<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
......................................
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 2000 Commission file number 0-6355
GROUP 1 SOFTWARE, INC.
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 November 7, 2000
---------------------------- ----------------------------
Common Stock, $.50 par value 6,599,683
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
(Unaudited)
----------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,368 $ 20,735
Short-term investments 5,789 11,259
Trade and installment accounts receivable, less
allowance of $3,386 and $3,317 16,203 21,561
Deferred income taxes 3,061 3,297
Prepaid expenses and other current assets 3,222 3,407
----------------- -------------------
Total current assets 57,643 60,259
Installment accounts receivable, long-term 1,404 1,945
Property and equipment, net 4,683 4,290
Computer software, net 20,058 21,823
Other assets 4,539 4,750
----------------- -------------------
Total assets $ 88,327 $ 93,067
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,564 $ 1,940
Current portion of capital lease obligation 101 109
Accrued expenses 6,496 6,627
Accrued compensation 5,658 7,617
Current deferred revenues 22,928 26,865
----------------- -------------------
Total current liabilities 36,747 43,158
Capital lease obligation, net of current portion 43 88
Deferred revenues, long-term 856 1,169
Deferred income taxes 3,185 3,724
----------------- -------------------
Total liabilities 40,831 48,139
----------------- -------------------
Commitments and contingencies
Stockholders' equity:
6% cumulative convertible preferred stock $0.25 par value; 1,200
shares authorized; 48 shares issued and outstanding
(aggregate involuntary liquidation preference $950,000) 916 916
Common stock $0.50 par value; 50,000 shares authorized; 6,538
and 6,468 shares issued and outstanding 3,269 3,234
Additional paid in capital 28,041 27,431
Retained earnings 18,491 15,684
Accumulated other comprehensive income (886) (2)
Less treasury stock, 497 shares, at cost (2,335) (2,335)
----------------- -------------------
Total stockholders' equity 47,496 44,928
-------------------
-----------------
Total liabilities and stockholders' equity $ 88,327 $ 93,067
================= ===================
</TABLE>
See notes to consolidated financial statements.
2
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(ADJUSTED TO REFLECT THE 3 FOR 2 STOCK SPLIT APPROVED BY THE
BOARD OF DIRECTORS ON FEBRUARY 4, 2000)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Month Period For the Six Month Period
Ended September 30, Ended September 30,
------------------------------------- -----------------------------------
2000 1999 2000 1999
---------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Software license and related revenues 9,099 $ 9,233 16,736 $16,118
Maintenance and services 13,035 10,037 25,460 19,909
---------------- ------------------ --------------- ----------------
Total revenue 22,134 19,270 42,196 36,027
---------------- ------------------ --------------- ----------------
Cost of revenue:
Software license expense 2,839 3,261 5,899 6,460
Maintenance and service expense 4,588 3,739 8,800 7,448
---------------- ------------------ --------------- ----------------
Total cost of revenue 7,427 7,000 14,699 13,908
---------------- ------------------ --------------- ----------------
Gross profit 14,707 12,270 27,497 22,119
Operating expenses:
Research and development 1,519 1,019 3,030 1,821
Sales and marketing 7,118 6,336 13,630 12,199
General and administrative 3,842 3,223 7,484 5,997
---------------- ------------------ --------------- ----------------
Total operating expenses 12,479 10,578 24,144 20,017
---------------- ------------------ --------------- ----------------
Income from operations 2,228 1,692 3,353 2,102
Non-operating income
Interest income 622 228 1,150 420
Interest expense (11) (55) (17) (63)
Other non-operating income 61 (30) 310 (6)
---------------- ------------------ --------------- ----------------
Total non-operating income 672 143 1,443 351
---------------- ------------------ --------------- ----------------
Income from operations before provision 4,796
for income taxes 2,900 1,835 2,453
---------------- ------------------ --------------- ----------------
Provision for income taxes 1,196 725 1,961 964
---------------- ------------------ --------------- ----------------
Net income 1,704 1,110 2,835 1,489
Preferred stock dividend requirements (14) (14) (28) (28)
---------------- ------------------ --------------- ----------------
Net income available to common stockholders $1,690 $1,096 $2,807 $1,461
================ ================== =============== ================
Basic earnings per share $ 0.28 $ 0.20 $ 0.47 $ 0.26
================ ================== =============== ================
Diluted earnings per share $ 0.24 $ 0.19 $ 0.40 $ 0.26
================ ================== =============== ================
Basic weighted average shares outstanding 6,016 5,588 5,998 5,588
================ ================== =============== ================
Diluted weighted average shares outstanding 6,974 5,673 6,935 5,669
================ ================== =============== ================
</TABLE>
See notes to consolidated financial statements.
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD
ENDED SEPTEMBER 30,
------------------------------------
2000 1999
---------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,835 $ 1,489
Adjustments to reconcile net income from
Operations to net cash provided by operating activities:
Amortization expense 5,324 5,702
Depreciation expense 952 799
Provision for doubtful accounts 175 488
Net loss on disposal of assets 4 9
Deferred income taxes (152) (836)
Foreign currency transaction gain (321) - - -
Changes in assets and liabilities:
Accounts receivable 5,562 5,893
Prepaid expenses and other current assets 174 112
Other assets (84) 82
Deferred revenues (4,140) (35)
Accounts payable (347) 701
Accrued expenses and accrued compensation (1,940) (703)
---------------- -------------
Net cash provided by operating activities 8,042 13,701
---------------- -------------
Cash flows from investing activities:
Purchase and development of computer software (3,572) (4,847)
Purchase of property and equipment (1,470) (1,214)
Purchase of marketable securities (68,046) (38,148)
Sale of marketable securities 73,516 30,727
---------------- -------------
Net cash used in investing activities 428 (13,482)
---------------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock options 496 18
Repayment of principal on capital lease obligations (53) (49)
Dividends paid (28) (29)
---------------- -------------
Net cash provided by (used in) financing activities 415 (60)
---------------- -------------
Net increase (decrease) in cash and cash equivalents 8,885 159
Effect of exchange rate on cash and cash
equivalents (252) ---
Cash and cash equivalents at beginning of period 20,735 13,378
---------------- -------------
Cash and cash equivalents at end of period 29,368 $ 13,537
================ =============
Supplemental disclosure of non-cash financing activity:
Warrants issued in exchange for services $ 211 ---
</TABLE>
See notes to consolidated financial statements.
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Month Period Ended For the Six Month Period Ended
September 30, September 30,
------------------------------------- -----------------------------------
2000 1999 2000 1999
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net income $1,704 $1,110 $2,835 $1,489
Foreign currency translation adjustments (284) 163 (884) 126
---------------- ----------------- --------------- ----------------
Comprehensive income $1,420 $1,273 $1,951 $1,615
================ ================= =============== ================
</TABLE>
See notes to consolidated financial statements.
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Group 1 Software, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. The consolidated financial statements for the three and six months ended
September 30, 2000 and 1999 are unaudited. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included and
are of a recurring nature in the normal course of business. Limited footnote
information is presented in accordance with quarterly reporting requirements.
The results of operations for the three and six months ended September 30, 2000
are not necessarily indicative of the results for the year ending March 31,
2001. The information contained in the annual report on the Form 10-K for the
year ended March 31, 2000, should be referred to in connection with the
unaudited interim financial information.
2. Certain prior period amounts have been reclassified to conform to current
period presentation.
3. On February 4, 2000, the Board of Directors approved a 3 for 2 common
stock split for stockholders of record as of February 17, 2000. There was no
change in the par value of the stock as a result of the split. The effect of the
stock split has been retroactively reflected in the consolidated financial
statements for all periods presented.
4. Research and development expense, before the capitalization of computer
software development costs, amounted to approximately $3.2 million and $2.7
million for the three months ended September 30, 2000 and 1999, respectively.
Capitalization of computer software development costs for both three month
periods was $1.7 million. Research and development expense, before the
capitalization of computer software development costs, amounted to approximately
$6.4 million and $5.3 million for the six months ended September 30, 2000 and
1999, respectively. Capitalization of computer software development costs for
the same six months periods were $3.4 million and $3.5 million, respectively.
5. Earnings per share
Earnings per share (EPS) is computed in accordance with SFAS No. 128, "Earnings
Per Share". Basic EPS is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS is computed using the weighted average number of shares
of common stock and potentially dilutive securities outstanding during the
period. Potentially dilutive securities consist of convertible preferred stock
(using the if converted method) and stock options and warrants (using the
treasury stock method). Potentially dilutive securities are excluded from the
computation if the effect is anti-dilutive.
Reconciliation of basic EPS calculations to the shares used in the diluted EPS
calculation (in thousands, adjusted to reflect the 3 for 2 stock split approved
by the Board of Directors on February 4, 2000):
<TABLE>
<CAPTION>
For the Three Month Period Ended For the Six Month Period Ended
September 30, September 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding-basic 6,016 5,588 5,998 5,588
Effect of dilutive securities:
Stock options and warrants 958 85 937 81
---------------- ------------- ------------- --------------
Weighted average shares outstanding-
diluted 6,974 5,673 6,935 5,669
================ ============= ============= ==============
</TABLE>
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There were additional potentially dilutive convertible securities of 47,500 in
the three and six months ended September 30, 2000, and 1999 respectively, which
were not included in the earnings per share calculation due to their
anti-dilutive effect.
6. Recent Accounting Pronouncements
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No.
101,"Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. Subsequently, the SEC released SAB 101A, which delayed the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000. In June 2000 the SEC issued SAB
101B, further delaying the required implementation of SAB 101 by the Company
until the fourth quarter of fiscal year 2001. The Company has not fully assessed
the effect on our financial statements as a result of SAB 101.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, which delays the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for our fiscal year
2002. This statement establishes accounting and reporting standards requiring
that every derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. The Company believes the adoption of SFAS
Nos. 133 and 137 will not have a material effect on its financial statements.
7. Legal Contingencies
The Company is not a party to any legal proceedings which in its belief, after
review by legal counsel, could have a material adverse effect on the
consolidated financial position, cash flows or results of operations of the
Company.
8. Segment Information
The following table presents certain financial information relating to each
reportable segment:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------------------------------------
Segment Information (in thousands) 2000 1999 2000 1999
-------------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Enterprise Solutions Software $13,904 $13,496 $27,157 $24,469
Electronic Document Composition Software 8,230 5,774 15,039 11,558
-------------- -------------- --------------- --------------
Total revenue $22,134 $19,270 $42,196 $36,027
============== ============== =============== ==============
Gross Profit:
Enterprise Solutions Software $ 9,004 $ 8,684 $17,388 $15,475
Electronic Document Composition Software 5,703 3,757 10,109 7,375
Other --- (171) --- (731)
-------------- -------------- --------------- --------------
Total gross profit $14,707 $12,270 $27,497 $22,119
============================= ==============================
</TABLE>
All of the Company's assets are retained and analyzed at the corporate level and
are not allocated to the individual segments. Amortization of capitalized
software associated with the Enterprise Solutions Software segment was $1.5
million and $1.7 million for the three months ended September 30, 2000 and 1999,
respectively. For the six month
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period ended September 30, 2000 and 1999, amortization of capitalized software
for the Enterprise Solutions Software segment was $3.3 million and $3.0 million,
respectively. Amortization of capitalized software associated with the
Electronic Document Composition Software segment was $0.6 million and $0.5
million for the three months ended September 30, 2000 and 1999, respectively.
Amortization of capitalized software associated with the Electronic Document
Composition Software segment was $1.2 million and $1.1 million for the six
months ended September 30, 2000 and 1999, respectively.
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 three months ended September 30, 2000 and 1999, the Company had revenues
of $22.1 million and $19.3 million, respectively. Net income available to common
stockholders for the three months ended September 30, 2000 was $1.7 million or
$0.24 per share compared with net income available to common stockholders of
$1.1 million or $0.19 per share in the same period in the prior year. For the
six months ended September 30, 2000 and 1999, the Company had revenues of $42.2
million and $36.0 million, respectively. Net income available to common
stockholders for the six months ended September 30, 2000 was $2.8 million or
$0.40 per share compared with net income available to common stockholders of
$1.5 million or $0.26 per share in the same period in the prior year. The
increase in profitability for both the quarter and six months ended September
30, 2000 is primarily due to higher revenue in both of the Company's operating
segments along with higher interest and other non-operating income.
All of Group 1's operations are based in the two business segments defined as
Enterprise Solutions Software and Electronic Document Composition Software.
Enterprise Solutions revenue accounted for 63% and 70% of Group 1's total
revenue for the second fiscal quarter of 2001 and 2000, respectively. Enterprise
Solutions revenue accounted for 64% and 68% of Group 1's total revenue for the
first six months of 2001 and 2000, respectively. Electronic Document Composition
revenue was 37% and 30% of total revenue for the second quarter of fiscal 2001
and fiscal 2000, respectively. Electronic Document Composition revenue was 36%
and 32% of total revenue for the six months ended September 30, 2000 and 1999,
respectively. International revenues accounted for 16% of Group 1's total
revenue in the second quarter of fiscal 2001 and 11% in the second quarter of
fiscal 2000. International revenues accounted for 16% and 13% of Group 1's total
revenue in the six months ended September 30, 2000 and 1999, respectively. The
increase in International revenue as a percent of total revenue is primarily due
to higher sales of the DOC 1 product in Europe.
Software license and related revenues of $9.1 million for the second fiscal
quarter of 2001 decreased 1% from $9.2 million the same period the prior year.
As a percent of total revenue, second quarter software license and related
revenues were 41% in fiscal 2001 compared with 48% in fiscal 2000. For the six
month period, software license and related revenues of $16.7 million were 4%
above the same period the prior year. As a percent of total revenue, software
license and related revenues were 40% for the six months ended September 30,
2000 compared with 45% for the same period the prior year.
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<PAGE> 9
License fees from Enterprise Solutions Software decreased 10% in the three month
period ended September 30, 2000 as compared to the same period in the prior
year. License fees were flat year to year for the six month period ended
September 30, 2000 as compared to the same period in the prior year. The
specifics of Enterprise Solutions license fees are discussed below.
For the three and six months ended September 30, 2000, license fees from
database marketing products decreased by $0.1 million and $0.2 million
respectively compared to the same periods in the prior year. The decrease for
the quarter and six month periods was primarily due to lower sales of the Model
1 product.
The Company's mailing efficiency/data quality software license fees for the
three months ended September 30, 2000 decreased 8% as compared to the same
period in the prior year. License fees of these products were relatively flat
for the six month period ended September 30, 2000. The decrease for the three
month period is primarily due to lower sales of Group 1's international coding
products.
License fees from Electronic Document Composition Software increased 10% in the
three months and 12% in the six months ended September 30, 2000 over the same
periods in the prior year. The increases in sales for both periods were due to
higher European sales.
Maintenance and service revenue of $13.0 million for the second quarter of
fiscal 2001 increased 30% over the prior year's comparable period. For the six
month period ended September 30, 2000 maintenance and service revenue of $25.5
million was 28% above the same period in the prior year. Maintenance and service
revenue accounted for 59% and 60% of total revenue for the quarter and six
months ended September 30, 2000, compared with 52% and 55% of total revenue in
the same periods in the prior year. Recognized maintenance fees included in
maintenance and service revenue were $9.8 million for the quarter ended
September 30, 2000 and $7.8 million for the same period the prior year, an
increase of 26%. The increase in maintenance revenue is due to the recognition
of a higher level of maintenance deferrals based on higher aggregate sales from
prior periods and from increased maintenance renewals based on an increase in
the installed customer base.
For the quarter ended September 30, 2000, Enterprise Solutions recognized
maintenance increased 22% to $7.8 million over the same period in the prior
year. For the six months ended September 30, 2000, Enterprise Solutions
recognized maintenance increased 24% to $15.5 million over the same period in
the prior year. Electronic Document Composition recognized maintenance increased
43% to $2.0 million in the quarter ended September 30, 2000 compared to the
comparable period in the prior year. Electronic Document Composition recognized
maintenance increased 50% to $3.9 million in the six months ended September 30,
2000 compared to the same period in the prior year.
Professional and educational service revenue from the Enterprise Solutions
segment decreased $0.2 million to $0.6 million in the quarter ended September
30, 2000 from the same period in the prior year. Professional and educational
service revenue from the Enterprise Solutions segment increased to $1.5 million
in the six months ended September 30, 2000, an increase of $0.2 million from the
same period in the prior year. Electronic Document Composition service revenue
increased 93% to $2.7 million in the quarter ended September 30, 2000 from the
same period the prior fiscal year. Electronic Document Composition service
revenue increased 31% to $4.6 million in the six months ended September 30, 2000
compared to the same prior year period. The increase in Electronic Document
Composition service revenue is due to higher services in the U.S. and
internationally.
Total cost of revenue for the second quarter of fiscal 2001 was $7.4 million
versus $7.0 million in the same period of fiscal 2000. The total cost the
revenue for the six month period was $14.7 million compared to $13.9 million in
the same period in the prior year. The separate components of cost of revenue
are discussed below.
Software license expense decreased for the three month period ended September
30, 2000 to $2.8 million from $3.3 million for the same period in the prior year
representing 31% and 36% of software license and related revenues,
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<PAGE> 10
respectively. Software license expense decreased for the six month period ended
September 30, 2000 to $5.9 million from $6.5 million for the same period in the
prior year representing 35% and 40% of software license and related revenues,
respectively. The decrease in expense as a percent of software license revenue
was due to higher license fees in both operating segments, as well as lower
royalty expenses.
Maintenance and service expense increased to $4.6 million in the current quarter
from $3.7 million in the comparable period in fiscal 2000, representing 35% and
37% of maintenance and service revenue, respectively. Maintenance and service
expense increased to $8.8 million in the six month period ended September 30,
2000 from $7.4 million in the comparable period in fiscal 2000, representing 35%
and 37% of maintenance and service revenue, respectively. The decrease in
expense as a percentage of revenue can be attributed to higher maintenance and
revenue spread across relatively flat maintenance costs as well as higher
margins on professional services revenue as discussed below.
Included in maintenance and service expense discussed above are professional and
educational service costs of $2.5 million which were 76% of professional service
and education revenue for the second quarter compared with $1.9 million which
represented 86% of professional service and educational revenue for the
comparable period in the prior year. For the six month period ended September
30, 2000, professional and educational service costs of $4.8 million were 79% of
professional service and educational revenue compared with $3.9 million or 81%
in the prior year period. The decrease in expense as a percent of revenue for
the three and six month periods can be attributed to higher revenue in
Electronic Document Composition services as discussed above.
Costs of maintenance were $2.1 million for the second fiscal quarter of 2001
representing 21% of maintenance revenue. Costs of maintenance for the same
quarter in the prior year were $1.8 million, representing 23% of maintenance
revenue. For the six months ended September 30, 2000, costs of maintenance were
$4.0 million, representing 21% of maintenance revenue versus $3.5 million or 23%
of revenue in the prior year. The lower cost as a percentage of revenue reflects
economies of scale achieved with maintenance and support costs spread over a
larger revenue base.
Total operating costs of $12.4 million amounted to 56% of revenue for the
quarter ended September 30, 2000 compared with $10.5 million or 55% of revenue
for the prior year period. Total operating costs of $24.1 million amounted to
57% of revenue for the six months ended September 30, 2000 compared $20.0
million or 56% of revenue for the prior year period. The various components of
operating costs are discussed below.
Software development costs incurred subsequent to establishment of the
software's technological feasibility are capitalized. Capitalization ceases when
the software is available for general release to customers. All costs not
meeting the requirements for capitalization are expensed in the period incurred.
Software development costs include direct labor cost and overhead. Capitalized
software development costs are amortized by the greater of (a) the ratio that
current gross revenues for the product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported on. At the balance sheet date, the Company evaluates the
net realizable value of the capitalized costs and adjusts the current period
amortization for any impairment of the capitalized asset value. Amortization of
capitalized software is included in the cost of license fees.
Total research and development expense before capitalization of certain
development costs was $3.2 million or 14% of revenue for the three month period
ended September 30, 2000 compared with $2.7 million or 14% in the prior year.
For the six months ended September 30, 2000 total research and development
expense before capitalization of certain development costs was $6.4 million or
15% of revenue compared with $5.3 million or 15% of revenue in the prior year.
Research and development expenses (after capitalization of certain software
development costs) totaled $1.5 million for the second fiscal quarter of 2001
and $1.0 million for the same period of fiscal 2000, representing 7% and 5% of
revenue, respectively. Research and development expenses (after capitalization
of certain software development costs) totaled $3.0 million for the six months
ended September 30, 2000 and $1.8 million for the same period of the prior year,
representing 7% and 5% of revenue, respectively. The increase in expense is due
to increased spending on new product initiatives in both the Enterprise
Solutions and Electronic Document Composition segments.
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<PAGE> 11
Sales and marketing expenses totaled $7.1 million or 32% of revenue in the
second quarter of fiscal 2001 and $6.3 million or 33% in the prior year same
period. Sales and marketing expenses totaled $13.6 million or 32% of revenue in
the six months ended September 30, 2000 and $12.2 million or 34% in the six
months ended September 30, 1999. The decrease in cost as a percent of revenue
for the current year versus the prior year was primarily due to higher revenue
partially offset by higher costs for sales and marketing of Enterprise Solutions
and Electronic Document Composition products. Sales and marketing costs for the
Enterprise Solutions products were 32% of Enterprise Solutions revenue in the
second fiscal quarter of 2001 and 33% for the same period the prior year.
Electronic Document Composition selling and marketing costs were 33% for the
three month periods ended September 30, 2000 and 1999. Sales and marketing costs
for the Enterprise Solutions products were 32% of Enterprise Solutions revenue
in the first six months of fiscal year 2001 and 36% for the same period in the
prior year. Electronic Document Composition sales and marketing costs were 32%
and 33% for the six months ended September 30, 2000 and 1999, respectively.
General and administrative expenses were $3.8 million or 17% of total revenue
compared with $3.2 million or 17% of revenue for the three months ended
September 30, 2000 and 1999, respectively. General and administrative expenses
were $7.5 million or 18% of total revenue compared with $6.0 million or 17% of
revenue for the six months ended September 30, 2000 and 1999, respectively. The
increase in general and administrative expenses is primarily related to
increased compensation associated with increased head count along with increased
shareholder relations costs. The Company expects these costs to remain
relatively close to the current levels as a percent of revenue.
Net non-operating income was $0.6 million for the quarter ended September 30,
2000 as compared with $0.1 million for the same period in the prior year. For
the six months ended September 30, 2000 and 1999, net non-operating income was
$1.4 million and $0.4 million, respectively. This increase represents higher
interest income generated from higher cash and short-term investment balances in
the current periods compared to the same periods of fiscal 2000 along with a
$0.3 million currency gain in the first fiscal quarter of 2001.
The Company's effective tax rates were 41% and 39% for the six month period
ended September 30, 2000, and 1999, respectively. The current year's rate is the
net effect of a 33% effective tax rate on foreign taxable income and a 47% rate
on domestic taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $20.9 million at September 30, 2000, as
compared to $17.1 million at March 31, 2000. The current ratio was 1.6 to 1 at
September 30, 2000 and 1.4 to 1 at March 31, 2000.
The Company provides for its cash requirements through cash funds generated from
operations. Additionally, the Company maintains a $10 million line of credit
arrangement with a commercial bank, expiring October 31, 2001. The line of
credit bears interest at the bank's prime rate or Libor plus 150 basis points,
at Group 1's option. The line of credit is not collateralized but requires Group
1 to maintain certain operating ratios. At September 30, 2000 and at March 31,
2000, there were no borrowings outstanding under the line of credit.
For the six months ended September 30, 2000, net cash provided by operating
activities was $8.0 million. This amount included net income of $2.8 million
plus non-cash expenses of $6.0 million. Also included in cash provided by
operating activities was a $5.6 million decrease in accounts receivable, offset
by a $4.1 million decrease in deferred revenues, a $1.9 million decrease in
accrued expenses and accrued compensation and $0.4 million used by other
operating activities. The decrease in accounts receivable is due to increased
cash collections. Investment in purchased and developed software of $3.6
million, and capital equipment of $1.5 million, in addition to a decrease of
$5.5 million in short-term investments resulted in $0.4 million provided by
investing activities. For the six months ended September 30, 2000, $0.4 million
was provided by financing activities.
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The Company's exposure to market risk for changes in interest rates relates
primarily to its cash equivalents and short-term investments. The Company does
not invest in derivative financial instruments. Excess cash is invested in
short-term, fixed income financial instruments. These fixed rate investments are
subject to interest rate risk and may fall in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10% from the levels at September 30, 2000, the fair market value of the
portfolio would decline by an immaterial amount. The Company has the ability to
hold its fixed income investments until maturity and, therefore, does not expect
operating results or cash flows to be materially affected by a sudden change in
market interest rates on its investment portfolio.
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 to 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 benefit 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 the Company. The
service bureau industry is also highly competitive and subject to general
economic cycles, as they impact advertising and direct marketing expenditures.
The Company is aware of no current market risk associated with the installment
receivables. Service bureaus represent approximately $2.1 million or 68% of the
installment receivables at September 30, 2000.
As of September 30, 2000, 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 minimum lease obligations and
other short-term and long-term liquidity needs can be met from its existing cash
and short-term investment balances and cash flows from operations. The Company
believes that its long-term liquidity needs are minimal and no large capital
expenditures are anticipated, except for the continuing investment in
capitalized software development costs, which the Company believes can be funded
from operations during the next twelve months.
Recent Accounting Pronouncements
In December 1999, the SEC released Staff Accounting Bulletin ("SAB")
No. 101,"Revenue Recognition in Financial Statements," which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. Subsequently, the SEC released SAB 101A, which
delayed the implementation date of SAB 101 for registrants with fiscal years
that begin between December 16, 1999 and March 15, 2000. In June 2000 the SEC
issued SAB 101B, further delaying the required implementation of SAB 101 by the
Company until the fourth quarter of fiscal year 2001. The Company has not fully
assessed the effect on our financial statements as a result of SAB 101.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, which delays the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for our fiscal year
2002. This statement establishes accounting and reporting standards requiring
that every derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. The Company believes the adoption of SFAS
Nos. 133 and 137 will not have a material effect on its financial statements.
Legal Contingencies
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<PAGE> 13
The Company is not a party to any legal proceedings which in its belief,
after review by legal counsel, could have a material adverse effect on the
consolidated financial position, cash flows or results of operations of the
Company.
Quantitative and Qualitative Disclosures about Market Risk
The Company has a subsidiary in the United Kingdom with offices in
Germany, Italy and Denmark. Additionally, the Company uses third party
distributors to market and distribute its products in other international
regions. Transactions conducted by the subsidiary are typically denominated in
the local country currency, while transactions conducted by the distributors are
typically denominated in pounds sterling. As a result, the Company is primarily
exposed to foreign exchange rate fluctuations as the financial results of its
subsidiary and third party distributors are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and impact overall expected profitability. Based on the
Company's overall currency rate exposure at September 30, 2000 a 10% change in
foreign exchange rates would have had an immaterial effect on the Company's
financial position, results of operations and cash flows. The Company has not
entered into any foreign currency hedging transactions with respect to its
foreign currency market risk. The Company does not have any financial
instruments subject to material market risk.
Euro Currency
The European Union's adoption of the Euro currency raises a variety of
issues associated with the Company's European operations. Although the
transition from national currencies to the Euro will be phased in over several
years, the Euro became the single currency for most European countries on
January 1, 1999. The Company is assessing Euro issues related to its treasury
operations, product pricing, contracts and accounting systems. Although the
evaluation of these issues is still in process, management currently believes
that the Company's existing or planned hardware and software systems will
accommodate the transition to the Euro and any required operating changes will
not have a material effect on future results of operations or financial
condition.
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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
The following matters were submitted to, and approved by, the required vote of
security holders of the Company at the Company's annual shareholders' meeting
held on September 12, 2000:
1. To elect three directors to hold office until the third annual meeting of
shareholders of the Company following their election and their successors
have been elected and qualified.
<TABLE>
<CAPTION>
NOMINEES FOR WITHHELD
------------------------------------------------------------
<S> <C> <C>
James P. Marden 5,255,524 367,761
Charles A. Mele 5,255,524 367,761
Charles J. Sindelar 5,255,524 367,761
</TABLE>
All nominees were duly elected.
In addition to the newly elected directors, the term of office as a
director of Messrs. James V. Manning, Richard H. Eisenberg, Bruce J.
Spohler, Robert S. Bowen, Ronald F. Friedman and Thomas S. Buchsbaum
continued after the Meeting.
2. To amend the Company's Certificate of Incorporation to increase the
number of authorized shares of common stock from 14,000,000 shares to
50,000,000 shares.
<TABLE>
<CAPTION>
FOR WITHHELD ABSTAIN
-----------------------------------------------------------
<S> <C> <C>
4,898,248 715,912 9,125
</TABLE>
The proposal was duly adopted.
3. To amend the Company's 1995 Incentive Stock Option, Non-Qualified Stock
Option and Stock Appreciation Rights Plan to increase by 300,000 shares
the number of shares subject to the plan.
<TABLE>
<CAPTION>
FOR WITHHELD ABSTAIN
-----------------------------------------------------------
<S> <C> <C>
4,857,362 740,342 25,581
</TABLE>
The proposal was duly adopted.
14
<PAGE> 15
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
NONE
15
<PAGE> 16
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: November 14, 2000
/s/ Mark Funston
Mark Funston
Chief Financial Officer
16
