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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 June 30, 2002 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 |_|

Class
Common Stock, $.50 par value		 Shares Outstanding Effective
August 7, 2002
6,953,755

1

GROUP 1 SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)

  June 30,
2002
  March 31,
2002
 
  (Unaudited)      
ASSETS            
Current assets:    
   Cash and cash equivalents     $ 28,521   $ 22,936  
   Short-term investments, available-for-sale       23,095     24,669  
   Trade and installment accounts receivable, less    
      allowance of $1,967 and $2,058       13,113     17,551  
   Deferred income taxes       1,629     1,718  
   Prepaid expenses and other current assets       3,417     3,219  
 
 
 
Total current assets       69,775     70,093  
 
Installment accounts receivable, long-term       211     263  
Property and equipment, net       5,331     5,797  
Computer software, net       23,069     22,873  
Goodwill       12,707     12,686  
Other assets       173     167  
 
 
 
   Total assets     $ 111,266   $ 111,879  
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY    
Current liabilities:    
   Accounts payable     $ 1,534   $ 1,198  
   Current portion of notes payable and capital lease    
   obligation       3,302     3,496  
   Accrued expenses       5,998     5,857  
   Accrued compensation       4,655     3,732  
   Current deferred revenues       27,596     28,833  
 
 
 
Total current liabilities       43,085     43,116  
                 
Notes payable, net of current portion       722     3,630  
Deferred revenues, long-term       225     197  
Deferred income taxes       4,528     4,534  
 
 
 
Total liabilities       48,560     51,477  
 
 
 
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)       916     916  
Common stock $0.50 par value; 50,000 shares authorized;    
   6,946 and 6,918 shares issued and outstanding       3,473     3,459  
Additional paid in capital       33,329     33,079  
Retained earnings       29,862     28,903  
Accumulated other comprehensive income       (261 )   (1,368 )
Treasury stock, 622 and 620 shares, at cost       (4,613 )   (4,587 )
 
 
 
Total stockholders’ equity       62,706     60,402  
 
 
 
Total liabilities and stockholders’ equity     $ 111,266   $ 111,879  
 
 
 

See notes to consolidated financial statements.

2

GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

  For the Three Month Period
Ended June 30,
 
  2002
   2001
  
Revenue:            
   Software license and related revenue     $ 9,877   $ 7,160  
   Maintenance and services       13,502     13,687  
 
 
 
 
      Total revenue       23,379     20,847  
 
 
 
 
Cost of revenue:    
   Software license expense       4,071     2,515  
   Maintenance and service expense       4,274     6,101  
 
 
 
      Total cost of revenue       8,345     8,616  
 
 
 
 
Gross profit       15,034     12,231  
 
 
 
Operating expenses:    
   Research and development, net (see note 3)       2,742     2,401  
   Sales and marketing       7,510     7,397  
   General and administrative       3,330     2,776  
 
 
 
      Total operating expenses       13,582     12,574  
 
 
 
Income (loss) from operations       1,452     (343 )
 
Non-operating income:    
   Interest income       281     536  
   Interest expense       (130 )   (65 )
   Other non-operating income (expense)       (46 )   16  
 
 
 
      Total non-operating income       105     487  
 
 
 
      Income before provision for income taxes       1,557     144  
 
Provision for income taxes       584     58  
 
 
 
 
Net income       973     86  
 
Preferred stock dividend requirements       (14 )   (14 )
 
 
 
 
Net income available to common stockholders     $ 959   $ 72  
 
 
 
 
Basic earnings per share     $ 0.15   $ 0.01  
 
 
 
 
Diluted earnings per share     $ 0.14   $ 0.01  
 
 
 
 
Basic weighted average shares outstanding       6,308     6,174  
 
 
 
 
Diluted weighted average shares outstanding       6,943     6,884  
 
 
 

See notes to consolidated financial statements.

3

GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

  For the Three Month Period
Ended June 30,
 
  2002
   2001
  
Cash flows from operating activities:            
   Net income     $ 973   $ 86  
Adjustments to reconcile net income from    
   operations to net cash provided by operating activities:    
      Amortization expense       2,356     1,989  
      Depreciation expense       594     605  
      Provision for doubtful accounts       150     25  
      Deferred income taxes       80     (46 )
      Tax benefit from exercises of stock options       85     363  
      Foreign currency transaction (gain) loss       64     (18 )
   Changes in assets and liabilities:    
      Accounts receivable       4,478     5,854  
      Prepaid expenses and other current assets       (177 )   (167 )
      Other assets       (6 )   153  
      Deferred revenues       (1,357 )   (981 )
      Accounts payable       307     143  
      Accrued expenses and accrued compensation       972     (4,825 )
 
 
 
   Net cash provided by operating activities       8,519     3,181  
 
 
 
 
Cash flows from investing activities:    
      Purchases and development of computer software       (1,842 )   (2,157 )
      Purchases of property and equipment       (359 )   (415 )
      Purchases of marketable securities       (4,915 )   (9,150 )
      Sales of marketable securities       6,489     279  
      Payment for acquisitions, net of cash acquired       —     (4,782 )
 
 
 
      Net cash used in investing activities       (627 )   (16,225 )
 
 
 
 
Cash flows from financing activities:    
      Proceeds from exercise of stock options       153     462  
      Repayment of principal on long-term debt       (3,102 )   (32 )
 
 
 
      Net cash provided by (used in) financing activities       (2,949 )   430  
 
 
 
 
      Net increase (decrease) in cash and cash equivalents       4,943     (12,614 )
 
      Effect of exchange rate on cash and cash equivalents       642     (130 )
 
      Cash and cash equivalents at beginning of period       22,936     36,179  
 
 
 
      Cash and cash equivalents at end of period     $ 28,521   $ 23,435  
 
 
 
 
Supplemental disclosure of non-cash investing and financing    
activities:    
   Mature shares tendered in payment for stock option exercises     $ 26   $ 2,203  
 
 
 
   Note payable issues for acquisition     $ —   $ 5,991  
 
 
 

See notes to consolidated financial statements.

4

GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

  For the Three Month Period Ended
June 30,
 
  2002
   2001
  
Net income     $ 973   $ 86  
 
Foreign currency translation adjustments       1,107     (198 )
 
 
 
 
Comprehensive income (loss)     $ 2,080   $ (112 )
 
 
 

See notes to consolidated financial statements.

5

Group 1 Software, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

1. The consolidated financial statements for the three months ended June 30, 2002 and 2001 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 months ended June 30, 2002 are not necessarily indicative of the results for the year ending March 31, 2003. The information contained in the annual report on the Form 10-K for the year ended March 31, 2002, 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. Service revenue and service cost of revenue were each increased $123,000 in the quarter ended June 30, 2001.

3. Research and development expense, before the capitalization of computer software development costs, was $4,585,000 and $4,247,000 for the three months ended June 30, 2002 and 2001, respectively. Capitalization of computer software development costs for the three months ended June 30, 2002 and 2001 were $1,843,000 and $1,846,000, respectively.

4. Earnings per share

Basic earnings per share (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 dilutive common stock equivalents outstanding during the period. Potentially dilutive common stock equivalents consist of convertible preferred stock (computed using the if converted method) and stock options and warrants (computed using the treasury stock method). Potentially dilutive common stock equivalents are excluded from the computation if the effect is anti-dilutive.

Reconciliation of the shares used in the basic EPS calculations to the shares used in the diluted EPS calculation is as follows (in thousands):


  For the Three Month Period
Ended June 30,
 
  2002
   2001
  
Weighted average common shares outstanding-basic       6,308     6,174        
   Effect of dilutive securities:    
      Stock options and warrants       635     710        
 
 
 
Weighted average shares outstanding-diluted       6,943     6,884        
 
 
 

There were 750,000 and 811,000 additional potentially dilutive common stock option and warrants in the three months ended June 30, 2002 and 2001, respectively. There were additional potentially dilutive convertible securities of 71,000 in the three months ended June 30, 2002 and 2001 which were not included in the earnings per share calculation due to their anti-dilutive effect.

In August 2001, FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business. The provisions of this Statement will be effective for the Company’s fiscal year 2003. The adoption of this Statement is not expected to have a significant impact on the Company’s financial position and results of operations.

6

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds FAS 4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that Statement, FAS 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”, and FAS44, “Accounting or Intangible Assets of Motor Carriers”. SFAS 145 also amends FAS 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement additionally amends other existing authoritative pronouncements to make various technical corrections, clarify earnings, or describe their applicability under changed conditions. SFAS 145 is effective for fiscal years beginning after May 15, 2002 for FASB Statements No. 4, 44 and 64 and effective for transactions that occurred after May 15, 2002 for FASB Statement No. 13. Early application is encouraged.

In August 2002, the FASB issued SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities”. It addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and establishes that fair value is the objective for initial measurement of the liability. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. The new standard is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not believe that SFAS 146 will have a material effect on the Company’s financial position or results of operations.

5. Legal Contingencies

The Company is not a party to any legal proceedings, which in its belief, after review by the Company’s legal counsel, could have a material adverse effect on the consolidated financial position, cash flows or results of operations of the Company.

6. Segment Information

The following table presents certain financial information relating to each reportable se