<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, 1997 Commission file number 0-15389
GROUP 1 SOFTWARE, INC.
Incorporated in Delaware IRS EI No. 52-1483562
4200 Parliament Place, Suite 600, Lanham, MD 20706-1844
Telephone Number: (301) 918-0400
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------------ -----------
Shares Outstanding Effective
Class August 11, 1997
- ---------------------------- 4,293,697
Common Stock, $.01 par value
<PAGE> 2
GROUP 1 SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1997
(UNAUDITED) (AUDITED)
-------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 950 $ 1,500
Trade and installment accounts receivable,
less allowance of $2,950 and $3,208 27,950 32,460
Deferred income taxes 2,374 2,438
Prepaid expenses and other assets 3,791 4,047
------------- -------------
Total current assets 35,065 40,445
Installment accounts receivable, long-term 4,812 6,170
Property and equipment, net 3,372 3,472
Computer software, net 23,417 22,185
Other assets 2,196 2,275
------------- -------------
Total assets $ 68,862 $ 74,547
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-Term Borrowings $ 6,033 $ 7,097
Accounts payable 3,696 2,833
Current portion of long-term debt 180 164
Accrued expenses 2,854 5,731
Accrued compensation 2,413 3,577
Current deferred revenues 15,969 16,170
Due to parent company 1,426 1,719
------------- -------------
Total current liabilities 32,571 37,291
Long-term debt, net of current portion 476 303
Deferred revenues, long-term 4,125 4,606
Deferred income taxes, net 3,766 3,288
------------- -------------
Total liabilities 40,938 45,488
------------- -------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, $0.01 par value 10,000 shares
authorized, 4,293 issued and outstanding 43 43
Preferred stock, 6% cumulative convertible, $0.01 par value 1,000
shares authorized - none issued and outstanding - - - - - -
Capital contributed in excess of par value 5,189 5,189
Retained earnings 22,382 23,476
Cumulative foreign currency translation 310 351
------------- -------------
Total stockholders' equity 27,924 29,059
------------- -------------
Total liabilities and stockholders' equity $ 68,862 $ 74,547
============= =============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 3
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE - MONTH
PERIOD
ENDED JUNE 30,
---------------------------
1997 1996
(FY98) (FY97)
--------------- ------------
Revenue
<S> <C> <C>
Software licenses and related revenue $ 5,062 $ 5,410
Maintenance and service revenue 6,808 5,311
----------- ---------------
Total revenue 11,870 10,721
----------- ---------------
Costs and expenses:
Software licenses expenses 2,000 1,524
Maintenance and service expense 3,330 2,834
Research, development and indirect support 647 654
Selling and marketing 5,187 4,150
General and administrative 1,741 1,361
Provision for doubtful accounts 380 380
----------- ---------------
Total costs and expenses 13,285 10,903
----------- ---------------
Operating earnings (loss) (1,415) (182)
Non-operating income (expense), net (208) (8)
----------- ---------------
Earnings (loss) before provision for income taxes (1,623) (190)
Provision (benefit) for income taxes (529) (21)
----------- ---------------
Net earnings (loss) $ (1,094) $ (169)
=========== ===============
Earnings (loss) per share of common stock: $ (0.25) $ (0.04)
=========== ===============
Weighted average number of common and common
equivalent shares outstanding 4,314 4,293
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE - MONTH
PERIOD ENDED JUNE 30,
-------------------------------
1997 1996
(FY98) (FY97)
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (1,094) $ (169)
Adjustments to reconcile earnings (loss) from operations to net cash from
operating activities:
Amortization expense 1,604 1,361
Depreciation expense 256 229
Provision for doubtful accounts receivable 380 380
Deferred income taxes 542 443
Change in assets and liabilities:
Decrease in accounts receivable 5,488 784
Decrease (increase) in prepaid expenses and other current assets 256 (368)
Decrease in other assets 79 45
Increase in accounts payable 863 159
Decrease in accrued expenses (4,041) (3,369)
Increase (decrease) in due to parent company (293) 527
Decrease in deferred revenues (682) (1,211)
---------- -----------
Net cash provided by (used in operating activities) 3,358 (1,189)
---------- -----------
Cash flows from investing activities:
Purchase and development of computer software (2,829) (2,900)
Purchase of equipment and improvements (163) (194)
Purchase of marketable securities - - - (3,984)
Sale of marketable securities - - - 3,943
---------- -----------
Net cash used by investing activities (2,992) (3,135)
---------- -----------
Cash flows from financing activities:
Proceeds from short-term borrowings 2,415 5,101
Reduction of short-term borrowings (3,479) (1,682)
Proceeds from acquisition of debts 199 - - -
Reduction in long-term debt (10) (239)
---------- -----------
Net cash provided by (used in) financing activities (875) 3,180
---------- -----------
Net decrease in cash and cash equivalents (509) (1,144)
Effect of currency translation on cash (41) (28)
Cash and cash equivalents at beginning of period 1,500 1,716
---------- -----------
Cash and cash equivalents at end of period $ 950 $ 544
========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
GROUP 1 SOFTWARE, INC.
Notes to Consolidated Financial Statements
1. The financial statements for the three months ended June 30, 1997 and
1996, 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, 1997 are not necessarily indicative of the results for the year ending
March 31, 1998. The information contained in the audited financial
statements and the notes thereto for the year ended March 31, 1997, should
be referred to in connection with the unaudited interim financial
information.
2. Research and development expense, before the capitalization of computer
software development costs, amounted to approximately $3.3 million and $
3.4 million for the three months ended June 30, 1997 and 1996,
respectively.
3. Earnings per share of common stock in the accompanying financial
statements have been computed using the weighted average number of common
and common equivalent shares outstanding. Common equivalent shares result
from the dilutive effect of stock options, calculated under the treasury
stock method.
4. The Financial Accounting Standards Board issued SFAS No. 128 regarding
earnings per share. This statement which must be adopted by the Company
for fiscal accounting periods ending after December 15, 1997, requires
earnings per share to be calculated under newly prescribed methods.
Adoption of SFAS No. 128 is not expected to have a material impact on the
Company's financial statements.
5. Subsequent to June 30, 1997 the Company reached an agreement subject to
definitization, to license its WorldTrak product to a new entity formed by
the current management of its WorldTrak Division. The agreement transfers
all development, support and sales and marketing responsibility to this
new company. The Company will continue to receive a royalty on any sales
of the product by the new entity.
6. Certain amounts have been reclassified to conform with the current period
presentation.
5
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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 profitiability,
revenues, expenses or other financial items; together with other statements
that are not historical facts, are "forward-looking statements" as that term is
defined under the Federal Securities Laws. Forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
results to differ materially from those stated in such statements. Such risks,
uncertainties and factors include, but are not limited to, changes in currency
exchange rates, changes and delays in new product introduction, customer
acceptance of new products, changes in government regulations, changes in
pricing or other actions by competitors and general economic conditions, as
well as other risks detailed in the Company's filings with the Securities and
Exchange Commission.
For the quarter ended June 30, 1997 the Company's revenues of $11.9 million
increased 11% from the $10.7 million reported for the comparable period the
prior year. Net loss for the quarter ended June 30, 1997, was $1.1 million or
$(0.25) per share compared with a net loss of $0.2 million or $(0.04) per share
in fiscal 1997. The decline in profitability for the quarter ended June 30,
1997 was due to increased sales and marketing, G&A (primarily legal and
accounting fees) and maintenance and professional services costs partially
offset by an increase in revenue.
Software license fees and related revenues of $5.1 million for the first fiscal
quarter decreased 6% over the prior year. As a percent of total revenue, first
quarter software license and related revenue was 43% in fiscal 1998 compared
with 50% in fiscal 1997. The decrease was due to lower license revenue in our
PC , WorldTrak and Traditional Large Systems divisions offset by higher
license revenue in the DOC1 division.
License fees from Customer Information Management Systems software for the
fiscal first quarter were essentially flat compared with the first quarter of
fiscal 1997.
License fees from Database Marketing Systems decreased 11% for the fiscal first
quarter from the comparable period the prior year. The decrease resulted from
lower sales of our traditional Database Marketing products partially offset by
higher sales of the Data Designs product..
Licensing of Electronic Document Systems increased 35% in the fiscal first
quarter. Sales of these products were strong in both domestic and international
markets.
The Company's core Mailing Efficiency software license fees for the fiscal
first quarter decreased 13% over the same period in the prior year. The
decrease was due to lower sales in both our PC and Large Systems product lines.
Maintenance and other revenue of $6.8 million for the quarter increased 28%
over the prior year. Maintenance and other revenue accounted for 57% of total
revenue for the quarter ended June 30, 1997 compared with 50% for same period
in the prior year. Recognized maintenance fees were $5.2 million for the
quarter ended June 30, 1997, an increase of 16% over the comparable period of
the prior year. Professional and educational service revenues of $1.6 million
for the quarter ended June 30, 1997 were 73% higher than the same period of the
prior year. Maintenance revenue increased in all product lines while the
professional service revenue increases were primarily in Electronic Document
Systems.
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 typically includes multi-year maintenance agreements. In addition, as a
result of the delay in releasing software which fully complied with all new
United States Postal Service reclassification regulations the Company extended
maintenance contracts by six months for users of its Mailstream products. It is
anticipated that the other service revenues will continue to increase as a
percentage of Group 1's
6
<PAGE> 7
revenue, resulting from the growth of DOC1 and database marketing systems
revenues which require more consulting and professional services than the
Company's traditional products.
During the fiscal first quarter, total operating costs of $13.3 million
amounted to 112% of revenue compared with $10.9 million or 102% of revenue
during the same period the prior year.
Software license expense increased to $2.0 million for the three months ended
June 30, 1997, from $1.5 million in the comparable prior year period,
representing 40% and 28% of software license and related revenues,
respectively. The increase is due to higher royalty and amortization costs
along with lower license fees from the comparable period the prior year.
Maintenance and service expense increased to $3.3 million in the current
quarter from $2.8 in the comparable period in fiscal 1997, representing 49% and
53% of maintenance and service revenue, respectively. The decrease in expense
as a percent of revenue reflects higher margins in both maintenance and support
as described below.
Included in maintenance and service expense above are professional and
educational service costs of $1.4 million which were 87% of professional
services and education revenue for the first quarter compared with $1.0 million
and 104% for the comparable period in the prior year. The company expects these
margins to increase as professional services revenue grows.
Costs of maintenance were $1.9 million for the first quarter of fiscal 1998
representing 37% of maintenance revenue. Costs of maintenance for the same
quarter in the prior year were $1.8 million or 41% of maintenance revenue. The
lower cost as a percentage of maintenance revenues reflects economies of scale
achieved with maintenance support costs spread over a larger revenue base.
Research, development and indirect support expenses (after capitalization of
certain development costs) totaled $0.6 million in the first quarter of fiscal
1998 and $0.7 million in the same quarter the prior year, representing 5% and
6% of total revenue, respectively. The Company anticipates these costs as a
percentage of revenue to increase due to the expanded product offerings.
Selling and marketing expenses totaled $5.2 million or 44% of revenue in the
first quarter of fiscal 1998 and $4.2 million or 39% of revenue in the prior
year period. The increase in the current year expenses is primarily due to the
higher staffing, marketing and incentive compensation to support higher sales
of the DOC1 products. The Company believes these costs, as a percentage of
revenue, will decline as revenue increases.
General and administrative expenses were $1.7 million or 15% of total revenue
compared with $1.4 million or 13% for the three months ended June 30, 1997 and
1996, respectively. The increase is primarily due to higher legal and
accounting costs.
The provision for doubtful accounts was $0.4 million and 3% of revenue as
compared with $0.4 million and 4% for the three month period ended June 30,
1997 and 1996 respectively.
7
<PAGE> 8
Net non-operating expense was $0.2 million for the first quarter ended June 30,
1997 as compared with net non-operating expense of $8,200 for the comparable
period in fiscal year 1997. These differences reflect higher net interest
expense of $0.2 million for the quarter, which was caused by increased
borrowings under the company's line of credit.
The Company's effective tax rate was 33% and 11% for the three-month period
ending June 30, 1997 and 1996, respectively. The current year's rate is the net
effect of a 33% effective tax rate on both domestic and foreign taxable net
losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $2.5 million at June 30, 1997, as compared
with $3.2 million at March 31, 1997. The current ratio was 1.1 to 1 at both
June 30, 1997, and at March 31, 1997.
The Company provides for its cash requirements through cash funds generated
from operations and from borrowings under its line of credit. The Company
maintains a two-year uncollateralized $10.0 million line of credit arrangement
with Crestar Bank. The line of credit bears interest at the bank's prime rate
minus 50 basis points or Libor plus 150 basis points at the Company's option.
The line of credit arrangement requires Group 1, among other things, to
maintain an EBIT to interest ratio of at least 4.5 to 1 through December 31,
1997 and at least 6.5 to 1 thereafter. The bank has waived this requirement for
the quarter ended June 30, 1997. At June 30, 1997, borrowings outstanding under
the prior line of credit were $6.0 million; at March 31, 1997, borrowings were
$7.1 million.
For the three months ended June 30, 1997 , a net loss of $1.1 million plus
non-cash expenses of $2.8 million provided a total of $1.7 million cash from
operating activities. Working capital items contributed an additional $1.7
million resulting in net cash provided by operating activities of $3.4 million.
The cash provided by working capital items includes a $5.5 million decrease in
accounts receivable, offset by a $0.7 million decrease in deferred revenue and
a decrease in accrued expenses of $4.0 million. The decrease in accounts
receivable is due to increased cash collections along with the sale of certain
receivables to a third party financier. Investment in purchased and developed
software of $2.8 million and capital equipment of $0.2 million resulted in $3.0
million used by investing activities. $0.9 million was used in financing
activities, primarily payments to reduce short-term borrowings under the
Company's credit facility.
Group 1's practice of accepting license agreements under installment payment
arrangements substantially increases its working capital requirements.
Generally, these arrangements are for a period of one to five years after a
minimum down payment of 20% of the principal amount of the contract. Interest
currently ranges from 10% to 12%. Installment receivables included in accounts
receivable were $ 10.5 million and $11.1 million at June 30, 1997, and March
31, 1997, respectively. The installment receivable balance, in addition to
Group 1's policy of offering competitive trade terms of payment, make it
difficult to accurately portray a relationship between the outstanding accounts
receivable balance and the current period revenues.
8
<PAGE> 9
Group 1 continually evaluates the credit and market risks associated with
outstanding receivables. In the course of this review, Group 1 considers many
factors specific to the individual client as well as the concentration of
receivables within industry groups. Group 1's installment receivables are
predominately with service bureau clients who provide computer services to the
direct marketing industry. Many of these clients have limited capital and
insufficient assets to secure their liability with the Company. The service
bureaus are highly dependent on Group 1's software and services to offer their
customers the economic benefits of postal discounts and mailing efficiency. To
qualify for the U.S. Postal Service and Canada Post Corporation postal
discounts, service bureaus require continuous regulatory product updates
(including the new software releases associated with the postal
reclassification regulations issued July 1, 1996) from Group 1. The service
bureau industry is also highly competitive and subject to general economic
cycles as they impact advertising and direct marketing expenditures. Service
bureau clients represent approximately $8.6 million, or 82% of the installment
receivables at June 30, 1997. Group 1 is aware of no current market risk
associated with the installment receivables.
As of June 30, 1997, the Company's capital resource commitments consisted
primarily of non-cancelable operating lease commitments for office space and
equipment. The Company believes that its current debt services, minimum lease
obligations and other short-term liquidity needs can be met from cash flows
from operations and its current credit facility. The Company believes that its
long-term liquidity needs, principally for continuing investment in capitalized
software development costs, can be funded from operations and current credit
facilities. Historically, the Company has been able to negotiate capital leases
for its acquisition of equipment.
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. 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
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.
Group 1 Software, Inc.
Date: August 14, 1997
/s/ Mark Funston
Mark Funston
Chief Financial Officer
13
<PAGE> 1
EXHIBIT 11
GROUP 1 SOFTWARE, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
For the Three Month Period
Ended June 30,
--------------------------------
1997 1996
(FY98) (FY97)
------------- ------------
<S> <C> <C>
Net earnings (loss) $ (1,094) $ (169)
Primary earnings(loss) (A) (1,094) (169)
============= ============
Fully diluted earnings(loss) (B) (1,094) (169)
============= ============
Weighted average shares outstanding 4,314 4,293
Dilutive common stock equivalents for primary
earnings (loss) per share - - - - - -
------------- ------------
Weighted average shares and common equivalent
shares outstanding for primary earnings
(loss) per share (C) 4,314 4,293
============= ============
Additional equivalent shares assuming full dilution
- - - - - -
------------- ------------
Weighted average shares and common equivalent
shares for fully diluted earnings (loss) per (D)
share 4,314 4,293
============= ============
Earnings (loss) per share
Primary (A)/(C) $ (0.25) $ (0.04)
============= ============
Fully Diluted (1) (B)/(D) $ (0.25) $ (0.04)
============= ============
</TABLE>
(1) Not presented on the Consolidated Statements of Earnings because fully
diluted earnings loss per share had a differential less than 3% of primary
earnings loss per share.
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 950,000
<SECURITIES> 0
<RECEIVABLES> 30,900,000
<ALLOWANCES> 2,950,000
<INVENTORY> 0
<CURRENT-ASSETS> 35,065,000
<PP&E> 8,885,782
<DEPRECIATION> 5,513,782
<TOTAL-ASSETS> 68,862,000
<CURRENT-LIABILITIES> 32,571,000
<BONDS> 0
0
0
<COMMON> 43,000
<OTHER-SE> 27,881,000
<TOTAL-LIABILITY-AND-EQUITY> 68,862,000
<SALES> 11,870,000
<TOTAL-REVENUES> 11,870,000
<CGS> 5,977,000
<TOTAL-COSTS> 13,285,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 380,000
<INTEREST-EXPENSE> 208,000
<INCOME-PRETAX> 1,623,000
<INCOME-TAX> 529,000
<INCOME-CONTINUING> 1,094,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,094,000
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
