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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cl/TwEiwY9n8aJz4PgSofBJELFRdJjPVWDRiY7Zay6OLuHaGHUIwd3g2QlmTWPPo iVOuT7CD2oKLiZsIBjXkAQ== 0001206774-04-000081.txt : 20040217 0001206774-04-000081.hdr.sgml : 20040216 20040217164525 ACCESSION NUMBER: 0001206774-04-000081 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GROUP 1 SOFTWARE INC CENTRAL INDEX KEY: 0000023055 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 520852578 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15255 FILM NUMBER: 04609503 BUSINESS ADDRESS: STREET 1: 4200 PARLIMENT PLACE STREET 2: SUITE 600 CITY: LANHAM STATE: MD ZIP: 20706-1860 BUSINESS PHONE: 3019180400 MAIL ADDRESS: STREET 1: 4200 PARLIAMENT PLACE, SUITE 600 STREET 2: 4200 PARLIAMENT PLACE, SUITE 600 CITY: LANHAM STATE: MD ZIP: 20706 FORMER COMPANY: FORMER CONFORMED NAME: COMNET CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER NETWORK CORP DATE OF NAME CHANGE: 19851117 10-Q 1 d13980.htm AutoCoded Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2003.

o Transition report pursuant to Section 13 or 15(d) of the Exchange act for the transition period from ____________ to ____________

Commission File Number: 0-6355

Group 1 Software, Inc.
(Exact name of small business issuer as specified in its charter)

Delaware		52-0852578
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4200 Parliament Place, Suite 600, Lanham, MD		20706-1860
(Address of principal executive offices)		(Zip Code)

(301) 918-0400
(Issuer’s telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. xYes o No

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Shares Outstanding Effective
February 6, 2003
15,176,765

Class
Common Stock, $.50 par value

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


	December 31, 2003			March 31, 2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	50,685		$	56,475
Short-term investments, available-for-sale		7,801			7,712
Trade and installment accounts receivable, less
allowance of $2,561 and $ 1,755		22,963			18,834
Deferred income taxes		1,886			2,130
Prepaid expenses and other current assets		4,335			4,067

Total current assets		87,670			89,218
Installment accounts receivable, long-term		11			39
Property and equipment, net		5,723			4,707
Computer software, net		25,458			23,490
Goodwill		24,287			12,716
Other assets		6,025			206

Total assets	$	149,174		$	130,376

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,926		$	1,358
Current portion of note payable and capital lease obligations
		457			371
Accrued expenses		10,720			7,033
Accrued compensation		8,093			9,454
Current deferred revenues		35,938			31,241

Total current liabilities		57,134			49,457
Note payable and capital lease obligations, net of current portion		443			350
Deferred revenues, long-term		1,863			315
Deferred income taxes		4,104			4,694

Total liabilities		63,544			54,816

Commitments and contingencies
Stockholders’ equity:
6% cumulative convertible preferred stock $0.25 par
value; 1,200 shares authorized; none issued		— — —			— — —
Common stock $0.50 par value; 200,000 and 50,000 shares authorized; 15,156 and 14,902
shares issued		7,578			7,451
Additional paid in capital		37,309			34,951
Retained earnings		43,200			37,619
Accumulated other comprehensive income		2,636			184
Treasury stock, 1,271 and 1,246 shares, at cost		(5,093	)		(4,645	)

Total stockholders’ equity		85,630			75,560

Total liabilities and stockholders’ equity	$	149,174		$	130,376

See notes to consolidated financial statements

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

	For the Three Month Period Ended December 31,						For the Nine Month Period Ended December 31,
	2003			2002			2003			2002
Revenue:
Software license and related revenue	$	14,198		$	12,525		$	35,507		$	33,731
Maintenance and services		17,124			14,165			45,304			41,358

Total revenue		31,322			26,690			80,811			75,089

Cost of revenue:
Software license expense		4,038			3,379			11,024			11,213
Maintenance and service expense		4,821			4,302			13,332			12,681

Total cost of revenue		8,859			7,681			24,356			23,894

Gross profit		22,463			19,009			56,455			51,195

Operating expenses:
Research and development, net (see note 5)		5,228			3,032			10,952			8,586
Sales and marketing		11,107			8,464			27,037			23,712
General and administrative		4,579			3,999			11,104			10,868

Total operating expenses		20,914			15,495			49,093			43,166

		1,549			3,514			7,362			8,029
Income from operations

Other income:
Interest income		187			276			1,008			879
Interest expense		(6	)		(97	)		(31	)		(289	)
Other income (expense)		(141	)		(31	)		352			(222	)

Total other income		40			148			1,329			368

Income before provision for income taxes		1,589			3,662			8,691			8,397
Provision for income taxes		613			1,321			3,110			3,112

Net income;		976			2,341			5,581			5,285

Preferred stock dividend requirements		— — —			(14	)		— — —			(42	)

Net income available to common stockholders	$	976		$	2,327		$	5,581		$	5,243

Basic earnings per share	$	0.07		$	0.18		$	0.40		$	0.41

Diluted earnings per share	$	0.06		$	0.16		$	0.35		$	0.37

Basic weighted average shares outstanding		13,865			13,182			13,800			12,858

Diluted weighted average shares outstanding		15,766			14,959			15,821			14,376

See notes to consolidated financial statements.

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

	For the Nine Month Period Ended December 31,
	2003			2002
Cash flows from operating activities:
Net income	$	5,581		$	5,285
Adjustments to reconcile net income from
operations to net cash provided by operating activities:
Amortization expense		7,364			7,013
Depreciation expense		1,394			1,637
Provision for doubtful accounts		(359	)		575
Deferred income taxes		(342	)		(73	)
Net gain on sale of intellectual property and other property and equipment		(346	)		— — —

Tax benefit from exercises of stock options		908			1,138
Foreign currency transaction loss		151			228
Compensation expense for warrants issued		10			— — —
Changes in assets and liabilities:
Accounts receivable		1,924			(2,481	)
Prepaid expenses and other current assets		458			(958	)
Other assets		(495	)		(26	)
Deferred revenues		(2,760	)		1,423
Accounts payable		662			(330	)
Accrued expenses and accrued compensation		(3,452	)		3,910

Net cash provided by operating activities		10,698			17,341

Cash flows from investing activities:
Purchases and development of computer software		(5,515	)		(5,868	)
Purchases of property and equipment		(2,186	)		(1,187	)
Payment for acquisition, net of cash acquired		(11,472	)		— — —
Purchases of marketable securities		(31,963	)		(15,279	)
Sales of marketable securities		31,873			26,798
Proceeds from sale of intellectual property		375			— — —

Net cash (used in) provided by investing activities		(18,888	)		4,464

Cash flows from financing activities:
Proceeds from exercise of stock options		1,118			2,721
Repayment of principal on long-term debt		(56	)		(6,027	)
Dividends paid		— — —			(28	)

Net cash provided by (used in) financing activities		1,062			(3,334	)

Net (decrease) increase in cash and cash equivalents		(7,128	)		18,471
Effect of exchange rate on cash and cash equivalents		1,338			743
Cash and cash equivalents at beginning of period		56,475			22,936

Cash and cash equivalents at end of period	$	50,685		$	42,150

Supplemental disclosure of non-cash investing and financing activities:
Mature shares tendered in payment for stock option exercises	$	51		$	26
See notes to consolidated financial statements.

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

	For the Three Month Period Ended December 31,				For the Nine Month Period Ended December 31,
	2003		2002		2003		2002
Net income	$	976	$	2,341	$	5,581	$	5,285
Foreign currency translation
adjustments		1,455		143		2,452		1,561

Comprehensive income	$	2,431	$	2,484	$	8,033	$	6,846

See notes to consolidated financial statements.

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

1. The consolidated financial statements for the three and nine months ended December 31, 2003 and 2002 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 nine months ended December 31, 2003 are not necessarily indicative of the results for the year ending March 31, 2004. The information contained in the annual report on the Form 10-K for the year ended March 31, 2003, should be referred to in connection with the unaudited interim financial information.

2. On December 10, 2002, under authorization of the Board of Directors the Company moved to redeem all of the outstanding 6% cumulative convertible preferred stock. On January 15, 2003, the holders of all 47,500 shares outstanding elected to exchange their preferred shares for 142,500 common shares in accordance with the conversion provision of the preferred stock.

3. On November 5, 2002, the Board of Directors declared a two-for-one common stock split for stockholders of record as of November 15, 2002. There was no change in the par value of the stock as a result of the split. The additional shares were issued on December 2, 2002. The effect of the stock split has been retroactively reflected in the consolidated financial statements for all periods presented.

4. Certain prior period amounts have been reclassified to conform to current period presentation.

5. Research and development costs, before the capitalization of computer software development costs, were $6,476,000 and $5,003,000 for the three months ended December 31, 2003 and 2002, respectively. Capitalization of computer software development costs for the three months ended December 31, 2003 and 2002 were $1,248,000 and $1,971,000, respectively. Research and development costs, before the capitalization of computer software development costs, were $15,885,000 and $14,263,000 for the nine months ended December 31, 2003 and 2002, respectively. Capitalization of computer software development costs for the nine months ended December 31, 2003 and 2002 were $4,933,000 and $5,677,000, respectively. Amortization expense related to developed and acquired software costs was $2,110,000 and $2,117,000 in the three months ended December 31, 2003 and 2002, respectively and $6,587,000 and $6,313,000 in the nine months ended December 31, 2003 and 2002, respectively.

6. 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 December 31,				For the Nine Month Period Ended December 31,
	2003		2002		2003		2002
Weighted average common shares outstanding-basic
		13,865		13,182		13,800		12,858
Effect of dilutive securities:
Stock options and warrants		1,901		1,635		2,021		1,376
Convertible Securities		— — —		142		— — —		142

Weighted average shares
outstanding-diluted		15,766		14,959		15,821		14,376

There were 203,000 additional potentially dilutive common stock options or warrants in the three months ended December 31, 2003. There were 57,000 additional potentially dilutive common stock options or warrants in the nine months ended December 31, 2003. There were 11,000 and 814,000 additional potentially dilutive common stock options and warrants in the three and nine months ended December 31, 2002.

The Company accounts for its stock based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees” as interpreted by FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, and Interpretation of APB Opinion No. 25,” (FIN 44) and present the pro forma disclosures required by Statement of Financial Accounting Standard No. 123, “Accounting for Stock Based Compensation” (SFAS 123) as amended by Statement of Financial Accounting Standard No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure” (SFAS 148).

The Company accounts for the activity under the Plans in accordance with APB 25. Accordingly, no compensation expense has been recognized for the Plans. If compensation expense had been determined based on the fair value of the options at the grant dates consistent with the method of accounting under SFAS No. 123, the Company’s net income and earnings per share would have decreased or increased to the pro forma amounts indicated below (in thousands, except per share amounts):

	Three Months ended December 31,						Nine Months Ended December 31, 2002
	2003			2002			2003			2002
Net income available to common stockholders
as reported	$	976		$	2,327		$	5,581		$	5,243
Add: stock-based employee compensation expense included in reported
net income		— — —			— — —			— — —			— — —
Deduct: total stock-based employee compensation expense determined
under fair value based method for all awards		(1,293	)		(487	)		(3,456	)		(2,118	)

Pro forma net income (loss) available to
common stockholders	$	(317	)	$	1,840		$	2,125		$	3,125

Earnings (loss) per share
Basic, as reported	$	0.07		$	0.18		$	0.40		$	0.41

Basic, pro forma	$	(0.02	)	$	0.14		$	0.15		$	0.24

Diluted, as reported	$	0.06		$	0.16		$	0.35		$	0.37

Diluted, pro forma	$	(0.02	)	$	0.12		$	0.13		$	0.22

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the three months ended December 31, 2003 and 2002, respectively: dividend yield of 0%, expected volatility of 83% and 104%, a risk-free interest rate of 2.66% and 2.98% and

an expected term of 4.02 years for both periods. For the nine months ended December 31, 2003 and 2002, the following weighted-average assumptions were used: dividend yield of 0%, expected volatility of 83% and 104%, a risk-free interest rate of 3.25% and 4.04% and an expected term of 4.02 years.

7. Recent Accounting Pronouncements

In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this standard did not have a material impact on the Company’s financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2003. The adoption of this Statement did not have a material impact on the Company’s financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. The adoption of FIN 46 did not have a material effect on the Company’s financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after December 31, 2003, except in certain circumstances, and for hedging relationships designated after December 31, 2003. The Company does not expect that the adoption of this standard will have a material effect on its financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The adoption of this standard did not have a material effect on the Company’s financial position or results of operations.

8. 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.

9. Segment Information

The following table presents certain financial information relating to each reportable segment:

	Three Months Ended December 31,				Nine Months Ended December 31,
Segment Information (in thousands)	2003		2002		2003		2002
Revenue:
Enterprise Solutions	$	24,168	$	18,176	$	59,433	$	51,218
DOC1		7,154		8,514		21,378		23,871

	$	31,322	$	26,960	$	80,811	$	75,089

Gross Profit:
Enterprise Solutions	$	18,718	$	13,731	$	45,138	$	36,739
DOC1		3,745		5,278		11,317		14,456

Total Gross Profit	$	22,463	$	19,009	$	56,455	$	51,195

Amortization of capitalized developed and acquired software associated with the Enterprise Solutions segment was $1,100,000 and $1,356,000 in the three months and $3,681,000 and $4,079,000 in the nine months ended December 31, 2003 and 2002, respectively. Amortization of capitalized developed and acquired software associated with the DOC1 segment was $1,010,000 and $761,000 in the three months and $2,906,000 and $2,234,000 in the nine months ended December 31, 2003 and 2002.

As of December 31, 2003 and March 31, 2003, the Company determined that the identifiable assets for its reportable segments were as follows (in thousands):


	December 31, 2003		March 31, 2003
Enterprise Solutions	$	63,879	$	39,075
DOC1		34,340		32,039
Corporate		50,955		59,262

Total assets	$	149,174	$	130,376

The changes in the carrying amount of goodwill for the three months ended December 31, 2003 for each reportable segment were as follows (in thousands):


	Enterprise Solutions			DOC1
Balance as of March 31, 2003	$	4,497		$	8,219
Goodwill acquired		11,306			— — —
Effect of sale of intellectual property		(8	)		— — —
Effect of currency translation on goodwill		232			41

Balance as of December 31, 2003	$	16,027		$	8,260

10. Business Combinations

On October 1, 2003, Group 1 Software, Inc., a Delaware corporation (“Group 1”), and Sagent Technology, Inc., a Delaware corporation (“Sagent”), consummated the transaction contemplated in the Agreement for the Purchase and Sales of Assets dated April 15, 2003 (the “APA”). Pursuant to the APA, Group 1 has purchased specifically identified assets and assumed specifically identified liabilities of Sagent (the “Purchase”) as of October 1, 2003. In consideration for the Purchase, Group 1 has delivered $6,000,000 in cash, forgiven $7,000,000 in debt and will deliver approximately $1,850,000, plus interest, in cash at a future date in accordance with the APA. The cash consideration for the acquisition was paid from Group 1’s working capital and it is anticipated that future payments will also be made from working capital.

Under the purchase method of accounting the purchase price is allocated to assets acquired, including identifiable intangible assets, and liabilities assumed based on their respective fair values on the acquisition date. Purchase price in excess of net tangible and identifiable intangible assets has been recorded as goodwill.

The Sagent assets include: the Data Flow product for data extraction, transformation and loading (ETL), the Centrus products for business geographics applications as well added distribution capabilities.

The total purchase price of Sagent assets of approximately $16,326,000, consisting of $6,000,000 paid in cash, $7,000,000 debt forgiveness, an additional $1,850,000 to be paid in cash at a future date, acquisition costs of $1,476,000 and net liabilities assumed of $2,540,000 was preliminarily allocated as follows (in thousands):



Tangible assets	$	11,840
Liabilities assumed		(14,380	)

Net liabilities assumed	$	(2,540	)

Intangible assets:
Computer software		2,000
Goodwill		11,306
Trademarks		1,500
Distribution network		860
Contractual customer relationships		3,200

Total intangible assets	$	18,866

Total purchase price	$	16,326

Computer software will be amortized over 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 the product or (b) the straight-line method over the estimated economic life of five years. Goodwill and trademarks will not be amortized. Other intangibles will be amortized over their estimated useful lives of six to ten years.

The following unaudited pro forma consolidated results of operations give effect to the Purchase as if it had been consummated at the beginning of the fiscal years presented. The unaudited pro forma data gives effect to actual operating results prior to the October 1, 2003 acquisition, adjusted to include the pro forma effect of amortization of intangibles, interest income and tax effects to the pro forma adjustments. The accounting policies of Group 1 and Sagent are substantially comparable. Sagent’s fiscal year end is December 31.

(thousands, except per share data)	Three Months Ended December 31,				Nine Months Ended December 31,
	2003		2002		2003		2002
Revenue	$	31,322	$	35,006	$	95,867	$	100,969
Net income (loss) available to common shareholders	$	976	$	279	$	3,713	$	(6,610	)
Diluted earnings (basic and diluted loss) per share	$	0.06	$	0.02	$	0.23	$	(0.46	)
Weighted average shares outstanding		15,766		14,959		15,821		14,376

The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each of the periods presented, nor are they necessarily indicative of future consolidated results.

11. Acquired Intangible Assets (in thousands)


	Gross Carrying Amount as of December 31, 2003		Accumulated Amortization as of December 31, 2003
Amortized acquired intangible assets:
Computer software	$	10,693	$	7,121
Distribution network	$	860	$	22
Contractual customer relationships	$	3,200	$	128

Unamortized acquired intangible assets:
Goodwill	$	26,646	$	2,359
Trademarks	$	1,500		— — —

The aggregate amortization expense for the three and nine months ended December 31, 2003 and 2002 was $557,000 and $1,994,000 respectively. The following table summarizes aggregate amortization expense for each of the five succeeding fiscal years (in thousands):



For year ending March 31, 2005	$	2,275
For year ending March 31, 2006	$	2,255
For year ending March 31, 2007	$	1,697
For year ending March 31, 2008	$	1,088
For year ending March 31, 2009	$	881

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 may include words such as “may vary”, “believes”, “anticipates” and “expects”. Actual results may differ materially from the expectations expressed or implied in the forward-looking statements. 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 other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statement.

For the three months ended December 31, 2003 and 2002, the Company had revenues of $31.3 million and $26.7 million, respectively. Net income available to common stockholders for the three months ended December 31, 2003 was $1.0 million or $0.06 diluted earnings per share compared with $2.3 million or $0.16 diluted earnings per share in the same period in the prior year. The decrease in earnings for the three month period is primarily due to lower margins in the DOC 1 segment due to lower revenue along with one time costs associated with the Sagent acquisition. Revenues were $80.8 million and $75.1 million for the nine months ended December 31, 2003 and 2002, respectively. Net income available to common stockholders was $5.6 million or $0.35 diluted earnings per share and $5.2 million or $0.37 diluted earnings per share in the nine months ended December 31, 2003 and 2002, respectively.

All of Group 1‘s operations are based in the two business segments defined as Enterprise Solutions and DOC1. Enterprise Solutions revenue accounted for 77% and 68% of Group 1‘s total revenue for the third fiscal quarters ended December 31, 2003 and 2002, respectively. DOC1 revenue was 23% and 32% of total revenue for the third quarters of fiscal 2004 and fiscal 2003, respectively. For the nine months ended December 31, 2003 and 2002, Enterprise Solutions revenue was 74% and 68% of total revenue and DOC1 revenue was 26% and 32% of total revenue, respectively. All revenues associated with the recently acquired Sagent products are included in the Enterprise Solutions segment (see Note 10).

International revenues were 15% and 17% of Group 1‘s total revenue in the third quarters of fiscal 2004 and 2003, respectively. International revenues were 14% and 16% of total revenue in the first nine months of fiscal 2004 and 2003, respectively. The decrease in international revenue as a percent of total revenue is primarily due to a decrease in Latin American revenue.

Software license and related revenue of $14.2 million for the third fiscal quarter of 2004 increased 13% from $12.5 million the same period the prior year. As a percent of total revenue, third quarter software license and related revenues were 45% in fiscal 2004 compared with 47% in fiscal 2003. Software license and related revenue was $35.5 million for the nine months ended December 31, 2003, or 44% of revenue and $33.7 million or 45% of revenue in the prior year nine month period.

Enterprise Solutions license revenue increased 36% to $11.9 million in the three month period ended December 31, 2003. Enterprise Solutions license revenue was $28.6 million and $23.7 million in the nine month periods ended December 31, 2003 and 2002, respectively. The increase in the quarter is due to revenue from the recently acquired Sagent products along with higher sales of the Company’s GeoTAX tax jurisdiction software offset by lower sales of Code 1 Plus and Canadian Code 1 Plus.

License fees from DOC1 for the three months ended December 31, 2003 were $2.3 million compared with $3.8 million the prior year. DOC1 license revenue was $6.9 million and $10.0 million for the nine months ended December 31, 2003 and 2002, respectively. The decrease in DOC1 license revenue was due to lower domestic and Latin American sales.

Maintenance and service revenue was $17.1 million for the third quarter of fiscal year 2004 and $14.2 million in the prior year’s third fiscal quarter. Maintenance and service revenue was 55% of total revenue for the quarter ended December 31, 2003 and 53% of total revenue in the same period in the prior year. Maintenance and service revenue was $45.3 million, 56% of total revenue, for the first nine months of fiscal year 2004 and $41.4 million, 55% of total revenue, in the prior year’s nine month period. Recognized maintenance fees included in maintenance and service revenue were $14.3 million for the quarter ended December 31, 2003 and $11.6 million for the same period the prior year, an increase of 23%. Recognized maintenance fees included in maintenance and service revenue were $37.9 million for the nine months ended December 31, 2003 and $33.9 million for the same period the prior year, an increase of 12%.

For the quarter ended December 31, 2003, Enterprise Solutions recognized maintenance was $10.9 million, a 26% increase from the same period in the prior year. DOC1 recognized maintenance increased 13% to $3.4 million in the quarter ended December 31, 2003 compared with the comparable period the prior year. For the nine months ended December 31, 2003 and 2002, Enterprise Solutions recognized maintenance was $27.6 million and $25.3 million, respectively. DOC1 recognized maintenance was $10.3 million and $8.6 million in the nine months ended December 31, 2003 and 2002, respectively. The increase in maintenance revenue in DOC1 was due to the increase in the installed customer base. The increase in maintenance revenue in Enterprise Solutions for the three and nine month periods ended December 31, 2003 is due to the Sagent acquisition.

Professional and educational service revenue from the Enterprise Solutions segment was $1.4 million and $0.9 million in the three months ended December 31, 2003 and 2002, respectively. Enterprise Solutions service revenue was $3.2 million and $2.2 million in the nine months ended December 31, 2003 and 2002, respectively. DOC1 service revenue decreased to $1.4 million in the quarter ended December 31, 2003 from $1.7 million in the same period of the prior fiscal year. DOC1 service revenue was $4.2 million and $5.3 million in the nine months ended December 31, 2003 and 2002, respectively. The decrease in professional and educational service revenue in DOC1 in the three and nine month period is due to lower sales of new installations which require integration services.

Total cost of revenue for the third quarter of fiscal 2004 and 2003 was $8.9 million and $7.7 million, respectively. For the first nine months of fiscal 2004 and 2003, total cost of revenue was $24.4 million and $23.9 million. The separate components of cost of revenue are discussed below.

Software license expense increased for the three month period ended December 31, 2003 to $4.0 million from $3.4 million for the same period in the prior year representing 28% and 27% of software license and related revenues, respectively. Software license expense was $11.0 million and $11.2 million in the nine months ended December 31, 2003 and 2002, representing 31% and 33% of software license and related revenue in both respective periods. The increase in software license expense in the current quarter is primarily due to increases in royalty costs associated with increased sales of the Company’s GeoTAX product and the expense of certain third party inventory made redundant by the acquisition of the Sagent products.

Maintenance and service expense was $4.8 million in the current quarter and $4.3 million in the prior year third quarter, representing 28% and 30% of maintenance and service revenue, respectively. Maintenance and service expense was $13.3 million and $12.7 million in the nine months ended December 31, 2003 and 2002, or 29% and 31% of maintenance and service revenue, respectively.

Included in maintenance and service expense discussed above are professional and educational service costs which were $2.6 million and $2.5 million in the three month periods ended December 31, 2003 and 2002, respectively. Professional and educational service costs were $7.2 million and $7.1 million in the nine month periods ended December 31, 2003 and 2002 respectively.

Costs of maintenance were $2.2 million and $1.8 million for the third fiscal quarters of 2004 and 2003, representing 15% and 16% of maintenance revenue, respectively. Costs of maintenance were $6.1 million and $5.6 million for the first nine months of fiscal 2004 and 2003, 16% and 17% of maintenance revenue, respectively.

Total operating costs of $20.9 million amounted to 67% of revenue for the quarter ended December 31, 2003 compared with $15.5 million or 58% of revenue for the prior year period. Total operating costs of $49.1 million were 61% of revenue for the nine months ended December 31, 2003 compared with $43.2 million or 57% 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.

Costs of research and development, before capitalization, were $6.5 million and $5.0 million or 21% and 19% of revenue in the quarters ended December 31, 2003 and 2002, respectively. Costs of research and development, before capitalization, were $15.9 million and $14.3 million, 20% and 19% of revenue in the nine months ended December 31, 2003 and 2002, respectively. Total research and development expense after capitalization of certain development costs was $5.2 million or 17% of revenue for the three month period ended December 31, 2003 compared with $3.0 million or 11% in the prior year (see footnote 5 of notes to consolidated financial statements). The increase in research and development costs are attributed to higher costs associated with the Sagent asset acquisition. Amortization expense related to developed and acquired software costs was $2.1 million in both three month periods ended December 31, 2003 and 2002, and $6.6 million and $6.3 million in the nine months ended December 31, 2003 and 2002, respectively.

Sales and marketing expenses totaled $11.1 million or 35% of revenue in the third quarter of fiscal 2004 and $8.5 million or 32% in the prior year third quarter. Sales and marketing expenses totaled $27.0 million or 33% of revenue in the first nine months of fiscal 2004 and $23.7 million or 32% in the prior year same period. Sales and marketing expenses for Enterprise Solutions were 33% of Enterprise Solutions revenue in the third fiscal quarter of 2003 and 27% for the same period the prior year. In the first nine months of fiscal 2004 and 2003, Enterprise Solutions sales and marketing expenses were 29% and 27% of the segment’s revenue. DOC1 sales and marketing expenses were 45% of DOC1 revenue for the third fiscal quarter of 2003 and 41% for the same period the prior year. DOC1 sales and marketing expenses were 46% and 41% of DOC1 revenue in the first nine months of fiscal 2004 and 2003, respectively. The increase in the Enterprise Solutions segment is due to additional sales costs associated with the Sagent acquisition along with higher costs related to additional sales personnel. The increase in cost as a percent of revenue in the DOC1 segment is due primarily to lower revenues.

General and administrative expenses were $4.6 million or 15% of total revenue compared with $4.0 million or 15% of revenue for the three months ended December 31, 2003 and 2002, respectively. General and administrative expenses were $11.1 million or 14% of total revenue compared with $10.9 million or 14% of revenue for the nine months ended December 31, 2003 and 2002, respectively. The increase in general and administrative expenses in the quarter and nine months is primarily related to higher one time personnel costs associated with the Sagent acquisition.

Net other income was $40,000 for the quarter ended December 31, 2003 as compared with $148,000 for the same period in the prior year. For the nine months ended December 31, 2003 and 2002, net other income was $1.3 million and $0.4 million, respectively. The decrease in other income in the current year quarter is due to net currency translation loss in the current quarter. The increase in other income in the current year nine-month period is the result of net currency translation gains and a gain on the sale of intellectual property, in addition to interest income from the bridge loan to Sagent.

The Company’s effective tax rates were 38.6% and 36.0% for the three month periods ended December 31, 2003 and 2002, respectively. The current period’s rate is the net effect of a 33% effective tax rate on domestic taxable income offset by a 15% benefit on foreign losses. The higher effective tax rate in the current quarter is primarily due to the lower effective rate on higher foreign losses.

Critical Accounting Policies

The Securities and Exchange Commission issued Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FR 60”), in December 2001. FR 60 requires companies to disclose those accounting policies considered most critical. Note 1 to the audited financial statements in the Company’s annual report on Form 10-K for the year ended March 31, 2003 includes a summary of the Company’s significant accounting policies. Of those policies, the Company has identified the following as the most critical because they require significant judgment and estimates on the part of management in their application:

Revenue Recognition: Revenues are primarily derived from the sale of software licenses and from the sale of related services, which include maintenance and support, consulting and training services. Revenues from license arrangements are recognized upon delivery of the product when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. If the agreement includes acceptance criteria, revenue is not recognized until the Company can demonstrate that the software or service can meet the acceptance criteria. If an ongoing vendor obligation exists under the license arrangement, revenue is deferred based on vendor-specific objective evidence of the undelivered element. If vendor-specific objective evidence does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered. Revenues from annual maintenance and support are deferred and recognized ratably over the term of the contract. Revenues from consulting and training services are deferred and recognized when the services are performed and collectibility is deemed probable.

Contracts for professional services are negotiated individually. The Company generally recognizes revenues from professional service contracts on a time and materials basis as the work is performed. Revenues from fixed price professional service contracts are recognized using the percentage-of-completion method as work is performed, measured primarily by the ratio of labor hours incurred to total estimated labor hours for each specific contract. When the total estimated cost of a contract is expected to exceed the contract price, the total estimated loss is charged to expense in the period when the information is known. During the three months ended December 31, 2003, the Company has not incurred any losses on contracts in progress.

Revenue from arrangements where the Company provides Web based services is recognized over the contract period. Any fees paid or costs incurred prior to the customer relationship period, such as license fees, consulting, customization or development services, are deferred and recognized ratably over the subsequent contract period, which is typically one to two years.

Revenue from products licensed to original equipment manufacturers is recorded when products have been shipped and the appropriate documentation has been received by Group 1, provided all other revenue recognition criteria have been satisfied. Revenue from sales through value added resellers or distributors is recorded when a license agreement is signed with an end user.

Capitalized Software: In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. Software development costs capitalized include direct labor costs and fringe labor overhead costs attributed to programmers, software engineers, quality control and field certifiers working on products after they reach technological feasibility but before they are generally available to customers for sale. Capitalized costs are amortized over the estimated product life of three to five years, using the greater of the straight-line method or the ratio of current product revenues to total projected future revenues. 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.

Goodwill: In accordance with SFAS 142, “Goodwill and Other Intangible Assets”, the Company ceased amortization of goodwill as of April 1, 2001 and tested for impairment at least annually at the reporting unit level. Goodwill will be tested for impairment on an interim basis if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. In accordance with FAS 142 provisions, the Company completed the transitional and the annual goodwill impairment test as of April 1, 2001 and concluded that goodwill of its reporting units was not impaired. The Company also completed its annual goodwill impairment test for fiscal year 2004 and concluded that goodwill of its reporting units was not impaired.

Goodwill represents the excess of the aggregate purchase price over the fair market value of the tangible and intangible assets acquired in various acquisitions and, prior to fiscal year 2002, was amortized on a straight-line basis over the estimated economic useful life ranging from nine to fifteen years. There was no goodwill amortization expense during fiscal year 2004 and 2003 in accordance with SFAS Nos. 141 and 142, as discussed above.

Liquidity and Capital Resources

The Company’s working capital was $30.5 million at December 31, 2003, as compared with $39.8 million at March 31, 2003. The current ratio was 1.5 to 1 at December 31, 2003 and 1.8 to 1 at March 31, 2003. Note that the current portion of deferred revenue related to maintenance contracts is included in current liabilities. Accordingly, working capital and current ratios may not be directly comparable to such data for companies in other industries where similar revenue deferrals are not typical.

The Company provides for its funding 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, 2004. The line of credit bears interest at the bank’s prime rate or Libor plus 140 basis points, at Group 1‘s option. The line of credit is not collateralized but requires Group 1 to maintain certain operating ratios. At December 31, 2003 and at March 31, 2003, there were no borrowings outstanding under the line of credit.

During fiscal 2004 to date, net income of $5.6 million plus net non-cash expenses of $8.8 million less a $3.7 million net decrease in assets and liabilities provided a total of $10.7 million cash from operating activities. The net changes in assets and liabilities include a decrease in accounts receivable that increased cash by $1.9 million during the nine months resulting from an increase in cash collections, a decrease in deferred revenues by $2.8 million and a $3.5 million decrease in accrued expenses and compensation, decreasing cash by a total of $4.4 million. The decreased accrued compensation was due primarily to payments of prior year incentive compensation accruals. Other working capital items increased cash by $0.6 million.

Cash flows of $18.9 million used in investing activities consisted of expenditures for investments in software development and capital equipment of $7.7 million, net purchases of marketable securities of $0.1 million, proceeds of $0.4 million from the sale of intellectual property and net cash payments of $11.5 million related to the Sagent acquisition.

Proceeds from the exercise of stock options of $1.1 million net of repayments of long-term debt provided a total of $1.1 million cash from 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.

As of December 31, 2003, 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 currently planned, except for the continuing investment in software development costs, which the Company believes can be funded from operations during the next twelve months.

The following table lists the Company’s contractual obligations and commercial commitments (in thousands):


Contractual Obligations	Total Amount Committed		Less than 1 Year		1-3 Years		4-5 Years		Over 5 Years
Operating leases	$	29,866	$	4,338	$	7,314	$	5,237	$	12,977

Notes payable		650		300		350		— — —		— — —

Capital leases		99		50		49		— — —		— — —

Total contractual cash obligations	$	30,615	$	4,688	$	7,713	$	5,237	$	12,977

Recent Accounting Pronouncements

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.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The Company has subsidiaries in Europe and Southeast Asia. Additionally, the Company uses third party distributors to market and distribute its products in other international regions. Transactions conducted by the subsidiaries and distributors are typically denominated in the local country currencies. As a result, the Company is primarily exposed to foreign exchange rate fluctuations as the financial results of its subsidiaries 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. Through and as of December 31, 2003, however, the Company’s exposure was not material to the 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.

ITEM 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2003. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2003, our disclosure controls and procedures were (1) designed to ensure that material information relating to our Company, including our consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in internal controls. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

(a) Exhibits.

Exhibit 10.24 Amended and Restated Employment Agreement between Robert S. Bowen and Group 1 Software, Inc., dated as of July 17, 2000.

Exhibit 31.1 Certification of Robert S. Bowen, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2 Certification Mark Funston, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1 Certifications of Robert S. Bowen, Chief Executive Officer, and Mark Funston, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

Form 8-K filed January 29, 2004 for the press release regarding financial results for the period ended December 31, 2003.

Form 8-K filed January 16, 2004 for the press release regarding preliminary financial results for the period ended December 31, 2003.

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.

/s/ Robert S. Bowen
Chief Executive Officer
February 17, 2004

/s/ Mark Funston
Chief Financial Officer
February 17, 2004

EX-10.24 3 ex10_24.htm AutoCoded Document

Exhibit 10.24

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the “Agreement”) dated as of April 1, 2003, by and between Group 1 Software, Inc. (f/k/a COMNET Corporation), a Delaware corporation (“Group 1” or the “Company”), and ROBERT S. BOWEN (“Bowen”).

WHEREAS, Group 1 and Bowen entered into that certain Amended and Restated Employment Agreement, dated as of July 17, 2000; and

WHEREAS, Group 1 and Bowen wish to amend and restate the aforesaid July 17, 2000 Agreement, as set forth in its entirety, below.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto intending to be legally bound agree that the Agreement is hereby amended and restated in its entirety as follows:

1. Definitions. For purposes of this Agreement, the following terms shall be defined as set forth in this Section 1.

(a) “Board” shall mean the Board of Directors of Group 1.

(b) “Cause” shall mean (i) Bowen’s conviction of either a felony involving moral turpitude or any crime in connection with his employment by Group 1 which causes Group 1 or any affiliate a substantial detriment; or (ii) the willful and continued failure of Bowen to perform substantially his duties under this Agreement (other than any such failure resulting from Bowen’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Bowen by the Board which specifically identifies the manner in which the Board believes that Bowen has not substantially performed his duties, and he has not cured to the reasonable satisfaction of the Board any such failure that is capable of being cured in all material respects within ten (10) days of receiving such written demand or (iii) Bowen’s willful engaging in gross misconduct that is demonstrably and materially injurious to Group 1. For purpose of the preceding sentence, no act or failure to act by Bowen shall be considered “willful” unless done or omitted to be done by Bowen in bad faith and without his reasonable belief that his action or omission was in the best interests of Group 1. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, or based upon the advice of counsel for Group 1, shall be conclusively presumed to be done, or omitted to be done, by Bowen in good faith and in the best interests of Group 1. Cause shall not exist under clauses (ii) and (iii) above unless and until (A) the Board establishes by clear and convincing evidence that Cause exists, and (B) Group 1 has delivered to Bowen a copy of a resolution duly adopted by three-quarters (3/4) of the entire Board (excluding Bowen) at a meeting of the Board called and held for such purpose (after reasonable notice to Bowen and an opportunity for Bowen, together with counsel, to be heard by the Board), finding that in the good faith opinion of the Board an event set forth in clauses (ii) or (iii) has occurred and specifying the particulars thereof in detail. Group 1 must notify Bowen of any event constituting Cause within

ninety (90) days following Group 1‘s knowledge of its existence or such event shall not constitute Cause under this Agreement.

(i)

individuals who, on the date of this Agreement, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date of this Agreement, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies (or consents) by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;

(ii)

any “Person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”) and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)), or (E) pursuant to any acquisition by Bowen or any group of persons including Bowen (or any entity controlled by Bowen or any group of persons including Bowen);

(iii)

the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving

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the Company or any of its Subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 25% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction); or

(iv)

the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company’s assets.

Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 25% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting

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Securities beneficially owned by such person, a Change in Control of the Company shall then occur.

(d) “Consumer Price Index” shall mean the Consumer Price Index (All Urban Consumers – 1967 = 100) for the Washington Metropolitan Area, published by the United States Department of Labor, Bureau of Labor Statistics. If the Consumer Price Index shall be discontinued, there shall be substituted therefor the most nearly comparable index published by any governmental agency, or if no such index shall be available, then a comparable index published by a bank or other financial institution or by a universally recognized financial publication.

(e) “Date of Termination” means (i) the effective date on which Bowen’s employment by the Company terminates as specified in a prior written notice by the Company or Bowen, as the case may be, to the other, delivered pursuant to Section 14 or (ii) if Bowen’s employment with the Company terminates by reason of death, the date of death of Bowen.

(f) “Disability” shall mean any physical or mental disability which continuously disables and wholly prevents Bowen from performing his duties under this Agreement for a period of 180 consecutive days and which is expected to be of a permanent duration. The determination of whether Bowen is disabled shall be made by two duly licensed physicians, one chosen by the Board and one chosen by Bowen. In the event the two physicians are unable to agree with respect to whether Bowen is disabled, the determination of whether Bowen is disabled shall be made by a third duly licensed physician chosen by the two physicians; provided, that, Group 1 may not terminate Bowen’s employment as a result of a Disability unless it has first given Bowen notice of such termination and, within thirty (30) days after such notice is given, Bowen has not returned to the full-time performance of his duties.

(g) “Existing Businesses” shall mean any of Group 1‘s business operations as of, or directly related to those operations as of, the date of this Agreement.

(h) “Fiscal Year” shall mean Group 1‘s annual accounting period as in effect from time to time, which is the twelve (12) month period ending each March 31.

(i) “Good Reason” means, without Bowen’s express written consent, the occurrence of any of the following events after a Change in Control:

(i)

(A) any change in the duties or responsibilities (including reporting responsibilities) of Bowen that is inconsistent in any material and adverse respect with Bowen’s position(s), duties, responsibilities or status with the Company immediately prior to such Change in Control (including any material and adverse diminution of such duties or responsibilities) or (B) a material and adverse change in Bowen’s titles or offices, including membership on the Board, with the Company as in effect immediately prior to such Change in Control;

(ii)

a reduction by the Company in Bowen’s rate of annual base salary or Annual Bonus opportunity (including any material and adverse change in the formula for such Annual Bonus target) as in effect immediately prior to such Change in

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Control or as the same may be increased from time to time thereafter;

(iii)

any requirement of the Company that Bowen (A) be based anywhere more than thirty-five (35) miles from the office where Bowen is located at the time of the Change in Control, if such relocation increases Bowen’s commute by more than twenty (20) miles, or (B) travel on Company business to an extent substantially greater than the travel obligations of Bowen immediately prior to such Change in Control;

(iv)

the failure of the Company to (A) continue in effect any employee benefit plan, compensation plan, welfare benefit plan or material fringe benefit plan in which Bowen is participating immediately prior to such Change in Control or the taking of any action by the Company which would adversely affect Bowen’s participation in or reduce Bowen’s benefits under any such plan, unless Bowen is permitted to participate in other plans providing Bowen with substantially equivalent benefits in the aggregate (at substantially equivalent cost with respect to welfare benefit plans), or (B) provide Bowen with paid vacation in accordance with the most favorable vacation policies of the Company as in effect for Bowen immediately prior to such Change in Control, including the crediting of all service for which Bowen had been credited under such vacation policies prior to the Change in Control;

(v)

any refusal by the Company to continue to permit Bowen to engage in activities not directly related to the business of the Company which Bowen was permitted to engage in prior to the Change in Control;

(vi)

any purported termination of Bowen’s employment which is not effectuated pursuant to Section 14(b) (and which will not constitute a termination hereunder); or

(vii)

the failure of the Company to obtain a contractual agreement for the assumption of this Agreement from any successor (and Parent Corporation); or

(viii)

any material breach of the terms of this Agreement by the Company; or

(ix)

any termination of Bowen’s employment by Bowen following the first anniversary of a Change in Control.

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An isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company within ten (10) days after receipt of notice thereofgiven by Bowen shall not constitute Good Reason. Bowen’s right to terminate employment for Good Reason shall not be affected by Bowen’s incapacity due to mental or physical illness and Bowen’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any event or condition constituting Good Reason; provided, however, that Bowen must provide notice of termination of employment within ninety (90) days following Bowen’s knowledge of an event constituting Good Reason or such event shall not constitute Good Reason under this Agreement.

(j) “Qualifying Termination” means a termination of Bowen’s employment during the Term following a Change in Control (i) by the Company other than for Cause or (ii) by Bowen for Good Reason. Termination of Bowen’s employment on account of death, Disability or Retirement shall not be treated as a Qualifying Termination.

(k) “Retirement” shall mean the cessation by Bowen of gainful employment for pay with the Company at the age of at least sixty-two (62) years with at least five (5) full years of service with the Company or any affiliate company.

(l) “Term” shall mean the period commencing on April 1, 2003 and ending on April 1, 2007; provided that the Term shall automatically be extended until the third anniversary of a Change in Control that occurs prior to April 1, 2007.

2. Employment During Term. Group 1 hereby agrees to employ Bowen and Bowen hereby agrees to accept employment during the Term.

3. Title and Duties. During Bowen’s employment under this Agreement, Bowen’s title shall be Chief Executive Officer and his duties shall be commensurate with such position. Subject to the direction of the Board or any duly authorized committee thereof, Bowen shall exercise all of the authority that his title and office confers, and otherwise vested in him by the Board which shall be commensurate with his title and office, and, in general, so long as Bowen continues as Chief Executive Officer of any of the Existing Businesses, he shall (subject to the direction of the Board or the Board of Directors of such Existing Business, or any duly authorized committee thereof) direct and manage all of the operations, employees, financial and business affairs of such Existing Businesses and such other business operations and subsidiaries as Bowen and the Board may agree.

4. Compensation. During Bowen’s employment under this Agreement, Group 1 shall pay Bowen compensation for the services rendered by him as set forth below:

(a) For the period April 1, 2003 through March 31, 2004, Bowen shall be entitled to an annual base salary of Six Hundred Thousand Dollars ($600,000) per annum. Bowen’s annual base salary shall be adjusted April 1, 2004 and each April 1 thereafter by the amount of any positive percentage change in the Consumer Price Index (the amount of Bowen’s annual base salary as in effect under the terms of this Agreement at any given time shall hereinafter be referred to as “Base Salary”). Base Salary shall be payable in equal installments on the last day of each month or in accordance with Group 1‘s general salary payment procedures for its executives.

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(b) In addition to the amounts set forth in Section 4(a), Bowen shall be paid such other amounts in addition to his base salary as the Board may, in its discretion, determine from time to time, provided that any such additional payments shall not be considered to be Base Salary for purposes of Section 4(a), unless designated as such by the Board in a written document delivered to Bowen.

5. Bonuses.

(a) If Bowen is employed by Group 1 on the last day of any Fiscal Year during the Term, then, in addition to any payments made to Bowen by Group 1, Bowen shall be entitled to receive, following the close of such Fiscal Year, the following cash bonus payments for services in such Fiscal Year (the “Annual Bonus”):

(i)

An amount determined by multiplying the amount that Group 1’s consolidated net earnings for that Fiscal Year exceed the consolidated net earnings for the immediately preceding Fiscal Year ("Earnings Growth") as follows: seven percent (7%) of the Company’s Earnings Growth from zero percent (0%) Earnings Growth up to five percent (5%) Earnings Growth, plus ten percent (10%) of the Company’s Earnings Growth from five percent (5%) Earnings Growth up to ten percent (10%) Earnings Growth, plus fifteen percent (15%) of the Company’s Earnings Growth from ten percent (10%) Earnings Growth up to fifteen percent (15%) Earnings Growth, plus twenty-one percent (21%) of the Company’s Earnings Growth above fifteen percent (15%) Earnings Growth; provided, however, that the Annual Bonus in any Fiscal Year shall not exceed Eight Hundred Thousand Dollars ($800,000) (the "Maximum Annual Bonus"); provided, further, that the amount of the Annual Bonus payable with respect to any given Fiscal Year shall be reduced so that the total amount of compensation that (A) does not meet the requirements for "qualified performance-based compensation" within the meaning of Code Section 162(m) (as defined in Section 12 below) and the regulations thereunder and (B) is to be reported as income to Bowen from Group 1 or an affiliate on Form W-2 in the tax year of Group 1 in which the Annual Bonus is to be deducted by the Company, does not exceed $ 1 million (any amounts so reduced shall hereinafter be referred to as "Bonus Reductions"). Notwithstanding the foregoing, the Board may, in its sole discretion pay Bowen additional bonus, in a Fiscal Year, if specific circumstances warrant such payment.

(ii)

For any Fiscal Year that is used in the calculation of Earnings Growth with respect to the calculation of Annual Bonus the net consolidated earning for such year will be increased by the

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amount of any Acquisition Projected Losses with respect to such Fiscal Year.

“Acquisition Projected Losses” shall mean for any Fiscal Year in which an acquisition of another business entity occurs, or thereafter, the amount, if any, of projected loss to net consolidated earning of Group 1 as set forth in management’s projections (set forth on a quarterly basis) for such acquisition as approved by the Board at the time it approved the acquisition

In any Fiscal Year for which the amount earned under the Annual Bonus formula set out in Section 5(a)(i), above, exceeds the Eight Hundred Thousand Dollars ($800,000) maximum annual payment set out therein, such excess amount (the "Excess") will be carried forward and paid as soon as, and to the extent that, the net earnings for any subsequent Fiscal Year would result in an Annual Bonus payment to Bowen of less than the Maximum Annual Bonus; provided, however, that: (i) no payment of Excess payable in a given Fiscal Year shall exceed One Half (1/2) of the Maximum Annual Bonus for that Fiscal Year (ii) no Excess shall be paid to Bowen in any year in which he is subject to a Bonus Reduction under Section 5(a)(i) and any Excess not paid for that reason shall also be deemed to be a Bonus Reduction for purposes of Section 5(d) and (iii) any Excess not paid to Bowen within sixty (60) months of being first carried forward as Excess (other than amounts deemed to be Bonus Reductions) shall be forever forfeited by Bowen. Excess amounts carried forward shall be paid out on a first carried forward, first-paid basis.

(b) Upon the complete divestiture of any subsidiary of Group 1, Bowen shall have no further right to any bonus payment based on the net consolidated earnings of such divested subsidiary (other than net consolidated earnings attributable to the divestiture), and his obligations to perform duties with respect to such subsidiary shall also cease upon the consummation of the divestiture, subject to any agreements that the Board of Directors or authorized representatives of such subsidiary may have in place or may reach as to Bowen’s responsibilities and compensation for such divested subsidiary.

(c) The amount of any Annual Bonus for any Fiscal Year determined under Section 5(a) shall be paid in cash to Bowen within fifteen (15) days after Group 1‘s regular independent certified public accountants render their reports on Group 1‘s annual audited financial statements for such Fiscal Year.

(d) Bonus Reductions determined under Section 5(a)(i) and 5(a)(ii) shall be credited to the Group 1 Software, Inc. Deferred Compensation Plan (the “Deferred Plan”) and

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for purposes thereof shall be deemed to have been duly elected to be so deferred by Bowen under Section 4.1 of the Deferred Plan, and Bowen shall be further deemed to have elected payment of the deferred Bonus Reductions and any earnings thereon in a lump sum upon termination of employment with Group 1 in accordance with Section 6.1(c) of the Plan. Notwithstanding any other provision of this Agreement, payment of Bonus Reductions shall be exclusively governed by the Deferred Plan and the related Group 1 Software, Inc. Deferred Compensation Trust.

6. Fringe Benefits. In addition to all other remuneration provided by this Agreement, during his employment pursuant to this Agreement, Bowen shall be entitled, but not limited, to the following benefits (or, in the case of benefits described in Sections 6(a), (b), (c), (d) or (e), their reasonable equivalent) at Group 1‘s expense:

(a) Life insurance on the life of Bowen pursuant to the outstanding policy issued by Executive Life Insurance Company in the amount of $2,000,000 to the Robert S. Bowen Insurance Trust, as policy-holder, or pursuant to comparable coverage with an equivalent carrier, which coverage shall be selected by Bowen and reasonably acceptable to the Board as to the carrier and the terms of the policy (including, without limitation, premiums).

(b) Accidental death and dismemberment insurance, in addition to the insurance provided under Section 6(a) above, in an amount not less than Bowen’s base salary as the same shall be adjusted from time to time as provided herein and payable to Bowen or a beneficiary or beneficiaries named by him, as the case may be. Benefits shall be provided under essentially the same conditions as set forth in Exhibit A attached hereto and hereby incorporated herein.

(c) Short-term disability protection in an amount not less than Bowen’s base salary, as the same shall be adjusted from time to time as provided herein, for a period of fifty-two (52) weeks.

(d) Long-term disability protection in an amount equal to Two Hundred Seventy-Five Thousand Dollars ($275,000.00) per year reduced by any social security disability benefits received by Bowen with respect to the same disability until the earlier of (i) the date that Bowen is able to resume the duties contemplated by this Agreement or (ii) the date on which Bowen attains age 70.

(e) An annual physical at a clinic or from a physician(s) of Bowen’s choice.

(f) Paid vacation in an amount determined by Bowen in his discretion but subject to the needs of the business and subject to a limit of four (4) weeks per year of this Agreement.

(g) All other rights and benefits for which Bowen may be eligible pursuant to any employee benefit plans maintained from time to time by Group 1 for its executives or its employees.

7. Board of Directors. During Bowen’s employment under this Agreement, Group 1 will use its best efforts to cause Bowen to remain a member of the Board and the Executive Committee, if any, thereof. Bowen shall serve without additional compensation in such capacities. References herein to the Board shall include, where the context requires, such Executive Committee.

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8. Conditions and Places of Employment.

(a) Bowen’s services will be rendered in the United States or at such other places as he and the Board deem advisable; provided, however, that Bowen shall not be required to render services hereunder at any principal location for Group 1 (in the event that Group 1‘s location is moved from its present site in Lanham, Maryland) if such principal location lies in excess of thirty-five (35) miles from Bowen’s then- residence, without Bowen’s consent. Bowen shall devote such time and attention to his duties under this Agreement both within and outside normal working hours as shall be reasonably required by the Board.

(b) While he is employed under this Agreement, Bowen shall not, without the prior written consent of the Board, directly or indirectly engage in, or accept any position as agent, employee, officer or director of, or consult with, advise, invest in (except for investments of less than five percent (5%) of the capital stock of a publicly-traded company) or otherwise in any way give assistance or aid to any person, engaging in business which competes with the business of Group 1 or any of its subsidiaries as conducted during Bowen’s employment hereunder. If Bowen’s employment is terminated for any reason whatsoever, Bowen shall not (as an individual, principal, agent, employee, consultant or otherwise), for a period of twenty-four (24) months after such date of employment termination, directly or indirectly within the Unites States of America (including its territories and possessions) engage in activities relating to any of the businesses engaged in by Group 1 or any of its subsidiaries within the twelve (12) month period immediately preceding such date of employment termination, nor render services to, be associated with or have an ownership interest in (except for investments of less than five percent (5%) of the capital stock of a publicly-traded company) any business entity which offers goods or services that are directly competitive with those offered for Group 1 or any of its subsidiaries within such twelve (12) month period. Notwithstanding anything contained in this Section 8(b), if Group 1 sells or otherwise disposes of any of the Existing Businesses Bowen may render services to, be affiliated with or have an ownership interest in such Existing Business.

(c) Bowen shall not, at any time during or following his employment hereunder, directly or indirectly furnish to any person not entitled to receive the same for the immediate benefit of Group 1 or any of its subsidiaries, any trade secrets or confidential information, including but not limited to, information as to the business methods, operations and affairs of Group 1 or any of its subsidiaries, the names, addresses or requirements of any of its customers, or the prices, credit and other terms extended to or by Group 1 or any of its subsidiaries.

(d) The provisions of Sections 8(b) and 8(c) shall survive the termination of this Agreement. This provision shall not be construed to limit the survival of any other provisions that also survive the termination of this Agreement by the express or implied terms of such provisions. Bowen acknowledges that breach of any provision in Sections 8 (b) and 8(c) would cause grave and irreparable injury to Group 1 that would not be compensable in money damages, and therefore, in addition to Group 1‘s other express and implied remedies, Group 1 shall be entitled to injunctive and other equitable relief to prevent any actual or intended injuries that may result from such breach without any need to demonstrate that Group 1 has no adequate damages at law. However, nothing in this Section 8(d) shall limit any other right or remedy to which Group 1 may be entitled.

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9. Expenses, Etc. All expenses reasonably incurred by Bowen in connection with the performance of his duties hereunder, including expenses for travel, entertainment and other business activities, shall be paid by Group 1 or reimbursed to Bowen as the case may be. Group 1 shall provide, for Bowen’s business or personal use, an luxury automobile reasonably selected by Bowen and shall provide for all operation and maintenance expenses in connection therewith, including adequate insurance with respect, thereto.

10. Non-Qualifying Termination of Employment.

(a) In the event that Bowen’s employment by Group 1 is terminated during the Term because of Bowen’s Disability or Retirement, the consequences shall be as follows: (i) Bowen shall be entitled to receive his Base Salary equitably pro-rated through the Date of Termination; (ii) all Annual Bonus amounts which have not been paid to Bowen, including an Annual Bonus for the Fiscal Year of his termination of employment equitably pro-rated through the Date of Termination and any accumulated but unpaid Excess, shall be paid to Bowen at the time set forth in Section 5 hereof; and (iii) fringe benefit coverage granted to Bowen pursuant to Section 6 hereof, other than those set forth in Section 6(e) and (f), shall continue to be provided during the Term.

(b) In the event that Bowen’s employment by Group 1 is terminated during the Term because of Bowen’s death, the consequences shall be as follows: (i) Bowen’s Base Salary equitably pro-rated through the Date of Termination shall be paid to Bowen’s executor or other person representative or as Bowen shall otherwise have directed in writing; (ii) all Annual Bonus amounts which have not been paid to Bowen, including an Annual Bonus for the Fiscal Year of his death equitably pro-rated through the Date of Termination and any accumulated but unpaid Excess, shall be paid at the time set forth in Section 5 hereof to Bowen’s executor or other personal representative or as Bowen shall otherwise direct in writing; and (iii) fringe benefit coverage granted to Bowen pursuant to Section 6 hereof, other than those set forth in Section 6(g), shall cease, except for benefits payable due to such death, and except for those benefit coverages which would survive for the spouse, dependents or beneficiaries of Group 1‘s executives in general.

(c) In the event that Bowen’s employment with Group 1 is terminated during the Term (i) by Bowen for some reason other than death, Disability, Retirement, or, following a Change in Control, other than for Good Reason or (ii) by Group 1 for Cause (as such term is defined in Section 1 hereof), the consequences shall be as follows: (A) Bowen shall be entitled to receive his Base Salary equitably pro-rated through the Date of Termination; (B) any non-Excess Annual Bonus amounts earned under Section 5(a)(i) with respect to the Fiscal Year preceding the year of termination which have not been paid to Bowen shall be paid to Bowen at the time set forth in Section 5 hereof; provided that he shall not be entitled to an Annual Bonus for the Fiscal Year which includes the Date of Termination of or to payment of any accumulated but unpaid Excess; (C) Bowen shall be afforded the maximum length of time permissible under Group 1‘s stock option plans to exercise stock options granted to him thereunder; and (D) fringe benefit coverage granted to Bowen pursuant to Section 6 hereof shall cease.

(d) If Bowen’s employment by Group 1 is terminated by Group 1 during the Term and prior to a Change in Control without Cause, the consequences shall be as follows: (i) Bowen shall be entitled to receive, during the remainder of the Term, his Base Salary, as adjusted pursuant to Section 4 hereof and payable as set forth in such Section 4, (ii) all Annual

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Bonus amounts (including any Excess) shall be earned by and paid to Bowen, for the remainder of the Term, in such amounts and at such times as if Bowen’s employment with Group 1 had not been terminated but had continued for the remainder of the Term; provided that such Annual Bonus Amounts shall not be subject to any Bonus Reduction and shall be payable in full; (iii) all stock options granted to Bowen which have not yet vested shall continue to vest as if Bowen’s employment with Group 1 had not been terminated but had been continued for the remainder of the Term, and Bowen shall be afforded the maximum length of time permissible under Group 1‘s stock option plans to exercise stock options granted to him thereunder (disregarding any provisions that such options expire on termination); provided, however, that if such vesting after termination is prohibited by a governmental or regulatory authority, Group 1 shall at such time as such stock options would have vested, pay Bowen the difference between the average reported price for the stock over the immediately preceding twenty (20) days and the exercise price of such options at such date; and (iv) fringe benefits granted to Bowen pursuant to Section 6 hereof shall continue to be provided for the remainder of the Term, including, but not limited to, the insurance policy issued to the Robert S. Bowen Insurance Trust, as policy-holder, pursuant to Section 6(a) hereof, the annual premiums for which policy shall be paid by Group 1.

(e) Upon any termination of Bowen’s employment hereunder prior to a Change in Control, unless otherwise specifically provided herein, all options held by Bowen to purchase Group 1‘s stock shall be treated as provided in the instruments or agreements governing such options. Such treatment shall include any provision for acceleration of vesting upon retirement.

11. Qualifying Termination of Employment.

(a) Qualifying Termination – Severance. If, during the Term, Bowen’s employment shall terminate pursuant to a Qualifying Termination, then the Company shall provide to Bowen:

(i) any compensation previously earned by Bowen, including any deferred compensation (other than pursuant to a tax-qualified plan) together with any interest and earnings thereon

and any accrued vacation pay, in each case to the extent not theretofore paid; plus (ii) within ten (10) days following the Date of Termination, a lump-sum cash amount equal to two (2) times the sum of (i) Bowen’s highest annual rate of base salary during the 12-month period immediately prior to Bowen’s Date of Termination, plus (ii) the Target Annual Bonus (as defined below) in respect of the Fiscal Year in which the Date of Termination occurs.

For purposes of this Agreement, "Target Annual Bonus" shall mean (i) the Annual Bonus that Executive would earn under the formula set forth in section 5(a)(i) of this Agreement based on the attainment of the consolidated net earnings projection prepared by the Company and approved by the Board for the Fiscal Year in

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which a Qualifying Termination occurs or (ii) such greater amount as established by the Board prior to the start of such Fiscal Year.

(b) Qualifying Termination — Benefits. If, during the Term, Bowen’s employment shall terminate pursuant to a Qualifying Termination, the Company shall continue to provide, for a period of two (2) years following Bowen’s Date of Termination, Bowen (and Bowen ‘s dependents, if applicable) with the same level of medical, dental, accident, disability, life insurance and fringe benefits upon substantially the same terms and conditions (including contributions required by Bowen for such benefits) as existed immediately prior to Bowen’s Date of Termination (or, if more favorable to Bowen, as such benefits and terms and conditions existed immediately prior to the Change in Control); provided, that, if Bowen cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on the same after-tax basis as if continued participation had been permitted. Notwithstanding the foregoing, in the event Bowen becomes re-employed with another employer and becomes eligible to receive welfare benefits from such employer, the welfare benefits described herein shall be secondary to such benefits during the period of Bowen’s eligibility, but only to the extent that the Company reimburses Bowen for any increased cost and provides any additional benefits necessary to give Bowen the benefits provided hereunder.

(c) Qualifying Termination – Incentive Compensation. Notwithstanding any provision of any annual or long-term incentive compensation plan to the contrary, if, during the Term, Bowen’s employment shall terminate pursuant to a Qualifying Termination, the Company shall pay to Bowen within ten (10) days following the Date of Termination a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation, including the Annual Bonus, which has been allocated or awarded to Bowen for a completed Fiscal Year or other measuring period proceeding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of Bowen to a subsequent date; (ii) an Annual Bonus for the Fiscal Year in which the Qualifying Termination occurs equitably pro-rated through the Date of Termination; (iii) all accumulated, but unpaid Excess Amounts and (iv) the aggregate value of all contingent incentive compensation awards, other than the Annual Bonus, allocated or awarded to Bowen for all then uncompleted periods under any such plan that Bowen would have earned on the last day of the performance award period, assuming the achievement of the individual and corporate performance goals established with respect to such award; provided that awards for uncompleted periods shall be prorated based upon the number of days Bowen is employed by the Company during the relevant performance period.

(d) Qualifying Termination — 401(k) Plan Contributions. If, during the Term, Bowen’s employment shall terminate pursuant to a Qualifying Termination, all unvested 401(k) contributions in Bowen’s 401(k) account shall immediately vest or the Company shall pay Bowen an amount equal to any such unvested amounts that are forfeited by reason of said Qualifying Termination.

(e) Qualifying Termination — Outplacement Services. If, during the Term, Bowen’s employment shall terminate pursuant to a Qualifying Termination, the Company shall provide Bowen with outplacement services suitable to Bowen’s position for a period of two

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(2) years or, if earlier, until the first acceptance by Bowen of an offer of employment. The cost of such outplacement services shall not exceed 20% of Bowen’s base salary.

(f) Nonqualifying Termination. If, during the Term, Bowen’s employment shall terminate other than by reason of a Qualifying Termination, then the consequences of such termination shall be governed by the applicable provisions of Section 10 hereof. The payments and benefits provided for under Sections 10 and 11 hereof shall be mutually exclusive of one another and entitlement to benefits under the terms of one Section precludes receipt of benefits under the terms of the other.

(g) Stock Options. In the event of a Change in Control, all options to purchase Company stock held by Bowen which are not fully vested and exercisable shall become fully vested and exercisable as of a time established by the Board, which shall be no later than a time preceding the Change in Control which allows Bowen to exercise such options and cause the stock acquired thereby to participate in the Change in Control transaction.

(h) Restricted Stock. All unvested restricted shares of Company stock held by Bowen shall vest and all restrictions thereon shall lapse upon a Change in Control.

12. Certain Additional Payments by the Company.

(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any affiliate), or any entity which effectuates a Change in Control, to or for the benefit of Bowen (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 12) (the “Payments”) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any interest or penalties are incurred by Bowen with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Company shall pay to Bowen an additional payment (a “Gross-Up Payment”) in an amount such that after payment by Bowen of all taxes (including any Excise Tax) imposed upon the Gross-Up Payment, Bowen retains an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of any deductions disallowed because of the inclusion of the Gross-Up Payment in Bowen’s adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. For purposes of determining the amount of the Gross-Up Payment, Bowen shall be deemed to (i) pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-Up Payment is to be made, (ii) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes (and (iii) have otherwise allowable deductions for federal income tax purposes at least equal to those which could be disallowed because of the inclusion of the Gross-Up Payment in Bowen’s adjusted gross income.

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(b) Subject to the provisions of Section 12(a), all determinations required to be made under this Section 12, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and Bowen within fifteen (15) business days of the receipt of notice from the Company or Bowen that there has been a Payment, or such earlier time as is requested by the Company (collectively, the “Determination”). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Bowen may appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Company shall enter into any agreement requested by the Accounting Firm in connection with the performance of the services hereunder. The Gross-Up Payment under this Section 12 with respect to any Payments shall be made no later than thirty (30) days following such Payment. If the Accounting Firm determines that no Excise Tax is payable by Bowen, it shall furnish Bowen with a written opinion to such effect, and to the effect that failure to report the Excise Tax, if any, on Bowen’s applicable federal income tax return will not result in the imposition of a negligence or similar penalty. The Determination by the Accounting Firm shall be binding upon the Company and Bowen. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”) or Gross-Up Payments are made by the Company which should not have been made (“Overpayment”), consistent with the calculations required to be made hereunder. In the event that Bowen thereafter is required to make payment of any Excise Tax or additional Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to or for the benefit of Bowen. In the event the amount of the Gross-Up Payment exceeds the amount necessary to reimburse Bowen for his Excise Tax, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by Bowen (to the extent he has received a refund if the applicable Excise Tax has been paid to the Internal Revenue Service) to or for the benefit of the Company. Bowen shall cooperate, to the extent his expenses are reimbursed by the Company, with any reasonable requests by the Company in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax.

13. Withholding Taxes. The Company may withhold from all payments due to Bowen (or his beneficiary or estate) hereunder all taxes which, by applicable federal, state, local or other law, the Company is required to withhold therefrom.

14. Notices.

(a) All notices, demands or other communications under this Agreement shall be effective if in writing and either given personally to the other party or sent pre-paid certified or registered mail, with return-receipt requested, addressed to the other party at the

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address set forth below or at such other address as may have been furnished by such other party in writing. Any notice sent by mail pursuant to the preceding sentence shall be deemed to have been received no later than seven (7) days after mailing. Notices to Bowen by mail shall be sent to Bowen’s address as shown on the records of Group 1. Notices to Group 1 may be delivered by hand to the Chief Financial Officer of Group 1 or by mail by sending the same to Group 1‘s headquarters, Attention: Chief Financial Officer.

(b) A written notice of Executive’s Date of Termination by the Company or Executive, as the case may be, to the other, shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated and (iii) specify the termination date (which date shall be not less than fifteen (15) (thirty (30), if termination is by the Company for Disability) nor more than sixty (60) days after the giving of such notice). The failure by Executive or the Company to set forth in such notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company hereunder or preclude Executive or the Company from asserting such fact or circumstance in enforcing Executive’s or the Company’ s rights hereunder.

15. Effectiveness; Binding Effect. This Agreement shall be effective upon the execution and delivery hereof. This Agreement shall be binding on the parties hereto and their respective heirs, successors and assigns.

16. Governing Law; Severability. This Agreement and the relationships of the parties in connection with the subject matter of this Agreement shall be governed by and determined in accordance with the laws of the State of Maryland. The parties acknowledge that the terms of this Agreement are fair and reasonable at the date signed by them. However, in light of the possibility of a change of conditions or differing interpretations by a court of what is fair and reasonable, the parties stipulate as follows: if any one or more of the terms, provisions, covenants or restrictions of this Agreement shall be determined by a tribunal of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired, or invalidated; further, if any one or more of the terms, provisions, covenants, and restrictions contained in this Agreement shall for any reason be determined by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed, by limiting or reducing it, so as to be enforceable to the maximum extent compatible with then-applicable law.

17. Arbitration. Any disputes between the parties with respect to the meaning or interpretation of this Agreement or the amounts of any payments hereunder which cannot be settled amicably by the parties hereto, shall be settled by arbitration in the State of Maryland or another location mutually acceptable to the parties in accordance with the rules of arbitration of the American Arbitration Association. The costs of such arbitration or any action initiated by Bowen in good faith to enforce his rights under this Agreement, including, without limitation, Bowen’s legal fees, costs and expenses shall be paid by Group 1.

18. Gender; Number. The use of the feminine, masculine or neuter pronoun herein shall not be restrictive as to gender and shall be interpreted in all cases as the context may

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require. The use of the singular or plural herein shall not be restrictive as to number and shall be interpreted in all cases as the context may require.

19. Execution in Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. Counterparts may be executed on the same date (or different dates) in different locations and telephonic confirmation by all individual signators shall be deemed proper, complete and binding execution of this Agreement (on the date that Bowen and at least one (1) signator for Group 1 has signed) such that this Agreement shall thereafter be in full force and effect.

20. Entire Agreement; Amendment. This Agreement sets forth the entire understanding and agreement of the parties hereto concerning the subject matter hereto, including the understandings previously set out in the Fee Agreement dated as of January 25, 1992 between Bowen and Group 1. No representation, promise, inducement or statement of intention has been made by or on behalf of any party hereto concerning the subject matter hereof which is not set forth in this Agreement. None of the provisions of this Agreement may be amended, waived, otherwise modified or terminated, except by a writing which is signed by both Bowen and Group 1 and which is specifically authorized or ratified by the Board.

21. No Assignment Without Consent of Group 1. Except as set forth herein or either by operation of law upon Bowen’s death or pursuant to Bowen’s will upon his death, no rights of any kind under this Agreement shall, without the specific authorization of the Board, be transferable or assignable by Bowen or any other person, or be subject to alienation, encumbrance, garnishment, attachment, execution or levy of any kind, voluntary or involuntary.

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amended and Restated Employment Agreement as of the date first above written.

GROUP 1 SOFTWARE, INC.

By:_______________________________________________________
Name:
Title:

_______________________________________________________
Robert S. Bowen

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EXHIBIT A
ACCIDENTAL DEATH AND
DISMEMBERMENT
INSURANCE

This benefit is in addition to the Basic Life Insurance. It will be paid, if while insured, you suffer any of the losses described below solely as the result of accidental injury. The loss must occur within one hundred eighty (180) days of the injury. Accidental injury is one that occurs solely through external, violent and accidental means. No more than your amount of insurance will be paid for all losses incurred during your lifetime.

An amount equal to your Basic Life Insurance will be paid for the accidental loss of life, two limbs, sight of two eyes.

An amount equal to one-half your Basic Life Insurance will be paid for the accidental loss of one limb or sight of one eye.

Loss of sight means total and irrecoverable loss of sight. Loss of limb means loss of hand or foot by severance, at or above the wrist or ankle.

No loss if covered as an accidental death or dismemberment if it results directly or indirectly from:

Suicide, while sane or insane;

a state of war, any act of war, an insurrection, or participating in a riot;

bodily or mental infirmity or disease;

ptomaine or bacterial infection except only septic infection of and through a visible wound accidentally sustained.

EX-31.1 4 ex31_1.htm AutoCoded Document

Exhibit 31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert S. Bowen, certify that:

I have reviewed this quarterly report on Form 10-Q of Group 1 Software, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:/s/ Robert S. Bowen
Chief Executive Officer
February 17, 2004

EX-31.2 5 ex31_2.htm AutoCoded Document

Exhibit 31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Mark Funston, certify that:

I have reviewed this quarterly report on Form 10-Q of Group 1 Software, Inc.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:/s/ Mark Funston
Chief Financial Officer
February 17, 2004

EX-32.1 6 ex32_1.htm AutoCoded Document

Exhibit 32.1

CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Group 1 Software, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert S. Bowen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert S. Bowen
Chief Executive Officer
February 17, 2004

EX-32.2 7 ex32_2.htm AutoCoded Document

Exhibit 32.2

CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Group 1 Software, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark Funston, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Mark Funston
Chief Financial Officer
February 17, 2004

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