<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 December 31, 1999 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 February 7, 2000
- - - ---------------------------- ----------------
Common Stock, $.50 par value 3,811,145
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
----------- ---------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 14,713 $ 13,378
Short-term investments 10,771 1,471
Trade and installment accounts receivable, less
allowance of $4,316 and $3,383 16,396 22,596
Deferred income taxes 3,451 3,039
Prepaid expenses and other current assets 3,380 3,149
-------- --------
Total current assets 48,711 43,633
Installment accounts receivable, long-term 1,392 2,221
Property and equipment, net 3,954 3,678
Computer software, net 21,651 22,559
Other assets 4,966 5,708
-------- --------
Total assets $ 80,674 $ 77,799
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,823 $ 2,136
Current portion of long-term debt 107 99
Accrued expenses 7,580 5,647
Accrued compensation 5,284 7,095
Current deferred revenues 22,523 20,863
-------- --------
Total current liabilities 37,317 35,840
Long-term debt, net of current portion 117 198
Deferred revenues, long-term 1,430 2,670
Deferred income taxes 2,674 3,670
-------- --------
Total liabilities 41,538 42,378
-------- --------
Commitments and contingencies
Stockholders' equity:
6% cumulative convertible preferred stock $0.25 par
value; 200 shares authorized; 48 shares issued and
outstanding 916 916
Common stock $0.50 par value; 14,000 shares authorized;
6,176 and 6,068 shares issued
and outstanding 3,088 3,034
Additional paid in capital 24,577 24,060
Retained earnings 12,617 9,451
Accumulated comprehensive income 33 14
Less treasury stock, 486 and 482 shares, at cost (2,095) (2,054)
-------- --------
Total stockholders' equity 39,136 35,421
-------- --------
Total liabilities and stockholders' equity $ 80,674 $ 77,799
======== ========
</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 Nine Month Period
Ended December 31, Ended December 31,
-------------------------- -------------------------
1999 1998 1999 1998
-------- --------- --------- ---------
Revenues:
<S> <C> <C> <C> <C>
Software license and related revenues $ 9,292 $ 9,377 $ 25,410 $ 21,082
Maintenance and services 10,951 8,599 30,860 23,384
-------- -------- -------- --------
Total revenue 20,243 17,976 56,270 44,466
-------- -------- -------- --------
Cost of revenue:
Software license expense 3,370 3,194 9,830 7,923
Maintenance and service expense 3,356 3,256 10,820 9,124
-------- -------- -------- --------
Total cost of revenue 6,726 6,450 20,650 17,047
-------- -------- -------- --------
Gross profit 13,517 11,526 35,620 27,419
Operating expenses:
Research and development 1,024 674 2,829 1,893
Sales and marketing 6,216 5,997 18,415 15,313
General and administrative 3,690 3,543 9,687 8,141
-------- -------- -------- --------
Total operating expenses 10,930 10,214 30,931 25,347
-------- -------- -------- --------
Income from operations 2,587 1,312 4,689 2,072
Non-operating income
Interest income 322 85 743 283
Interest expense (6) (36) (69) (63)
Other non-operating 28 (6) 21 (60)
-------- -------- -------- --------
Total non-operating income 344 43 695 160
-------- -------- -------- --------
Income from operations before provision for income taxes
and minority interest 2,931 1,355 5,384 2,232
Provision for income taxes 1,212 521 2,176 847
Minority interest in net income of consolidated
subsidiary --- --- --- 83
-------- -------- -------- --------
Net income 1,719 834 3,208 1,302
Preferred stock dividend requirements 14 14 14 72
-------- -------- -------- --------
Net income available to common stockholders $ 1,705 $ 820 $ 3,166 $ 1,230
======== ======== ======== ========
Basic earnings per share $ 0.30 $ 0.15 $ 0.56 $ 0.24
======== ======== ======== ========
Diluted earnings per share $ 0.28 $ 0.14 $ 0.55 $ 0.23
======== ======== ======== ========
Basic weighted average shares outstanding 5,658 5,579 5,610 5,156
======== ======== ======== ========
Diluted weighted average shares outstanding 5,922 5,697 5,730 5,257
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD
ENDED DECEMBER 31,
--------------------------
1999 1998
---------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 3,208 $ 1,302
Adjustments to reconcile net income from
Operations to net cash provided by operating activities:
Amortization expense 8,496 6,426
Depreciation expense 1,271 951
Provision for doubtful accounts 1,250 2,205
Net loss on disposal of assets 9 - - -
Deferred income taxes (1,409) 36
Minority interest in income of consolidated subsidiary --- 83
Changes in assets and liabilities:
Accounts receivable 5,788 4,191
Prepaid expenses and other current assets (229) 21
Other assets 139 160
Deferred revenues 413 (327)
Accounts payable (315) 4
Accrued expenses 102 (610)
-------- --------
Net cash provided by operating activities 18,723 14,442
-------- --------
Cash flows from investing activities:
Purchase and development of computer software (6,796) (5,282)
Purchase of property and equipment (1,721) (1,093)
Purchase of short-term investments (54,037) - - -
Sale of short-term investments 44,737 - - -
Purchase of minority interest - - - (454)
-------- --------
Net cash used in investing activities (17,817) (6,829)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 530 220
Repayment of long-term debt (73) (249)
Dividends paid on preferred stock (29) (89)
Repurchase of common stock --- (3,465)
Repurchase of preferred stock --- (675)
-------- --------
Net cash provided by (used in) financing activities 428 (4,258)
-------- --------
Net increase in cash and cash equivalents 1,334 3,355
Effect of exchange rate on cash and cash
equivalents 1 (24)
Cash and cash equivalents at beginning of
period 13,378 3,683
-------- --------
Cash and cash equivalents at end of period $ 14,713 $ 7,014
======== ========
</TABLE>
See notes to consolidated financial statements.
4
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Month Period For the Nine Month Period
Ended December 31, Ended December 31,
------------------------------------------ --------------------------------------
1999 1998 1999 1998
------------------ --------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net income $ 1,719 $ 834 $3,208 $ 1,302
Foreign currency translation adjustments (107) (31) 19 (10)
------------------ --------------------- ----------------- ------------------
Comprehensive income $ 1,612 $ 803 $3,227 $ 1,292
================== ===================== ================= ==================
</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 nine months ended
December 31, 1999 and 1998 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 and nine months ended
December 31, 1999 are not necessarily indicative of the results for the year
ending March 31, 2000. The information contained in the annual report on the
Form 10-K for the year ended March 31, 1999, should be referred to in connection
with the unaudited interim financial information.
2. 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.
3. Research and development expense, before the capitalization of computer
software development costs, amounted to approximately $8.0 million and $7.0
million for the nine months ended December 31, 1999 and 1998, respectively.
Capitalization of computer software development costs for the same nine month
periods were $5.2 million and $5.1 million respectively.
4. 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 (using the treasury stock
method). Potentially dilutive securities are excluded from the computation if
the effect is antidilutive.
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 Nine Month Period
December 31, Ended December 31,
---------------------------------------- --------------------------------------
1999 1998 1999 1998
---------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Weighted common shares outstanding - basic 5,658 5,579 5,610 5,156
Effect of dilutive securities:
Stock options 264 118 120 101
---------------- ------------------ --------------- ------------------
Weighted average shares outstanding-diluted 5,922 5,697 5,730 5,257
=============== ================== =============== ==================
</TABLE>
There were additional potentially dilutive convertible securities of 47,500 in
the three and nine months ended December 31, 1999, 47,500 in the three months
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ended December 31, 1998 and 112,300 in the nine months ended December 31, 1998,
which were not included in the earnings per share calculation due to their
anti-dilutive effect.
5. Legal Contingencies
The Company and certain of its directors have been named as defendants in a
purported shareholder class action filed on April 28, 1998 in the Court of
Chancery of the State of Delaware (CA. No. 16349), "Brickell Partners,
Individually and on Behalf of All Others Similarly Situated v. Robert S. Bowen,
et al". The suit alleges that in connection with the merger of Group 1 Software,
Inc. into COMNET Corporation ("COMNET") there were breaches of fiduciary duties
in that COMNET, as majority stockholder of Group 1 Software, Inc. "had greater
knowledge of Group 1 Software, Inc. than the public shareholders and has timed
the merger transaction to take advantage of Group 1 Software, Inc.'s increased
efficiency and prospects of profitability", to the unfair disadvantage of Group
1 Software, Inc.'s public shareholders. The Company believes that the complaint
is meritless and is pursuing dismissal of all the claims made by Plaintiff in
the lawsuit. The Company does not believe that the ultimate resolution of this
matter will have a material adverse effect on its financial position, results of
operations or cash flows.
6. Segment Information
The following table presents certain financial information relating to each
reportable segment:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- ------------------------
Segment Information (in thousands) 1999 1998 1999 1998
-------- -------- -------- --------
Revenue:
<S> <C> <C> <C> <C>
Marketing support software $ 12,973 $ 12,238 $ 37,443 $ 29,740
Electronic document composition software 7,270 5,738 18,827 14,726
-------- -------- -------- --------
Total revenue $ 20,243 $ 17,976 $ 56,270 $ 44,466
======== ======== ======== ========
Gross Profit:
Marketing support software $ 8,232 $ 8,003 $ 23,214 $ 18,939
Electronic document
Composition software 5,325 3,756 12,695 9,141
Other (40) (233) (289) (661)
-------- -------- -------- --------
Total Gross Profit $ 13,517 $ 11,526 $ 35,620 $ 27,419
======== ======== ======== ========
</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 marketing support software segment was $1.9 million
and $1.5 million for the three months ended December 31, 1999 and 1998,
respectively. For the nine months ended December 31, 1999 and 1998,
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amortization associated with the marketing support software segment was $4.2
million and $2.9 million, respectively. Amortization of capitalized software
associated with the electronic document composition software segment was $0.5
million for the three months ended December 31, 1999 and 1998. For the nine
months ended December 31, 1999 and 1998, amortization of capitalized software
associated with the electronic document composition software segment was $1.6
million and $1.5 million, respectively.
7. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
For the Nine Month Period
Ended December 31,
--------------------------------------------
1999 1998
------------------ -------------------
Non Cash Investing and Financing Activities:
<S> <C> <C>
Issuance of common and treasury stock for minority interest
Acquisition $ - - - $ 9,444
Excess of redemption value of preferred stock below carrying value $ - - - $ 1,254
</TABLE>
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 December 31, 1999 and 1998, the Company had revenues
of $20.2 million and $18.0 million, respectively. Net income available to common
stockholders for the three months ended December 31, 1999 was $1.7 million or
$0.28 per share compared with net income available to common stockholders of
$0.8 million or $0.14 per share in the same period in the prior year. For the
nine months ended December 31, 1999 and 1998, the Company's revenues were $56.3
million and $44.5 million, respectively. The Company's net income available to
common stockholders for the nine months ended December 31, 1999 was $3.2 million
or $0.55 per share compared with $1.2 million or $0.23 per share in the same
period the prior year. The increase in profitability for the latest fiscal 2000
three and nine month periods are primarily due to higher revenue in both of the
Company's operating segments.
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All of Group 1's operations are based in the two business segments defined as
marketing support software and electronic document composition software. Group 1
recognizes maintenance and enhancement revenue over the life of the service
agreement, usually one or two years. International revenues accounted for 16% of
Group 1's total revenue in the third quarter of fiscal 2000 and 15% in the third
quarter of fiscal 1999. International revenues accounted for 14% and 17% of
Group 1's total revenue for the nine months ended December 31, 1999 and 1998,
respectively. The decrease in international revenue as a percent of total
revenue for the quarter and nine month period is due to slightly lower European
sales of electronic document composition software combined with significantly
higher domestic revenue in both business segments.
Software license fees and related revenues of $9.3 million for the third fiscal
quarter of 2000 decreased 1% from the prior year period. As a percent of total
revenue, third quarter software licenses and related revenues were 46% in fiscal
2000 compared with 52% in fiscal 1999. For the nine month period, software
licenses and related revenues of $25.4 million were 21% above the prior year
period. The decrease in software license fees in the third quarter of fiscal
2000 was due to lower sales in the marketing support software segment partially
offset by higher sales of electronic document composition systems. The increase
for the nine month period ended December 31, 1999 was due to higher license
sales in both the marketing support segment and the electronic document
composition segment.
License fees from electronic document in systems increased 26% in the fiscal
third quarter over the same period the prior year. For the nine month period
ended December 31, 1999, electronic document systems license fees increased 24%
over the comparable period the prior year. The increase in sales for the three
and nine month period ended December 31, 1999 was due to higher domestic and
Latin American sales slightly offset by lower European sales.
For the quarter ended December 31, 1999, license fees from database marketing
products decreased by $1.1 million compared to the same period in the prior
year. For the nine month period ended December 31, 1999, database marketing
products license fees increased by $0.3 million over the same period in the
prior year. The decrease for the quarter was primarily due to lower sales of the
Geotax product.
The Company's mailing efficiency/data quality software license fees for the
third quarter of fiscal 2000 decreased 2% over the same period in the prior
year. For the nine month period ended December 31, 1999, mailing efficiency/data
quality software license fees increased 14% over the comparable period in the
prior year.
Maintenance and service revenue of $11.0 million for the third quarter of fiscal
2000 increased 27% over the prior year period. For the nine month period,
maintenance and service revenue of $30.9 million increased 32% over the same
period in the prior year. Maintenance and service revenue accounted for 54% and
55% of total revenue for the quarter and nine months ended December 31, 1999,
compared with 48% and 53% in the same periods in the prior year. Recognized
maintenance fees included in maintenance and service revenue, were $8.6 million
and $23.7 million for the quarter and nine months ended December 31, 1999,
increases of 25% and 34% over the comparable periods in the prior year. The
increase in revenue is due to the recognition of higher maintenance deferrals
based on higher aggregate sales from prior periods and from increased
maintenance renewals based on an increased installed customer
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base. Professional and educational service revenue of $2.3 million for the
quarter and $7.1 million for the nine months ended December 31, 1999, represent
7% and 26% over the comparable periods in the prior year. The increase in
service revenue is due to higher services associated with all of the Company's
product lines.
During the third quarter of fiscal 2000, total operating costs of $10.9 million
amounted to 54% of revenue compared with $10.2 million or 57% of revenue during
the same period in the prior year. For the nine months ended December 31, 1999,
total operating costs of $30.9 million were 55% of revenue as compared with
$25.3 million or 57% of revenue in the prior year.
The various components of operating expenses are discussed below.
Software license expense increased to $3.4 million for the three months ended
December 31, 1999, from $3.2 million in the prior year period, representing 36%
and 34% of software license fees and related revenue, respectively. For the nine
months ended December 31, 1999 and 1998 software license expense represented 39%
and 38% respectively of the software license fees and related revenue. The
increase in expense was due to higher amortization costs in the marketing
support segment.
Maintenance and service expense increased to $3.4 million in the current quarter
from $3.3 million in the comparable period in fiscal 1999, representing 31% and
38% of maintenance and service revenue. For the nine months ended December 31,
1999 and 1998, maintenance and service expense were $10.8 million and $9.1
million, respectively, representing 35% and 39%, respectively of maintenance and
service revenue. The decrease in expense as a percentage of revenue can be
attributed to higher maintenance and service revenue.
Included in maintenance and service expense discussed above are professional and
educational service costs of $1.8 million which were 76% of professional service
and education revenue for the third quarter compared with $1.7 million which
also represented 76% of professional service and educational revenue for the
comparable period in the prior year. For the nine month period ended December
31, 1999, professional and education service costs of $5.7 million were 79% of
professional service and education revenue compared with $4.3 million or 76% in
the comparable period of the prior year. The increase in expense as a percent of
revenue for the nine month period can be attributed to the increased use of high
cost third party vendors to perform services associated with the mailing
efficiency/data quality products.
Costs of maintenance were $1.6 million for the third fiscal quarter of 2000
representing 18% of maintenance revenue. Costs of maintenance for the same
quarter in the prior year were also $1.6 million representing 25% of maintenance
revenue. For the nine month period ended December 31, 1999, maintenance costs of
$5.2 million were 22% of maintenance revenue compared with $4.8 million or 27%
in the comparable period 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.
Research, development and indirect support expenses (after capitalization of
certain software development costs) totaled $1.0 million for the third fiscal
quarter of 2000 and $0.7 million for the same period of fiscal 1999,
representing 5% and 4% of revenue, respectively. These same expenses were $2.8
million and $1.9 million for the nine months ended December 31, 1999 and
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1998, which represented 5% and 4% of revenue, respectively. The Company expects
these costs to remain relatively constant as a percentage of revenue for the
foreseeable future.
Sales and marketing expenses totaled $6.2 million or 31% of revenue in the third
quarter of fiscal 2000 and $6.0 million or 33% in the prior year same period.
For the nine month period, sales and marketing expenses were $18.4 million or
33% and $15.3 million or 34% for fiscal 2000 and 1999, respectively. The
decrease in cost as a percent of revenue for the three and nine month periods
versus the prior year same period was primarily due to higher revenue.
General and administrative expenses were $3.7 million or 18% of total revenue
compared with $3.5 million or 20% of revenue for the three months ended December
31, 1999 and 1998, respectively. For the nine months ended December 31, 1999 and
1998, general and administrative expenses were $9.7 million or 17% of revenue
and $8.1 million or 18% of revenue, respectively.
Net non-operating income was $0.3 million for the quarter ended December 31,
1999 as compared with $43,000 for the same period in the prior year. For the
nine months ended December 31, 1999 and 1998, respectively, net non-operating
income was $0.7 million and $0.2 million, respectively. This increase represents
higher interest income generated from higher cash and short-term investment
balances in the current period compared to the same period of fiscal 1999.
The Company's effective tax rates were 40% and 38% for the nine month period
ended December 31, 1999, and 1998, respectively. The current year's rate is the
net effect of a 33% effective tax rate on foreign taxable income and a 46% rate
on domestic taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $11.4 million at December 31, 1999, as
compared with $7.8 million at March 31, 1999. The current ratio was 1.3 to 1 at
December 31, 1999 and 1.2 to 1 at March 31, 1999.
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 and requires Group
1 to maintain certain operating ratios. At December 31, 1999 and at March 31,
1999, there were no borrowings outstanding under the line of credit.
For the nine months ended December 31, 1999, net cash provided by operating
activities was $18.7 million. This amount included net income of $3.2 million
plus non-cash expenses of $9.6 million. Also included in cash provided by
operating activities was a $5.8 million decrease in accounts receivable, offset
by a $0.1 million increase in accrued expenses and $0.2 million provided by
other operating activities. The decrease in accounts receivable is due to
increased cash collections. Investment in purchased and developed software of
$6.8 million, and capital equipment of $1.7 million, in addition to the increase
of $9.3 million in short-term investments resulted in $17.8
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million used in investing activities. The $6.8 million dollar investment in
purchased and developed software included $1.2 million for the acquisition of a
source code license to a data quality system that was previously sold by Group 1
under a royalty arrangement. For the nine months ended December 31, 1999, $0.4
million was used in financing activities.
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 the 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 $3.1 million or
70%, of the installment receivables at December 31, 1999.
As of December 31, 1999, 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.
The Year 2000 Issue
The Year 2000 issue affects virtually all companies and organizations. Many
existing computer programs and digital systems used by, and sold by, Group 1
Software, use only two digits to identify a year in the date field, creating the
possibility of system malfunction after December 31, 1999.
In 1997, the Company formed two special task forces:
- - - - The first task force was established to identify and evaluate our internal
systems and applications that may be affected by the Year 2000 issue;
modify or replace those systems and applications so they will work properly
in the Year 2000, and communicate with our suppliers to make sure they are
prepared for the Year 2000.
- - - - The second task force was established to evaluate the products sold by us,
to ensure they will function as designed after the Year 2000.
The Company has identified and evaluated all of our systems and
applications that may be affected by the Year 2000 issue, and have developed
plans to ready these systems and applications for the century change.
Modification and replacement projects are currently under way. The Company
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<PAGE> 13
has completed upgrading and testing on its major finance, customer information
management and other critical systems for Year 2000 functionality. Other less
critical systems continue to be tested and upgraded as required. Current
releases of all products sold by the Company have been modified to ensure Year
2000 functionality. The costs of the readiness program for products and internal
systems are primarily costs of existing internal resources largely absorbed
within existing spending levels. These costs were incurred primarily in 1998 and
earlier years and were not broken out from other operating costs. No future
material product readiness costs are anticipated. Although the Company expects
to be Year 2000 ready when necessary, failure of the Company or significant key
suppliers or customers to be fully Year 2000 ready could potentially have a
material adverse impact on the results of the Company's operations. The Company
is currently evaluating contingency plans.
Legal Contingencies
The Company and certain of its directors have been named as defendants in a
purported shareholder class action filed on April 28, 1998 in the Court of
Chancery of the State of Delaware (CA. No. 16349), "Brickell Partners,
Individually and on Behalf of All Others Similarly Situated v. Robert S. Bowen,
et al". The suit alleges that in connection with the merger of Group 1 Software,
Inc. into COMNET there were breaches of fiduciary duties in that COMNET, as
majority stockholder of Group 1 Software, Inc. "had greater knowledge of Group 1
Software, Inc. than the public shareholders and has timed the merger transaction
to take advantage of Group 1 Software, Inc.'s increased efficiency and prospects
of profitability", to the unfair disadvantage of Group 1 Software, Inc.'s public
shareholders. The Company believes that the complaint is meritless and is
pursuing dismissal of all the claims made by Plaintiff in the lawsuit. The
Company does not believe that the ultimate resolution of this matter will have a
material adverse effect on its financial position, results of operations or cash
flows.
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. However, through
December 31, 1999, the Company's exposure was not material to the overall
financial statements taken as a whole. 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
13
<PAGE> 14
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.
14
<PAGE> 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
No filings on Form 8-K have been made during the quarter
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: February 14, 2000
/s/ Mark Funston
Mark Funston
Chief Financial Officer
16
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