37,000)
<INCOME-CONTINUING> (165,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (209,000)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
