1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
------ OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
------ OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--- ---
Commission file number 0-6355
GROUP 1 SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1483562
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
4200 Parliament Place, Suite 600, Lanham, MD 20706-1844
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (301) 731-2300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01
par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on June 23, 1997, was $5,650,505.
The number of shares of the Registrant's Common Stock outstanding on June 23,
1997, was 4,293,697.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive proxy statement to be filed with the Securities and Exchange
Commission relating to Company's 1997 Annual Meeting of Shareholders
(Part III of Form 10-K).
2
PART I
ITEM 1. BUSINESS
THE COMPANY
Group 1 Software, Inc. ("Group 1") develops, manufactures, licenses,
sells and supports software products for specialized marketing and mail
management applications. On December 31, 1994, Group 1 acquired all of the
outstanding shares of capital stock of Archetype Systems, Ltd. of the United
Kingdom. After the acquisition, Archetype Systems, Ltd. changed its name to
Group 1 Software Europe, Ltd. ("Group 1 Europe") and continues its operations
based in London, England. Group 1 markets a broad range of software solutions
in each of four major categories: Customer Information Management, Database
Marketing, Electronic Document Systems and Mailing Efficiency. The operating
systems utilized for Group 1's products vary as to category. Products in the
first two categories - Customer Information Management and Database Marketing -
operate in a client/server architecture with server support for UNIX or Windows
NT (NT) and with client support in Windows 3.x, 95 and NT. Electronic Document
Systems currently run under MVS and OS/400, as well as under UNIX and IBM OS/2
with NT scheduled for release in fiscal 1998. Mailing Efficiency products run
on IBM and IBM compatible mainframe computers, IBM AS/400, Digital, UNIX, NT
and IBM OS/2 platforms as well as on IBM and IBM-compatible microcomputers
(PCs). Group 1's Electronic Document Systems support Kodak, IBM and Xerox
print architectures (AFP and Metacode) for high-speed, high-volume production
laser printing.
Group 1 distributes all of its products in North America and its
Electronic Document Systems throughout the world as well; plans are underway to
distribute additional Group 1 products internationally. Group 1 believes it is
a leading vendor of Mailing Efficiency and Electronic Document System software
products in North America.
Group 1's software products serve the needs of a wide variety of
clients, including those in the financial, insurance, utility,
telecommunications, manufacturing, retailing, hospitality, publishing and mail
order industries, plus service bureaus, associations and various activities of
educational institutions and governmental agencies. In general, Group 1's
software systems are designed to minimize the costs and maximize the
opportunity to sell products and services to existing and potential customers.
Group 1's software systems also provide solutions where a need exists for
highly accurate name and address data or where address information must be
correlated with demographic or geographic data. Other Group 1 systems provide
highly effective document preparation for customized forms or personalized
correspondence. This is achieved through the use of advanced document design
workstation software coupled with sophisticated host-based document composition
software, resulting in highly targeted and individualized documents (e.g.,
statements, invoices, policies, direct mail). Group 1 believes that the
continuing growth of database marketing, data warehousing and targeted, direct
communication, together with increased postal rates and postage discounts for
coded and/or sorted mail, can expand the market potential for Group 1's
existing and future products.
Group 1 also offers a broad variety of professional services to its
clients, including systems and business analysis, installation assistance,
operations support, programming services, technical education and training and
operational reviews. These services are designed to assist clients in
obtaining maximum utilization from their Group 1 products and/or in improving
efficiency and effectiveness of their business operations.
Group 1 markets its Electronic Document Systems Products directly to
its clients in North America, the United Kingdom, and Scandinavia and through
distributors in the remainder of Europe. Mailing Efficiency and Database
Marketing products are marketed directly for mainframe and midrange system
configurations and through a dealer and distributor network for PC
applications. Customer Information Management products are marketed primarily
through business partners and to a lesser extent the Group 1 direct sales
force.
Group 1 Software, Inc. is incorporated under the laws of the state of
Delaware. As of March 31, 1997, COMNET Corporation ("COMNET"), a publicly
traded Delaware corporation, owned approximately 81.2% of the Company's issued
and outstanding shares of common stock. The terms "Group 1" and the "Company"
are used herein to refer to Group 1 Software, Inc. and its wholly owned
subsidiaries. The executive offices of Group 1 are located at 4200
2
3
Parliament Place, Suite 600, Lanham, Maryland 20706-1844, and its telephone
number at that location is (301) 731-2300.
MARKETS SERVED
Group 1 markets its products within a broad span of industries to
fulfill customer information management, database marketing, database
publishing/electronic printing and mailing efficiency requirements. Included
among the industry groups served by Group 1 are banking, insurance, credit card
companies and financial institutions, retailers, hotels, catalog mailers,
publishers, manufacturers, telecommunication companies, non-profit
associations, educational institutions, fund raisers and governmental agencies.
All of these industry groups use Group 1's mailing efficiency systems, although
use by retailers, catalog mailers and publishers is particularly significant
due to the large volume of heavy and expensive mail pieces typically involved.
Associations, educational institutions and fundraisers are also extensive users
of Group 1's list management and personalization products. The Smart Marketing
Suite integrates mailing efficiency, file merge and duplicate and mail
preparation functions in an integrated PC based marketing tool for small
businesses.
The banking and insurance segments, while requiring address correction
products, additionally use Group 1's products to build and maintain Customer
Information Systems (CIS's) and to clean transaction based, operational data
prior to loading into a data warehouse. Both CIS's and data warehouses are
being built by these organizations primarily to provide a complete picture of
their customers and their business. Geographic and demographic overlays may be
used to gauge market penetration, demographic targets and competitive position.
Cross-selling opportunities among groups can also be identified. While banking
and insurance organizations have led in the CIS applications of Group 1
products, such applications have potential within many other market segments as
well. Banking and insurance organizations also have increasing need for
software tools to assist in certain record keeping and analysis used to
demonstrate compliance with government regulations. These industry segments
use Group 1's geocoding and demographic coding products for Credit Reporting
Act and Home Mortgage Disclosure Act compliance.
Enterprises with large sales organizations are increasingly in need of
a closed-loop sales and marketing automation systems that can track every
communication with a prospect or existing customer. Group 1's multi-module
sales and marketing automation system supports complex global territories, plus
direct and indirect sales channels, allowing businesses to manage sales
opportunities more effectively. Businesses may now fully integrate account,
contact, activity and resource management functions with Oracle Office,
Microsoft Office, Lotus Smart Suite and knowledge based support products to
maximize sales results.
Many industries that have adopted database marketing utilize Group 1
products that append demographic and geographic data to provide enhancements to
existing customer databases. Use of Group 1's modeling products provides
automated predictive modeling to identify more precise buying patterns, or by
clustering, identify differences in behavioral characteristics across product
lines or over time allowing more effective, targeted marketing campaigns.
Group 1's DataDesigns system extracts raw customer data from existing client
systems for conversion into a useful marketing database. Meticulous filtering,
correcting and consolidating of large amounts of operational data from multiple
sources create a highly accurate database. The system provides the capability
to query for relevant customer information and to prepare target market
profiles and market segmentation analysis, to help plan more effective media
and direct mail programs. Organizations are able to discover the lifetime
value of each customer, as a guide to the development of stronger relationships
with the more profitable customers. Group 1's DataDesigns system currently
addresses the hospitality and gaming industries, but the product can be applied
to other industry segments.
Information-intensive organizations are seeking automated solutions
that combine their customer data with today's advanced printing technology to
produce individualized, well-designed business documents. These organizations,
which include banks, credit card processors, insurance companies, public
utilities, health care providers, telecommunication companies and others, use
Group 1's electronic document composition software and plus, in many instances,
Group 1's consulting services to generate and manage customized statements
using conditional statement logic. The format, content and language of each
statement may be individually structured relative to specific information
contained in each customer record; individualized marketing messages can also
be
3
4
incorporated. Increasing numbers of organizations are integrating complete
marketing strategies with automated document design and composition systems to
improve sales and customer satisfaction.
PRODUCTS AND SERVICES
As of March 31, 1997, Group 1 offered a total of 97 software products.
The multi-platform electronic document composition system is offered
with enhanced PC-based WYSIWYG technology. The system directly converts and
imports IBM and Xerox laser printing resources such as fonts, images and
overlays. DOC 1 can operate in centralized, or distributed, departmental or
desktop environments. The DOC 1 workstation runs under OS/2 and the DOC 1
production engines can run under MVS, OS/2, MS-DOS, OS/400, and UNIX operating
systems with NT due to be released during FY 1998. The system is printer
independent and supports AFP, Metacode and PCL output.
Most of the mailing efficiency products are offered in an Open System
format that enables the specific application to operate on all major computer
systems from NT to mainframe. This approach allows the user to migrate from
one platform to another without lost productivity or added training.
The database marketing products are offered for a variety of operating
systems. The DataDesigns database marketing system with a proprietary database
operates in a client/server environment. The server software is the SQLBase
RDMS that runs under Windows 3.x, 95, or NT, OS/2 and Novell NetWare; the
client utilizes Windows 3.x or 95. Support for SQLRouters are available to
access Oracle, SYBASE and SQLBASE databases. The Model 1 predictive modeling
system utilizes all traditional predictive techniques and selects the best fit
to your data. Model 1 runs under Windows 95 or NT. Demographic and geographic
coding products operate in most open system operating environments.
The customer information management products include NADIS and
WorldTrak. WorldTrak operates in a client/server mode. Data synchronization
facilitates information exchange with remote users. Client support includes
Windows 3.x, 95, and NT. Server operating systems may be UNIX, NT or Novell.
WorldTrak supports Oracle, SYBASE, SQLServer, SQLBASE databases. The data
repository structure features dynamic configuration. Data sources may be
accessed and drilled on RDBMS through a single interface to all
customer-related data. NADIS products are offered in open systems format
compatible with most mainframe and mid size operating systems.
The newest releases of the PC products are developed in a 32-bit
Windows environment. All Group 1 PC products support ".dbf" files, the
industry standard PC database software format.
Group 1's software products can each operate on a stand-alone basis or
in conjunction with other Group 1 products to create an integrated system
tailored to a client's requirements.
Group 1 professional services include data migration, integration with
other systems, document analysis, consultation and design, installation and
training, file conversion and operational review.
ELECTRONIC DOCUMENT SYSTEMS
Group 1's Electronic Document system (DOC 1) makes possible advanced
electronic preparation of high volumes of individualized documents for
worldwide markets. The software supports all major printing architectures and
can operate in centralized, distributed or desktop environments under OS/2,
OS/400, MVS, and UNIX operating systems. DOC 1 produces individualized
statements, insurance policies, invoices, medical bills, letters, etc. that
allow one-on-one targeted communication with the recipient. The system is a
truly visual application that allows the user to extract information from
multiple systems, and place text, images and graphics on the page in a dynamic
WYSIWYG process. DOC 1 can be integrated with Group 1's MailStream Plus system
to produce output documents in a sequence that provides USPS presorting
discounts.
4
5
Group 1's Automated System for Advanced Printing (ASAP) is a complete
system comprising batch and on-line components to create, print and manage
individualized business documents. The system uses conditional statement logic
and variable processing to generate customized documents such as statements,
invoices, and policies, all based on customer-unique information. The system
is a tailored solution for IBM and IBM-compatible mainframes, implemented to
client specifications. ASAP features a menu-driven interface that lets users
define documents interactively, as well as manage printer resources and
documents within a secure environment. The system supports all major printing
architectures.
ASAP is used to create, compose, edit and produce direct mail, mass
correspondence and other forms of written material on a highly individualized
basis. Specific information for each individual can be extracted from computer
databases for incorporation into a mail piece. Words, sentences and/or entire
paragraphs can be automatically added, changed or deleted based upon the target
recipient's information file and the creative wishes of the user. The
resulting personalized letters, forms, coupons, reports, labels and other
correspondence can be produced economically on high-speed laser, impact or
ink-jet printers.
MAILING EFFICIENCY
Group 1's postal mailing efficiency software products provide a fully
automated means for clients to take advantage of significant postal discounts
offered in both the United States and Canada for presorted and coded mail.
Within this group of software products are also the tools to improve lettershop
efficiency, palletize mail, speed mail delivery, allow in-plant truck loading,
print barcodes and produce the necessary United States Postal Service (USPS)
reports and Canada Post Corporation (CPC) statements of mailing.
Group 1's U.S. mailing efficiency products include Code-1 Plus,
MailStream Plus, Palletization Plus, POSTNET Barcoding Plus, Barcoded Bag/Tray,
Manifest Reporting, Line of Travel, and MOVEforward. Group 1's Code-1 Plus and
MailStream Plus products are Coding Accuracy Support System (CASS) and Presort
Accuracy Validation and Evaluation (PAVE) certified by the USPS. These
products allow mailers to qualify for enhanced carrier route, presort and
automation postal discounts and to optimize discounts among various postal rate
categories. Clients can currently save nearly 28% of the cost of first-class
mail and up to 48% of the cost of Standard mail by presorting and coding.
Significant savings can also be achieved with other classes of mail. Similar
benefits are provided to Canadian mailers using Group 1's products accepted
under the Software Evaluation and Recognition Program (SERP) of CPC. Canadian
clients can avoid the $0.05 per piece surcharge by demonstrating an address
accuracy level of at least 95%, and can qualify for certain other postal rate
incentives.
Group 1's list management products, Merge/Purge Plus and List
Conversion Plus, allow clients to convert name and address lists into desired
formats, to standardize address information, to identify and/or eliminate
duplicates on business and consumer mailing files, add gender codes and to make
targeted demographic selections.
Group 1's recently released Code-1 International product validates and
corrects address elements to the street level for approximately 31 countries
worldwide; validates and corrects address elements to the city, province (or
state) level for approximately 41 countries and formatted address data to
comply with the formats of all 195 countries recognized by the United Nations.
Group 1's PC-based products include a specialized database management
system designed specifically to handle mailing lists, and postal discount
systems which allow mailers to qualify for various discounts depending on
various postal rate categories. A stand-alone product is also available that
is designed to remove duplicates from address lists on the most popular
database management systems. The system can print virtually any type of label.
DATABASE MARKETING
Group 1's DataDesigns database marketing system allows the user to
develop a composite profile of its best customers and prospects. Raw customer
data is extracted from existing client systems for conversion into a useful
marketing database. Meticulous filtering, correcting and consolidating of the
large amounts of operational data from multiple sources creates a highly
accurate database. The system provides the capability to query for relevant
customer information, and to prepare target market profiles and market
segmentation analysis, to help plan
5
6
more effective media and direct mail programs. Organizations are able to
discover the lifetime value of each customer as a guide to the development of
stronger relationships with the most profitable customers.
Group 1's demographic and geographic systems allow census-based
information and longitude and latitude information compiled by R.L. Polk &
Company and the U.S. Bureau of the Census to be appended to the customer or
prospect database. The Generalized Selection System provides a flexible method
of target marketing and mailing list manipulation.
The Model 1 automated predictive modeling system permits the analysis
of volumes of data quickly, to identify buying patterns of individuals for more
precise, profitable targeted marketing. This sophisticated, easy to use system
utilizes all traditional predictive modeling techniques including RFM, linear
regression, logistic regression, CHAID, neural networks and genetic algorithms.
The system selects the best fit with your data. Other Group 1 products provide
data analysis and decision support tools to identify motivational behavioral
characteristic and changes across products or over time.
CUSTOMER INFORMATION MANAGEMENT
Group 1's WorldTrak sales and marketing automation system provides
closed-loop tracking of all prospect and customer inquiries. WorldTrak's
user-definable workflow allows clients to tailor the system to match their
sales and marketing processes. Enhanced reporting, campaign management, sales
pipeline management and sales forecasting are streamlined to provide improved
market analysis. A client-server based system, it maintains closed-loop sales,
marketing and service information to allow for improved management of the
prospect, customer and supplier relationship. WorldTrak records the
characteristics of all types of marketing, sales and support efforts, including
media advertising and telemarketing. This relationship-driven system
consolidates all activity to enable measurement of the quality of leads, return
on marketing investment and total cost of marketing and selling. WorldTrak
supports international business disciplines, helping to ensure that language,
cultural and geographic issues affecting global business operations are
properly addressed.
To process name and address data for Customer Information Files
(CIF's) reliably, Group 1 offers the NADIS System (Name and Address Data
Integrity Software). An expert system technology, NADIS offers capabilities to
verify data integrity and to identify relationships within and across files.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT SERVICES
Professional services are available including operations support,
systems analysis, data migration, system integration, document design, file
conversion, technical education and training, and operational reviews. These
services are designed to assist clients in obtaining maximum utilization from
their Group 1 products and in improving other areas of their operations.
Group 1 offers with its product licenses an annual service agreement
that provides telephone support and continuing updates and enhancements, as
available, to its products and documentation. Educational and training
seminars specific to Group 1 products are offered as part of the initial
product licensing agreement at no additional charge; thereafter, such seminars,
together with a variety of more general educational seminars, are available for
a fee.
PRICING
The Customer Information Management and Database Marketing software
products offered by Group 1 carry one-time perpetual license fees of $5,000 to
$175,000 except for the Demographic Coding System for which a full national
package is currently priced on an annual license basis at $50,500 (regional
editions are available). A complete Group 1 mail and list management system
would have a list price of more than $136,000. For PCs, products are offered
for suggested retail prices from $295 to $2,995.
6
7
The DOC 1 software product carries a one-time perpetual license fee
ranging from $50,000 to over $400,000 depending on platform chosen, number of
workstations and number of composition systems licensed. Enterprise-wide
corporate licenses of DOC 1 are available at additional costs generally
exceeding $250,000.
License agreements and products sold to distributors generally call
for payment in full, 30 days after execution, although extended payment terms
may be granted. Alternatively, a customer may elect an installment payment
program (typically from one to five years) with a minimum down payment of 20%
of the license and first year maintenance fees, and an interest charge of 10%
to 12% per annum depending on credit-worthiness. Actual prices and terms
charged by Group 1 for its products and services may reflect volume and other
discounts.
To receive maintenance, enhancements and telephone support for Group
1's software products, a customer must pay an annual fee in advance which is
presently 16.5% (currently 15% in the U.K. and the European marketplace) of the
then-current license fee for the product. U.S. and Canadian postal master
files are available for an additional fee. A service and enhancement agreement
is available for an annual fee of $495 each for certain of Group 1's PC
products.
Professional services are provided on hourly or daily rates. The list
price for professional services is $1,500 per day plus out-of-pocket expenses.
Group 1's Code-1 Plus and MailStream products are subject to annual
subscription fees ranging from $585 to $6,600 annually in order for customers
to receive the required bimonthly database updates.
LICENSING
With the exception of the Demographic Coding System, Group 1's
products are licensed on a perpetual "right to use" basis pursuant to
non-exclusive license agreements. The Demographic Coding System is licensed on
an annual basis. Group 1 does not sell or transfer title to its software
products to clients. A client is generally entitled to use a product only for
internal purposes on a single computer at a single location. Client/server
implementations are available for DataDesign and WorldTrak; LAN network
versions for PC products are also available. Multi-site, multi-computer
corporate license agreements are available as well. Certain postal products
are required by the USPS and CPC regulations ("CASS" and "SERP", respectively)
to have an expiration date (quarterly or monthly) and must be under
subscription or re-licensing arrangements with Group 1 in order to be used for
postal discounts or price qualification.
Group 1 warrants that its products other than PC products will perform
substantially in accordance with their standard documentation for the defined
warranty period or as long as a service agreement is in effect, whichever is
longer. The software is generally licensed in conjunction with a first year
maintenance agreement to provide an initial warranty for twelve months from the
date of the license agreement. PC software is warranted for ninety days from
date of purchase against defects in material and workmanship and against
operational failures.
CUSTOMERS
Group 1's customer base includes approximately 2,400 clients who have
licensed one or more of its large software systems. In addition, there are
currently over 8,100 registered users of Group 1's PC software systems. Group
1 believes that it is a leading vendor of list and mail management software in
North America.
Group 1's clients range from small businesses to a large number and
broad variety of the foremost businesses and other organizations in North
America and internationally. Included are utilities such as Pacific Gas and
Electric, Scottish Power and PEPCO, telecommunication companies such as AT&T,
Iridium and MCI; major banks such as Citibank, National Westminster Bank, Bank
One, Chase Manhattan Bank and Banque Nationale du Canada; insurance companies
such as The Hartford Insurance Group, Metropolitan Life, and Standard Life of
Scotland; publishers such as Time, Inc., McGraw-Hill and Encyclopedia
Britannica; computer services companies such as EDS and Neodata; financial
services companies such as Prudential Securities, Charles Schwab and General
Electric Credit; retailers such as Nordstrom, J.C. Penney and Wal-Mart;
manufacturers such as GTE, Caterpillar, Eastman Kodak, General Mills and Xerox;
governmental bodies such as the U.S. Senate, U.S. Customs, the Internal
7
8
Revenue Service and U.S. Government Printing Office; credit companies such as
GE Data Services and TRW Information Services; direct marketers such as
Publishers Clearing House, Lands End and L.L. Bean; service companies such as
American Express, Trans World Airlines, Avis, Terminix and Tru Green Chem Lawn;
educational institutions such as The Johns Hopkins University, Duke University
Medical Center and MIT; health and leisure companies such as Nordic Track;
non-profit service groups such as The Girl Scouts of America, National
Geographic Society and AARP; cultural organizations such as the Metropolitan
Museum of Art and Metropolitan Opera Association; and hospitality and
entertainment companies such as Marriott, Mirage Resorts and Westin Hotels.
The United States Postal Service is also a client of Group 1.
All of Group 1's operations are in the one business segment broadly
defined as marketing support software; during the fiscal year ended March 31,
1997, seven customers individually accounted for more than 1% of Group 1's
revenue. No customer accounted for 3% of revenue. Traditionally, Group 1 does
not have a material order backlog for its software products at any given time.
Group 1 recognizes maintenance and enhancement revenue over the life of the
service agreement, usually from one to five years. International revenues
account for 15.7% of Group 1's total revenue, although that percentage is
expected to increase with the continued growth of European revenue and
increased sales of the new Code-1 international product.
SALES AND MARKETING
Group 1 markets all of its software products with the exception of its
WorldTrak product in North America and Europe through a direct sales and sales
support force of 100 representatives located in the U.S., Canada, Scandinavia
and the United Kingdom. To serve existing clients and to solicit new additions
to the client base, Group 1 has two sales and support offices in the
Washington, D.C. area and eight other regional offices in the New York City,
Chicago, Los Angeles, Las Vegas, Atlanta, Dallas, Minneapolis, and Toronto
metropolitan areas. European offices are located in the London, England and
Copenhagen, Denmark metropolitan areas. WorldTrak is marketed through business
partnership arrangements.
The Group 1 sales organization is supported by a comprehensive
marketing program administered from Group 1's Lanham, Maryland headquarters.
Marketing is conducted through direct mail, print advertising, trade show
exhibitions and speaking engagements, product training seminars, telemarketing
and a broad variety of public relations activities including the Group 1 Report
and the annual Group 1 Software Users Conference.
Through its Group 1 Europe subsidiary, Group 1 has entered into
software distribution and support agreements for the DOC 1 product with
companies throughout Europe. These agreements provide for a royalty payment to
Group 1, with the distributor performing sales and marketing, customer service
and support activities. Group 1 continues to pursue additional international
sales and marketing opportunities for its products.
Group 1's PC software products are marketed to end-users through Group
1's developing U.S. and Canadian dealer and distributor network.
Group 1 has entered into joint marketing agreements with a number of
business partners including IBM, Unica, Xerox, Data General Corp., R.L. Polk,
Campaign Mail & Data, the Harris Group, MapInfo, Software Pursuits, Mastersoft
International Pty., Geographic Data Technology, Claritas/NPDC, Versatility,
AMS, UNICA Technologies and OBIMD International. Generally, the agreements
provide for distribution of Group 1 products in conjunction with the business
partner's products. A sale may arise from either sales organization, and
territories are non-exclusive. The agreements provide for a commission payment
to Group 1 when it has contributed to a sale of the other company's products.
Conversely, Group 1 may pay a commission when a partner contributes to a sale
of Group 1 products or services.
SUPPORT
Group 1 believes that effective support of its customers and products
has been a substantial factor in Group 1's success to date and will continue to
be so in the future. Customer support for these software products is provided
by telephone for assistance in product installation and problem resolution
during
8
9
normal business hours. A telephone support help line is also provided for PC
products. Automated call tracking, client-specific call routing and on-line
bulletin board services are also provided for maintenance customers. Customer
support is provided by telephone and, if necessary for large systems, on-site
by qualified Company personnel. Group 1 Europe also has modem links with many
of its worldwide customers to provide even higher levels of mission-critical
support. In the fiscal years ended March 31, 1997, 1996 and 1995, maintenance
and enhancement fees represented approximately 33%, 37% and 41%, respectively,
of Group 1's revenue.
Professional services, including operations support, business
analysis, programming services, technical education and training, and
operational reviews, are provided at the client's location and at Group 1
training facilities throughout the U.S., Canada and the U.K.
PRODUCT DEVELOPMENT
The computer industry is characterized by rapid change in hardware and
software technology and in user needs, requiring a continuing expenditure for
product development. It is likely that such circumstances will continue in the
future. Accordingly, Group 1 must be able to provide new products and to
modify and to enhance existing products on a continuing basis to meet the
requirements of its customers and of regulatory agencies, particularly the USPS
and CPC. Group 1 may also have to adapt its products to accommodate future
changes in hardware. To date, Group 1 has been able to adapt its products to
such changes and believes that it will be able to do so in the future. Most of
the company's products are developed internally. The company also purchases
technology, licenses intellectual property rights and oversees third party
development of certain products. Quality assurance testing of Group 1's new or
enhanced products is conducted by teams of experienced individuals drawn from
all segments of Group 1's organization under the direction of testing
specialists. Whether the product is developed internally or acquired from
another company, Group 1 considers it important to control the marketing,
distribution, enhancement and evolution of each of its products.
Significant investment was made during the year in new software
development for migration of products to the Open Systems platform.
Additionally, extensive work was performed on enhancing existing mainframe,
midrange and open system products.
During 1997, Group 1 enhanced its MailStream, ArcList, and ProSort
products to meet the new postal reclassification regulations that became
effective July 1, 1996. Additional enhancements and new product releases were
made to help mailing efficiency customers meet the expanding requirements of
the U.S. Postal Service in order to qualify for postal discounts.
Substantial investment was made during 1997 in a new Windows NT
version of its DOC 1 product scheduled for release in FY 1998. Other major
product enhancements begun in FY 1997 include a new release of Code-1 Plus,
substantial enhancements to Canadian postal products and PC products.
Group 1 also released Code-1 International under a joint venture
agreement. Group 1 began development of an enhanced Code-1 International
during FY 1997.
COMPETITION
The computer software and service industry is highly competitive, and
no published data are available regarding Group 1's relative position in the
markets in which it operates. Although no major competitor currently competes
against Group 1 across its entire product line, competitive products offer many
similar features. Group 1's existing and potential competitors include
companies having greater financial, marketing and technical resources than
Group 1. Group 1 believes that there are at least thirty-four companies that
offer products competitive with one or more of Group 1's products. Group 1
believes that six companies offer customer information management systems and
at least twelve companies offer database marketing systems. At least four
competitors are in the document composition and production marketplace. For
mailing efficiency products, at least two competitors offer products that
compete with Group 1 on open system and mainframe platforms. During the year,
Group 1 continued to experience strong competition in the market for postal
coding and presorting software from these competitors. Group 1 believes that
at least ten companies offer PC products competitive with one or more of Group
1's products.
9
10
There can be no assurance that one or more of these competitors will not
develop products that are equal or superior to the products Group 1 expects to
market. In addition, many potential clients for which Group 1's products are
targeted have in-house capability to develop computer software programs.
Group 1 believes that the principal, distinguishing competitive
factors in the selection of its software products are price/performance
characteristics, marketing and sales expertise, ease of use, product features
and functions, reliability and quality of technical support, integration of the
product line and the financial strength of the publisher. Group 1 believes
that it competes favorably with regard to these factors including pricing and
credit terms. Group 1's primary strengths are the technical capabilities of
its personnel and products, marketing and sales expertise, service and support,
and industry product leadership.
PRODUCT PROTECTION
Group 1 regards its software, in source and object code, as
proprietary and relies upon a combination of contract, trade secret and
copyright laws to protect its products and related manuals and documentation.
The license agreements under which clients use Group 1's products generally
restrict the client's use to its own operations and always prohibit
unauthorized disclosure to third persons. Notwithstanding these restrictions,
it may be possible for other persons to obtain copies of Group 1's products.
Group 1 believes that because of the rapid pace of technological change in the
computer industry and, in addition, changes in postal regulations that affect
several core products, copyright and trade secret protection are less
significant than factors such as the knowledge and experience of Group 1's
management and other personnel and their ability to develop, enhance, market
and acquire new products.
TRADEMARKS
Group 1 Software (name and logo), MailStream Plus, CODE-1 Plus and
WorldTrak are registered trademarks of Group 1 Software, Inc. ASAP,
Palletization Plus, POSTNET Barcoding, Bar Code Bag/Tray, Manifest Reporting,
Merge/Purge Plus and List Conversion Plus are trademarks of Group 1 Software,
Inc. The trademark applications for Model 1, DOC 1, DataDesigns, MOVEforward
and CODE-1 International are pending. All other trademarks referenced herein
are the property of their respective owners.
EMPLOYEES
As of March 31, 1997, the Company employed 342 persons on a full-time
basis. Of those employees, 156 were in management, professional and technical
positions, 167 in marketing, sales and support and 19 in administrative
positions. None of the Company's employees is represented by a labor union and
the Company has experienced no work stoppages. The Company believes its
employee relations are satisfactory.
ITEM 2. PROPERTIES
The Company's executive offices and headquarters occupy approximately
46,600 square feet subleased from COMNET in a building located at 4200
Parliament Place, Suite 600 in Lanham, MD 20706-1844, a Washington, D.C.
suburb. COMNET's lease expires in 2004. COMNET has options to lease
additional space at specified periods during the term and to extend its lease.
In addition, the Company leases office space for twelve regional offices.
During the year ended March 31, 1997, rental expenses for these properties
totaled $946,000. See notes 14 & 15.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings, which in its
belief, after review by legal counsel, could have a material adverse effect on
the consolidated financial position or results of operations of the Company.
10
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matter was submitted to, and approved by, the required
vote of security holders of the Company at the Company's most recent annual
Shareholder's meeting held on September 12, 1996.
(1) To elect two (2) directors to hold office until the third
annual meeting of stockholders of Group 1 following their
election and until the election and qualification of their
successors.
WITHHELD
NOMINEES FOR AUTHORITY
-------- --------- ---------
Thomas S. Buchsbaum 4,279,865 2,860
Ronald F. Friedman 4,279,565 3,160
11
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The trading of the common stock of the Company is reported on the
NASDAQ National Market System under the symbol GSOF. The table below sets
forth the highest and lowest closing prices between dealers for the quarter
indicated. These prices, as reported by NASDAQ, do not include retail markup,
markdown or commissions and may not necessarily represent actual transactions.
CLOSING COMMON STOCK PRICES
---------------------------
1997 HIGH LOW 1996 HIGH LOW
- ---- ---------------- ---- ---------------
First - June 30, 1996 $11.00 $7.50 First - June 30, 1995 $12.50 $ 9.50
Second - September 30, 1996 $16.50 $8.00 Second - September 30, 1995 $26.00 $10.75
Third - December 31, 1996 $11.50 $8.00 Third - December 31, 1995 $13.60 $ 8.50
Fourth - March 31, 1997 $ 9.00 $6.75 Fourth - March 31, 1996 $ 9.75 $ 7.50
No cash dividends have been paid on the Company's common stock. The
Board of Directors intends to retain, for the foreseeable future, the Company's
earnings for use in the development of the business.
At June 23, 1997, there were approximately 661 holders of record of
the Company's common stock, including persons who wished to be identified as
having an interest in shares held or recorded in "street name" with
broker-dealers.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands except per share amounts) Year Ending March 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- ------- -------- -------- --------
Statement of Earnings Data:
Revenue $54,550 $45,875 $37,921 $31,312 $31,706
Earnings (loss) from operations $(1,803) $ 5,653 $ 5,073 $ 3,548 $ 5,814
Net earnings (loss) $(1,648) $ 3,701 $ 3,272 $ 2,474 $ 3,796
Earnings (loss) per share of common stock (1) $ (0.38) $ 0.86 $ 0.76 $ 0.57 $ 0.88
Weighted average number of shares outstanding: 4,308 4,325 4,310 4,312 4,310
Balance Sheet Data:
Working capital $ 3,154 $ 5,424 $ 6,970 $ 8,403 $ 7,887
Total assets $74,548 $65,851 $55,181 $45,731 $40,065
Long-term debt $ 304 $ 320 $ 561 $ 719 $ 1,206
Stockholders' equity $29,059 $30,421 $26,624 $23,378 $20,902
- -----------------------------------------------------------------------------------------------------------
(1) See Note 1 of notes to Consolidated Financial Statements.
12
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 as Compared with 1996
For the year ended March 31, 1997, Group 1's revenue was $54.5 million
compared with $45.9 million for the prior year. Group 1 had a net loss for the
year of $1.6 million compared with net earnings of $3.7 million for fiscal
1996. The decline in profitability is primarily attributed to write downs in
the net realizable value of certain capitalized software products. The write
downs result from decisions to de-emphasize certain products, principally DOS
based PC products that are being phased out and replaced with Windows based
products and certain mainframe products which are being replaced with new Open
Systems products. Additionally, Group 1 incurred additional costs associated
with implementation of the United States Postal Service's new mail
classification regulations that became effective July 1, 1996.
All of Group 1's operations are in the one business segment broadly
defined as marketing support software; during the fiscal year ended March 31,
1997, seven customers individually accounted for more than 1% of Group 1's
revenue. No customer accounted for 3% of revenue. Traditionally, Group 1 does
not have a material order backlog for its software products at any given time.
Group 1 recognizes maintenance and enhancement revenue over the life of the
service agreement, usually from one to five years. International revenues
account for 15.7% of Group 1's total revenue. That percentage is expected to
increase with the continued growth of European revenue.
Software license fees and related revenue of $31.3 million represented
an increase of 21% over the prior year attributable primarily to new product
licenses. As a percent of total revenue, software license and related revenue
was 57% and 56% for fiscal years 1997 and 1996, respectively.
Licensing of Electronic Document Systems increased by 38% over the
prior fiscal year. Sales of the DOC 1 system continue to grow both in North
America and Europe.
The Company's core Mailing Efficiency software license fees for fiscal
1997 increased 20% over the prior year. The increases were primarily due to
continued growth of the Open Systems product suite and the new international
postal software introduced in the third quarter of fiscal 1997, partially
offset by declines in PC product revenue. Mainframe revenue also increased
during the period.
License fees from Database Marketing Systems increased 59% for the
fiscal year. The increase resulted from higher revenues from DataDesigns
products (acquired in August 1995) and also increased sales of traditional
Database Marketing products. During the third quarter, the Company completed
an exclusive product licensing agreement with Unica Technologies to market its
predictive modeling software under the trademark "Model 1." Sales of these
products during the fourth quarter also contributed to the increases in this
category.
License fees from Customer Information Management Systems software
decreased by $0.6 million for fiscal year 1997 compared with the prior year.
Sales of both the WorldTrak product acquired in November 1995 and the NADIS
product declined over the prior year. As a result, the Company has revised its
distribution strategy for both of these product lines. During most of fiscal
1997 each of these products were sold through a direct sales force dedicated to
each product. The NADIS product continues to be sold through direct sales;
however, it is now sold by the Mailing Efficiency sales force, rather than a
dedicated sales force. The market for the WorldTrak product changed
significantly during fiscal 1997. Several competitors with greater resources
emerged during the year. In order to address the changing market, Group 1 has
entered into distribution agreements with business partners for this product
and has discontinued its direct sales effort.
Maintenance and other revenue of $23.3 million for the year increased
16% over the prior year. Maintenance and other revenue accounted for 43% of
total revenue in 1997 and 44% of total revenue in 1996. Recognized maintenance
fees were $18 million in 1997 and $17.1 million in 1996, an increase of 5%.
Professional service and educational training revenues of $5.9 million in 1997
and $3 million in 1996 represented an increase of 97%. The maintenance renewal
rate was 83% for the fiscal year 1997 compared with 85% in fiscal 1996.
13
14
Group 1 expects maintenance renewal revenue to grow at a lower
percentage than in prior years due to the high rate of conversion to Open
System products, which conversion typically includes multi-year maintenance
agreements. In addition, as a result of the delay in releasing certain
software that fully complied with all new United States Postal Service
reclassification regulations, the Company extended maintenance contracts by six
months for users of its MailStream products. It is anticipated that the other
service revenues will continue to increase as a percentage of Group 1's total
revenue, resulting from the growth of DOC 1, WorldTrak and Data Designs
products whose customers typically request more consulting and professional
services than do the Company's traditional customers.
Total operating costs of $56.4 million amounted to 103% of revenue in
1997 compared with $40.2 million or 88% of revenue during 1996. Of the
increase in cost, approximately $3.1 million was related to DataDesigns,
WorldTrak and Latin American operations which were $0.8 million in the prior
and $4.2 million was attributed to the write downs to net realizable value of
capitalized software. Excluding the capitalized software write downs, total
operating costs represented 96% of revenue during 1997.
Software license expense increased to $12 million in 1997 (including
the write-downs) representing 38% of software license and related revenues
compared with $7.6 million or 29% in 1996. Excluding the write-downs to
capitalized software, software license expense increased to $9.5 million in
1997 representing 30% of software license and related revenues.
Maintenance and service expense increased to $13.5 million in 1997
from $7.6 million in 1996, 58% and 38% of maintenance and service revenue,
respectively. Excluding the write-downs of capitalized software, maintenance
and service expense increased to $11.9 million in 1997 representing 51% of
maintenance and service revenue. The increase in expense as a percent of
maintenance and service revenue (excluding the capitalized software
write-downs) reflects the proportionately higher percentage of lower margin
revenue derived from service versus maintenance, as well as the costs of
distribution and service of Group 1's software associated with the
implementation of the United States Postal Service's new mail classification
regulations effective July, 1, 1996.
Included in maintenance and service expense above are professional
service and educational training costs of $4.4 million which were 74% of
professional services revenue during 1997 and $2.3 million and 77% of
professional services revenue for the prior year.
Costs of maintenance were $9.1 million for 1997 representing 51% of
maintenance revenue compared with costs of $5.4 million and 32% of maintenance
revenue in 1996. Excluding the write-downs of capitalized software, costs of
maintenance increased to $7.5 million in 1997 representing 43% of maintenance
revenue. The increased cost as a percentage of maintenance revenue (excluding
the capitalized software write-down) were primarily due to continued higher
distribution costs and technical support expenses for its mail classification
software stemming from the United States Postal Service's postal
reclassification regulations which became effective July 1, 1996. The Company
anticipates the cost as a percentage of revenue to decline as the incremental
cost associated with the new postal regulations declines.
Research, development and indirect support expenses (after
capitalization of certain development costs) totaled $3.6 million in 1997 and
$2.6 million in 1996, representing 7% and 6% of total revenue,
respectively. The increases are due to increased support requirements for
Group 1's expanded computer platforms and internal network systems, as well as
expenses for DataDesigns and WorldTrak for which there were no material amounts
in the prior year. The Company anticipates that these costs as a percentage of
revenue will increase due to expanded product offerings.
Selling and marketing expenses totaled $20.7 million or 38% of revenue
in 1997 and $15.9 million or 35% of revenue in the prior year. The current
year expenses include $2.1 million for DataDesigns, WorldTrak and Latin
America, which were $0.7 million in the prior year. Additionally, the current
year expenses reflect higher sales compensation expense associated with the
increased revenue, as well as increased staffing and marketing for the DOC 1,
NADIS and Open System products. The Company believes these costs, as a
percentage of revenue, will remain at approximately these levels.
14
15
General and administrative expenses were $4.5 million or 8% of total
revenue in 1997 compared with $4.9 million or 11% for 1996. The decrease in the
current year is primarily due to lower executive compensation accruals.
The provision for doubtful accounts was $2 million and 3.6% of revenue
in fiscal 1997 as compared with $1.6 million and 3.5% of revenue in fiscal year
1996. The increase in the current year provision is based upon the larger
accounts receivable balances at March 31, 1997 as compared with the same period
the prior year.
Net non-operating expense was $0.6 million for 1997 compared to net
non-operating income of $0.1 million in 1996. The difference primarily
reflects higher net interest expense.
The Company's effective tax rate was 30% in 1997 and 36% in 1996. The
current year's rate is the net effect of a 32% effective tax benefit on
domestic taxable net loss and 33% effective rate on foreign taxable net income.
1996 as Compared with 1995
For the year ended March 31, 1996, the Company's revenue was $45.9
million compared with $37.9 million for the prior year. Net earnings for the
year were $3.7 million compared with $3.3 million for fiscal 1995. Earnings
per share for fiscal year 1996 were $0.86 compared with $0.76 per share for
1995. On December 31, 1994, the Company acquired Archetype Systems, Ltd.
(renamed Group 1 Software Europe, Ltd.). The results of operations from that
subsidiary subsequent to the acquisition did not have a material effect on the
consolidated financial statements for fiscal 1995.
All of Group 1's operations are in the one business segment broadly
defined as marketing support software; during the fiscal year ended March 31,
1996, four customers individually accounted for more than 1% of Company's
revenue. No customer accounted for 3% of revenue. Traditionally, the Company
does not have a material order backlog for its software products at any given
time. The Company recognizes maintenance and enhancement revenue over the life
of the service agreement, usually from one to five years. International
revenues account for 10% of Company's total revenue, although that percentage
is expected to increase with the continued growth of European revenue.
Software license fees and related revenue of $25.8 million represented
an increase of 24% over the prior year attributable primarily to new product
sales. As a percent of total revenue, software license and related revenue was
56% and 55% for fiscal years 1996 and 1995, respectively.
License fees from Customer Information Management Systems software
increased by $808,000 over the prior year due mostly to NADIS revenues;
Database Marketing Systems license fees decreased by $127,000 due to lower
geographic and demographic license fees offset in part by revenue from the
newly-acquired DataDesigns system. Licensing of Electronic Document Systems
contributed increased revenue of $1,745,000, due primarily to a full year of
European operations versus only four months the prior year. Mailing Efficiency
software revenues increased $2,609,000 over the prior year due to the continued
growth of the Open Systems product suite; the increase also reflects a growth
of $850,000 in PC software revenue.
Maintenance and other revenue in fiscal 1996 of $20.1 million
increased by 17% over the prior year. Maintenance and other services accounted
for 44% of total revenue in 1996 versus 45% of total revenue in 1995.
Recognized maintenance contract revenue increased over the prior year by $1.8
million due primarily to the continuing growth in the number of customers under
maintenance contracts. The maintenance renewal rate was 85% for the fiscal
year 1996 compared with 83% in fiscal 1995.
Total operating costs and expenses for fiscal year 1996 were $40.2
million or 88% of total revenue compared with $32.8 million or 87% of total
revenue during the prior year. The increase in operating costs and expenses as
a percent of revenue is primarily due to increased selling and marketing
expenses.
Software license expense increased to $7.6 million in fiscal 1996 from
$6.5 million the prior year, representing 29% and 31% of software license and
related revenue, respectively. The increase in software license
15
16
expense was related to increased amortization of product development and
acquisition cost as well as the direct sales support activity related to the
DOC 1 and NADIS products. PC cost of sales also increased for the year due to
the cost of production and shipping.
Maintenance and other service expense increased to $7.6 million in the
current year from $6.2 million in 1995, representing 38% and 36% of maintenance
and other revenue, respectively. The incremental cost was due primarily to an
increase of $1.3 million in amortization expenses for the current year
reflecting the new and enhanced products released during fiscal 1996 and fiscal
1995 for all computer platforms. Amortization was 11% of total revenue in both
years. Group 1 expects the amortization of software costs to continue to
increase due to development expenditures capitalized and to recent software
acquisitions. Other direct costs to fulfill new customer orders and provide
updates for existing customers increased to 6% of total revenue from 5% the
prior year due to an increase in internal product distribution support
personnel. The Company expects the cost of maintenance and other service to
increase as the Company's customer base expands.
Research, development and indirect support expenses totaled $2.6
million and $1.9 million in the prior year, representing 6% and 5% of revenue,
respectively. Expenses during fiscal 1996 increased due to additional internal
management and technical support requirements for the growing number of
computer platforms and specialized product applications. The Company expects
these expenses to continue to increase as the Company's product applications
increase.
Selling and marketing expenses totaled $15.9 million or 35% of revenue
in fiscal year 1996, compared with $12.2 million or 32% of revenue the prior
year. The increase in expenses reflects higher sales compensation, travel and
direct marketing expenses to support increased sales activity for new products
and markets.
General and administrative expenses increased $.6 million to $4.9
million or 11% of revenue, primarily as a result of increased costs associated
with a full year of operations in Europe and establishing operations in Puerto
Rico to address the South American market. Additionally, professional services
and management fees to the parent increased over the prior year.
The provision for doubtful accounts of $1.6 million represented a
decrease of $.2 million from the prior year. This expense decrease reflects a
lower incidence of client payment defaults in 1996 versus the prior year.
Net non-operating income for the Company totaled $.1 million in fiscal
year 1996, which represents an increase of $.05 million as compared with fiscal
1995. Interest income and gains on investments increased $.2 million, as
compared with fiscal 1995 as a result of the improved invested cash position of
the Company throughout the year. Interest expense increased $.07 million due
to increased capital lease obligations. Other expense increased by $.03
million for foreign exchange losses and $.05 million for other items.
The Company's effective tax rate for both the 1996 and 1995 fiscal
years was 36%.
SEASONALITY AND INFLATION
The Company in the past has experienced greater sales and earnings in
the January-March quarter, the fourth quarter of its fiscal year, however,
there can be no certainty that this will occur in the future. This seasonal
factor is believed to be attributable to buying patterns of major accounts and
also to a fiscal year incentive program for Company sales representatives. The
Company's revenue and resultant earnings have shown substantial variation on a
quarter-to-quarter basis. A substantial portion of revenue in any given
quarter is comprised of a relatively limited number of high-value software
license agreements. These license agreements represent the culmination of a
sales cycle averaging three to six months. Any significant lengthening in the
sales cycle can have the effect of moving revenue from one quarter into the
next, contributing to quarter-to-quarter variations.
Prices remain stable for the Company's products. Inflation directly
affects the Company's cost structure principally in the areas of employee
compensation and benefits, occupancy and support services and supplies.
16
17
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $3.2 million at March 31, 1997 as
compared with $5.4 million in the prior year. The current ratio was 1.1 to 1
at March 31, 1997, compared with 1.2 to 1 at March 31, 1996. Note that the
current portion of deferred revenue related to maintenance and enhancement
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 cash requirements through cash funds
generated from operations. Additionally, it maintains a line of credit
facility. On October 8, 1996 Group 1 entered into a new two year
uncollateralized $10,000,000 line of credit arrangement with Crestar Bank. The
line of credit bears interest at the bank's prime rate minus 50 basis points or
Libor plus 150 basis points at Group 1's option. The line of credit requires
the Group 1 to maintain an EBIT to interest expense ratio of at least 4.5 to 1
through December 31, 1997 and 6.5 to 1 thereafter. Borrowings under the
facility are limited to 85% of eligible receivables. At March 31, 1997
borrowings under the line of credit were $7.1 million; at March 31, 1996 there
were no short-term borrowings.
During fiscal 1997 a net loss of $1.6 million along with non-cash
expenses of $12.9 million provided a total of $11.3 million cash from operating
activities. This amount was offset by an increase in accounts receivable of
$10.5 million, which is the combined result of higher year-end sales over the
prior year-end, and the increased mix of large dollar contracts with extended
collection cycles versus the prior year. Deferred revenues increased cash by
$2.3 million, and other working capital items decreased cash provided by
operating activities by $0.7 million. Cash flows from investing activities are
primarily expenditures for investments in software development and capital
equipment of $12.1 million. Cash of $2.0 million was generated from the sale of
marketable securities. Long-term debt was reduced by $0.4 million while
short-term borrowings increased by $7.1 million.
The Company's practice of accepting license agreements under
installment payment arrangements substantially increases its working capital
requirements. Generally, these arrangements are for a period of one to five
years after a minimum down payment of 20% of the principal amount of the
contract. Interest currently ranges from 10% to 12%. In the years ended March
31, 1997, 1996, and 1995, the principal amount of installment agreements
entered into during the year represented 10%, 15%, and 17% of the Company's
revenue, respectively. Installment receivables included in accounts receivable
are $11.9 and $11.8 at March 31, 1997 and 1996, respectively. The Company
continues to experience a significant interest in financing of software
purchases by a broad range of customers, in every industry segment served. The
installment receivable balance, in addition to the Company's policy of offering
competitive trade terms of payment, make it difficult to accurately portray a
relationship between the outstanding accounts receivable balance and the
current year revenues.
The Company continually evaluates the credit and market risks
associated with outstanding receivables. In the course of this review, the
Company considers many factors specific to the individual client as well as to
the concentration of receivables within industry groups. The Company's
installment receivables are predominately with clients (service bureaus) who
provide computer services to the direct marketing industry. Many of these
clients have limited capital and insufficient assets to secure their liability
with the Company. The service bureaus are highly dependent on the Company's
software and services to offer their customers the economic benefit of postal
discounts and mailing efficiency. To qualify for the U.S. Postal Service and
Canada Post Corporation postal discounts, service bureaus require continuous
regulatory product updates from the Company. The service bureau industry is
also highly competitive and subject to general economic cycles, as they impact
advertising and direct marketing expenditures. The Company is aware of no
current market risk associated with the installment receivables. Service
bureaus represent approximately $9.3 million or 78%, of the installment
receivables at March 31, 1997.
As of March 31, 1997, the Company's capital resource commitments
consisted primarily of non-cancelable operating lease commitments for office
space and equipment. The Company believes that its current debt services,
minimum lease obligations and other short-term and long-term liquidity needs
can be met from cash flows from operations and its current credit facility.
The Company believes that its long-term liquidity needs are minimal and no
large capital expenditures are anticipated, except for the continuing
investment in capitalized software development costs which the Company believes
can be funded from operations. Historically, the Company has been able to
negotiate capital leases for its acquisition of equipment.
17
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 19 through 37.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
19
REPORT OF INDEPENDENT ACCOUNTANTS
-----------------
To the Stockholders and
Board of Directors
Group 1 Software, Inc.
We have audited the accompanying consolidated balance sheets of Group
1 Software, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1997. These
financial statements are the responsibility of Group 1's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Group
1 Software, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
McLean, Virginia
June 27, 1997
19
20
GROUP 1 SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
--------------------------------------
1997 1996
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,499,876 $ 1,716,495
Marketable securities - - - 1,979,166
Trade and installment accounts receivable,
less allowance of $3,208,000 and $2,409,000 32,460,267 24,141,678
Deferred income taxes, net 2,437,992 1,931,000
Prepaid expenses and other current assets 4,047,045 2,819,475
-------------- -------------
Total current assets 40,445,180 32,587,814
Installment accounts receivable, long-term 6,169,987 5,985,291
Property and equipment, net 3,472,281 3,029,856
Computer software, net 22,184,874 22,241,792
Other assets 2,275,194 2,006,415
-------------- -------------
Total assets $ 74,547,516 $ 65,851,168
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 7,096,854 $ - - -
Accounts payable 2,833,086 2,359,210
Current portion of long-term debt 163,748 564,934
Accrued expenses 5,731,859 5,564,481
Accrued compensation 3,576,938 3,386,236
Current deferred revenues 16,169,758 14,129,359
Due to parent company 1,719,016 1,159,721
-------------- -------------
Total current liabilities 37,291,259 27,163,941
Long-term debt, net of current portion 303,504 320,115
Deferred revenues, long-term 4,605,606 4,363,429
Deferred income taxes, net 3,287,679 3,583,000
-------------- -------------
Total Liabilities 45,488,048 35,430,485
-------------- -------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock $0.01 par value; 10,000,000
shares authorized; 4,293,697 issued and outstanding 42,938 42,938
Preferred stock, 6% cumulative convertible, $0.01 par value, 1,000,000
shares authorized - none issued and outstanding - - - - - -
Capital contributed in excess of par value 5,188,873 5,188,873
Retained earnings 23,476,460 25,124,760
Unrealized loss on investments, net - - - (2,175)
Cumulative foreign currency translation 351,197 66,287
-------------- -------------
Total stockholders' equity 29,059,468 30,420,683
-------------- -------------
Total liabilities and stockholders' equity $ 74,547,516 $ 65,851,168
============== =============
See notes to consolidated financial statements.
20
21
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31
--------------------------------------------------
1997 1996 1995
------------- ------------- -------------
Revenue:
Software license and related revenues $ 31,253,434 $ 25,785,598 $ 20,792,997
Maintenance and other revenue 23,296,182 20,089,892 17,128,462
------------- ------------- -------------
Total revenue 56,549,616 45,875,490 37,921,459
------------- ------------- -------------
Costs and expenses:
Software license expense 12,014,110 7,582,297 6,453,283
Maintenance and service expense 13,516,133 7,569,039 6,170,855
Research, development and indirect support 3,597,915 2,627,627 1,895,315
Selling and marketing 20,725,677 15,897,343 12,208,007
General and administrative 4,542,300 4,928,434 4,285,154
Provision for doubtful accounts 1,956,403 1,617,637 1,836,344
------------- ------------- -------------
Total costs and expenses 56,352,538 40,222,377 32,848,958
------------- ------------- -------------
Operating earnings (loss) (1,802,922) 5,653,113 5,072,501
Non-operating income (expense), net (567,008) 125,131 74,618
------------- ------------- -------------
Earnings (loss) before provision for income taxes (2,369,930) 5,778,244 5,147,119
Provision (benefit) for income taxes (721,630) 2,077,000 1,875,000
------------- ------------- -------------
Net earnings (loss) $ (1,648,300) $ 3,701,244 $ 3,272,119
============= ============= =============
Earnings (loss) per share of common stock $ (0.38) $ 0.86 $ 0.76
============= ============= =============
Weighted average shares outstanding 4,307,596 4,324,909 4,309,891
============= ============= =============
See notes to consolidated financial statements.
21
22
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1997, 1996, and 1995
Common Stock
---------------------------------------
Capital
$0.01 Contributed
Par in Excess of Retained
Shares Value Par Value Earnings
--------- ------------ ----------- -----------
Balance, March 31, 1994 4,292,947 $42,930 $5,183,913 $18,151,397
Gain on foreign currency translation - - - - - - - - - - - -
Unrealized loss on investments - - - - - - - - - - - -
Net earnings - - - - - - - - - 3,272,119
--------- ------------ ---------- -----------
Balance, March 31, 1995 4,292,947 42,930 5,183,913 21,423,516
Issuance of stock upon Exercise of options 750 8 4,960 - - -
Gain on foreign currency translation - - - - - - - - - - - -
Unrealized gain on investments - - - - - - - - - - - -
Net earnings - - - - - - - - - 3,701,244
--------- ------------ ---------- -----------
Balance, March 31, 1996 4,293,697 42,938 5,188,873 25,124,760
Gain on foreign currency translation - - - - - - - - - - - -
Unrealized loss on investments - - - - - - - - -
Net earnings (loss) - - - - - - - - - (1,648,300)
--------- ------------ ---------- -----------
Balance, March 31, 1997 4,293,697 $42,938 $5,188,873 $23,476,460
========= ============ ========== ==========-
Unrealized Equity
Gain/(Loss) Adjustment Total
from from Stockholders'
Investments Translation Equity
------------ ------------- ------------
Balance, March 31, 1994 $ - - - $ - - - $23,378,240
Gain on foreign currency translation - - - 18,486 18,486
Unrealized loss on investments (44,720) - - - (44,720)
Net earnings - - - - - - 3,272,119
------------ ------------- ------------
Balance, March 31, 1995 (44,720) 18,486 26,624,125
Issuance of stock upon Exercise of options - - - - - - 4,968
Gain on foreign currency translation - - - 47,801 47,801
Unrealized gain on investments 42,545 - - - 42,545
Net earnings - - - - - - 3,701,244
------------ ------------- ------------
Balance, March 31, 1996 (2,175) 66,287 30,420,683
Gain on foreign currency translation - - - 284,910 284,910
Unrealized loss on investments 2,175 - - - 2,175
Net earnings (loss) - - - - - - (1,648,300)
------------ ------------- ------------
Balance, March 31, 1997 $ - - - $351,197 $29,059,468
============ ============= ============
See notes to consolidated financial statements.
22
23
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ---------------
Cash flows from operating activities:
Net earnings (loss) $ (1,648,300) $ 3,701,224 $ 3,272,119
Adjustments to reconcile earnings (loss) from
operations to net cash provided by operating
activities:
Amortization expense 10,736,069 5,073,224 3,774,768
Depreciation expense 966,507 837,077 723,011
Provision for doubtful accounts receivable 1,956,403 1,617,637 1,836,344
Deferred income taxes (802,313) 1,253,000 1,332,000
Net gain on disposal of assets - - - - - - (5,044)
Changes in assets and liabilities:
Increase in accounts receivable (10,459,688) (9,786,047) (7,075,125)
(Increase) decrease in prepaid expenses
and other current assets (1,227,570) (308,589) (263,719)
(Increase) decrease in income taxes receivable - - - 521,090 (417,474)
Increase in other assets (268,779) (426,514) (116,925)
Increase (decrease) in accounts payable 473,876 (82,426) 460,807
Increase in accrued expenses 358,080 2,866,923 3,444,937
Increase (decrease) in taxes payable - - - 730,584 (51,723)
Increase in deferred revenues 2,282,576 2,399,126 1,692,876
---------------- ---------------- ---------------
Net cash provided by operating activities 2,366,861 8,396,309 8,606,852
---------------- ---------------- ---------------
Cash flows from investing activities:
Purchase and development of computer software (10,658,018) (8,741,794) (5,741,347)
Purchase of equipment and improvements (1,430,065) (1,288,704) (724,313)
Purchase of marketable securities - - - (18,067,097) (3,824,344)
Sale of marketable securities 1,981,341 19,910,100
Note receivable from parent - - - - - - 485,243
Advances to and payment for acquisition of subsidiary, net
of cash acquired - - - - - - (2,514,945)
---------------- ---------------- ---------------
Net cash used in investing activities (10,106,742) (8,187,495) (12,319,706)
---------------- ---------------- ---------------
Cash flows from financing activities:
Proceeds from short-term borrowings 20,961,666 8,384,995 3,307,458
Reduction of short-term borrowings (13,864,812) (8,384,995) (3,307,458)
Reduction of long-term debt (417,797) (328,050) (790,739)
Increase in due to parent company 559,295 163,843 418,211
Proceeds from exercise of
common stock options and warrants - - - 4,968 - - -
---------------- ---------------- ---------------
Net cash provided by (used in) financing activities 7,238,352 (159,239) (372,528)
---------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents (501,529) 49,575 (4,085,382)
Effect of currency translation on cash 284,910 47,801 30,659
Cash and cash equivalents at beginning of period 1,716,495 1,619,119 5,673,842
---------------- ---------------- ---------------
Cash and cash equivalents at end of period $ 1,499,876 $ 1,716,495 $ 1,619,119
================ ================ ===============
See notes to consolidated financial statements.
23
24
GROUP 1 SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Group 1 Software, Inc. ("Group 1" or the "Company") develops,
acquires, markets and supports specialized marketing and mail management
software. The company distributes all of its products in North America and its
Electronic Document Systems throughout the World.
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of Group 1 Software, Inc. and its wholly and majority owned
subsidiaries (the "Company"). All material intercompany transactions and
balances have been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with the American
Institute of Certified Public Accountants' Statement of Position 91-1 on
Software Revenue Recognition. Revenue from perpetual licenses and the portion
of royalty revenues not subject to future obligations is generally recognized
after execution of a licensing agreement and shipment of the product provided
that no significant vendor obligations remain and the resulting receivable is
deemed collectible by management.
Maintenance and enhancement (post contract support) revenues are
deferred and recognized ratably over the life of each contract. Costs related
to performance under post-contract support agreements are expensed as incurred.
The amount of deferred revenue at March 31, 1997, to be recognized
during the subsequent years is:
1998 $16,169,758
1999 2,641,033
2000 1,333,862
2001 428,021
2002 197,023
2003 & beyond 5,667
-----------
20,775,364
===========
Contracts for professional services are negotiated individually and
are non-cancelable. The Company recognizes revenues from professional service
contracts 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.
24
25
Contract professional services revenue in the year ended March 31,
1997 and 1996 was recognized primarily using the percentage-of-completion
method as the work was performed. For the period ended March 31, 1995 the
completed contract method was used; any difference in revenue resulting from
this change in accounting method was immaterial to the consolidated financial
statements for 1995.
Cash Equivalents
Cash equivalents consist of investments with original maturities of 90
days or less, which are readily convertible into cash.
Installment Accounts Receivable
License agreements may be executed under installment contracts, which
provide for interest charges and monthly payments, with terms up to five years.
Interest income from such contracts, which is included in software licenses and
related revenue, was $468,000, $440,000, and $406,000 in 1997, 1996, and 1995,
respectively.
Property and Equipment
Property and equipment are stated at cost and are depreciated using
the straight-line method over their estimated useful lives, ranging from three
to ten years. Leasehold improvements are amortized on a straight-line basis
over the shorter of their useful lives or the lives of the respective leases.
Research and Product Development
Research and product development costs not subject to Financial
Accounting Standards Board ("FASB") Statement No. 86, "Accounting for the Cost
of Computer Software to be Sold, Leased, or Otherwise Marketed," are expensed
as incurred and relate mainly to the development of new products and on-going
maintenance of existing products.
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. 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.
Costs for research and development incurred in 1997, 1996, and 1995
were approximately $12,604,000, $9,068,000, and $6,948,000, respectively.
Under FASB Statement No. 86, software development costs amounting to
$9,331,000, $7,675,000, and $5,089,000, respectively, were capitalized. During
the years ended March 31, 1997, 1996, and 1995, amortization of capitalized
internally developed computer software costs, based on an estimated economic
life of no more than five years, was $8,543,000, $4,010,000, and $3,430,000,
respectively.
Marketable Securities
Concurrent with its purchase of investments during fiscal 1995, Group
1 adopted Statement of Financial Accounting Standards ("SFAS") Statement No.
115, "Accounting for Certain Investments and Debt and Equity Securities."
Group 1 has classified its investments as "available for sale" securities which
require that all unrealized gains and losses be reported, net of tax, as a
separate component of stockholders' equity. Group 1 held no marketable
securities as of March 31, 1997.
25
26
Goodwill
The Company has classified as goodwill the cost in excess of fair
value of the net assets of companies acquired in purchase transactions.
Goodwill is being amortized on a straight-line basis over periods not exceeding
9 years. Amortization charged to operations amounted to $132,000, $70,000, and
$44,000, for 1997, 1996, and 1995, respectively. At each balance sheet date,
the Company evaluates the net realizable value of goodwill based upon
expectations of non-discounted cash flows and operating income. Based upon its
most recent analysis, Group 1 believes that no impairment of goodwill existed
at March 31, 1997.
Foreign Currency Translation
Assets and liabilities of the Company's foreign operation are
translated into U.S. dollars using rates of exchange in effect at the balance
sheet date. Revenues and expenses are translated at the monthly average
exchange rate. Gains and losses from foreign currency transactions are
included in the results of operations currently, while those resulting from
translation of financial statement amounts are included as a separate component
of stockholders' equity.
Sale of Stock of and by a Subsidiary
Gains arising from both the public sale by the Company of stock in a
subsidiary and the issuance to the public by a subsidiary of the Company of its
own stock have been recognized as non-operating income.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Under the liability method, deferred income taxes are recognized for the tax
consequences of temporary differences by applying currently enacted statutory
tax rates applicable to future years to differences between the financial
statements carrying amounts and the tax bases of existing assets and
liabilities.
Earnings per Share of Common Stock
Earnings per share of common stock have been computed for the years
ended March 31, 1997, 1996, and 1995 on net earnings, after deducting dividends
using the weighted average number of common and dilutive common equivalent
shares outstanding during the respective years. Common equivalent shares
result from the dilutive effect of stock options, calculated under the treasury
stock method. The weighted average number of common shares and equivalents
used for primary earnings per share was 4,307,596 in 1997, 4,324,909 in 1996,
and 4,309,891 in 1995.
Concentration of Credit Risk
The Company designs, develops, manufactures, markets and supports
computer software systems to customers in diversified industries. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral. The Company's installment receivables are
predominately to clients (service bureaus) who provide computer services to the
direct marketing industry. Certain of these service bureau clients may have
limited capital and insufficient assets to secure their liability to the
Company. The service bureau industry is also highly competitive and subject to
general economic cycles as they impact advertising and direct marketing
expenditures. These clients represent approximately $9.2 million or 78% of the
installment receivables at March 31, 1997 versus $9.0 million or 76% the prior
year.
Impairment of Long-Lived Assets
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, specifies circumstances in which certain long-lived
assets must be reviewed for impairment. If such review indicates that the
carrying amount of an asset exceeds the sum of its expected future cash flows,
the asset's carrying
26
27
value must be written down to fair value. Adoption of this standard on April
1, 1996 did not have a material effect on the financial position or results of
operation of the Company.
Fair Value of Financial Instruments
The carrying amount of the Company's cash and cash equivalents,
receivables, accounts payable and accrued expenses approximates fair value
because of the short maturity of those instruments. The Company derives the
fair value of its short-term investments based on quoted market prices which
are generally readily available. The Company estimates the fair value of its
notes and extended term receivables by discounting the required future cash
flows using borrowing rates at which similar types of borrowing arrangements
could be currently obtained by the Company. Since the Company's notes payable
and Line of Credit are short term, carrying value approximates fair value in
nature.
New Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 128 regarding
earnings per share. This statement which must be adopted by the Company for
fiscal years beginning April 1, 1997, requires earnings per share to be
calculated under newly prescribed methods. Adoption of SFAS No. 128 is not
expected to have a material impact on the Company's financial statements
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
March 31,
----------------------------------
1997 1996
----------- -----------
Trade $29,974,239 $20,767,019
Installment accounts receivable, interest 11,864,015 11,768,950
typically at 8.5% to 13%
Allowance for doubtful accounts (3,208,000) (2,409,000)
----------- -----------
38,630,254 30,126,969
Less non-current portion of installment
accounts receivable 6,169,987 5,985,291
----------- -----------
Current portion $32,460,267 $24,141,678
=========== ===========
(3) PREPAID EXPENSE AND OTHER ASSETS
Prepaid expenses and other current assets are comprised of the
following:
March 31,
---------------------------------
1997 1996
---------- ----------
Prepaid expense $1,095,771 $ 563,418
Prepaid commission 1,046,266 801,912
Prepaid royalty 545,495 695,003
Other assets 1,359,513 759,142
---------- ----------
$4,047,045 $2,819,475
========== ==========
27
28
Prepaid commissions and royalties primarily relate to amounts paid, as
of the balance sheet date, on initial maintenance and enhancement revenues
deferred into future periods.
(4) PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
March 31,
-----------------------------------
1997 1996
------------ -----------
Data processing equipment $5,341,791 $4,441,088
Furniture and fixtures 2,554,087 2,258,358
Leasehold improvements 833,847 236,305
------------ -----------
8,729,725 6,935,751
Less accumulated depreciation and amortization (5,257,444) (3,905,895)
------------ -----------
$3,472,281 $3,029,856
============ ===========
(5) COMPUTER SOFTWARE
Computer software is comprised of the following:
March 31,
------------------------------------
1997 1996
------------- -------------
Developed software $41,837,398 $30,247,944
Acquired software 5,931,877 6,317,931
Software purchased for internal use 3,126,557 3,021,556
------------- -------------
50,895,832 39,587,431
Less accumulated amortization (28,710,958) (17,345,639)
------------- -------------
$22,184,874 $22,241,792
============= =============
(6) ACCRUED EXPENSES
Accrued expenses are as follows:
March 31,
---------------------------------
1997 1996
---------- ----------
Accrued sales and other taxes $1,456,053 $ 734,798
Accrued royalties 1,228,770 953,636
Accrued sales incentives 326,418 301,556
Accrued rent abatements 106,424 39,402
Income taxes payable 1,197,669 854,926
Other accrued expenses 1,416,525 2,680,163
---------- ----------
$5,731,859 $5,564,481
========== ==========
(7) SHORT-TERM BORROWINGS
At March 31, 1997, Group 1 maintained an uncollateralized $10,000,000
bank line of credit arrangement with interest at the bank's prime rate minus 50
basis points or Libor plus 150 basis points. The line of credit arrangement
requires Group 1, among other things, to maintain an EBIT to interest expense
ratio of at least 4.5 to 1 through December 31, 1997 and at least 6.5 to 1
thereafter. At March 31, 1997, borrowings under the line of credit were $7.1
million; at March 31, 1996 there were no short-term borrowings.
28
29
(8) LONG-TERM DEBT
Long-term debt consists of the following:
March 31,
--------------------------------
1997 1996
-------- --------
Installment notes payable $363,505 $702,035
Capitalized lease obligations 103,747 183,014
-------- --------
Sub-total 467,252 885,049
Less current portion 163,748 564,934
-------- --------
Long-term portion $303,504 $320,115
======== ========
Installment notes and capital lease obligations are payable monthly
and bear interest at rates ranging from 6% to 10%. The notes are
collateralized by certain furniture and equipment with a net book value that
approximates the outstanding loan balance. These lease obligations were
entered into at then current market rates.
As of March 31, 1997, installment notes include uncollateralized
non-interest bearing notes.
As of March 31, 1996, installment notes included two notes with no
interest. These notes were discounted to reflect the present value of the
debt. The note for the acquisition of certain assets of Arc Tangent, Inc. was
discounted at 6% to $291,220 at March 31, 1996. The note payable for the
acquisition of certain assets of PostSaver, Inc. was discounted at 7.25% to
$167,360 at March 31, 1996. (See Note 14). These notes were paid in full as
of March 31, 1997.
The aggregate maturities of the long-term debt during the years
subsequent to March 31, 1997 are:
1998 $163,748
1999 72,713
2000 52,709
2001 58,229
2002 and beyond 119,853
--------
$467,252
========
The Company believes that there are no material differences between
carrying amounts and market value of its long-term obligations.
(9) STOCKHOLDERS' EQUITY
Stock Option Plans
The Company has two stock option programs currently in effect, and two
predecessor plans for which option grants are still outstanding:
The Group 1 Software, Inc. Stock Option Plan of 1995 authorizes the
grant of incentive stock options, non-qualified stock options and stock
appreciation rights, at the sole discretion of the Compensation Committee of
the Board of Directors, to officers and other employees of the Company, and
reserved 300,000 shares of common stock for issuance on exercise of options
under the Plan. The option and rights vest over five years; however, all
options and rights expire ten years after the date of the grant. The plan
activity was as follows:
29
30
Option
Shares
------
Shares under option, beginning of year - - -
Options granted - exercise price $6.50 42,013
------
Shares under option end of year - exercise price of $6.50 42,013
======
At March 31, 1997 none of the options was exercisable. Options for
8,402 shares become exercisable in the year ending March 31, 1998. At March
31, 1997, 257,987 shares were available for future grants of options.
The Group 1 Software, Inc. Stock Option Plan of 1986 authorized the
grant of incentive stock options, non-qualified stock options and stock
appreciation rights, at the sole discretion of the Compensation Committee of
the Board of Directors, to officers and other employees of the Company, and
reserved 345,000 shares of common stock for issuance on exercise of options
under the Plan. The options and rights vest over five years; however, all
options and rights expire ten years after the date of the grant. The Plan
activity was as follows:
March 31,
-----------------------------------------
1997 1996 1995
-------- -------- ------
Shares under option, beginning of year - 42,063 42,813 42,813
exercise price $6.00
Options exercised - exercise price of - - - (750) - - -
$10.125 - $11.00
Options cancelled - (42,063) - - - - - -
-------- -------- ------
Shares under option, end of year - exercise
price of $6.00 - - - 42,063 42,813
======== ======== =======
At March 31, 1997, no shares under option were issued, vested or
exercisable. No stock appreciation rights have been granted under the Plan,
and the Plan has terminated. See Note 14.
The Group 1 Software, Inc. Stock Option Plan for Non-Employee
Directors of 1995 provides for annual automatic grants of non-qualified stock
options to non-employee directors of the Company, at an exercise price set by
the market price of the stock on the anniversary date of their election as a
director, and reserves 100,000 shares of common stock for issuance on exercise
of options under the Plan. The options vest over five years and expire ten
years after the date of the grant.
The Plan activity was as follows:
March 31,
------------------------
1997 1996
------ --------
Shares under option, beginning of year- 15,000 - - -
exercise price $7.75 - $11.00
Options granted - exercise price $7.75 - $11.00 - - - 20,000
Options granted - exercise price $6.50 - $9.00 15,000 - - -
Options canceled - exercise price of $11.00 - - - (5,000)
------ --------
Shares under option end of year -
exercise price of $6.50 30,000 15,000
====== ========
At March 31, 1997, options for 3,000 shares were vested and
exercisable. Options for 6,000 shares become exercisable in the year ending
March 31, 1998. At March 31, 1997, 70,000 shares were available for future
grants of options.
The Group 1 Software, Inc. Stock Option Plan for Non-Employee
Directors of 1986 provided for annual automated grants of non-qualified stock
options to non-employee directors of the Company, at an exercise price set by
the market price of the stock on the anniversary date of their election as a
director, and reserves 162,500 shares of
30
31
common stock for issuance on exercise of options under the Plan. The options
vest over five years and expire ten years after the date of the grant.
March 31,
----------------------------------------
1997 1996 1995
------ ------- -------
Shares under option, beginning of year - 85,000 100,000 80,000
exercise price $7.75 - $18.75
Options granted - exercise price of $7.75 - $9.25 - - - - - - 20,000
Options canceled - exercise price of $8.75 - $13.00 - - - (15,000) - - -
------ ------- -------
Shares under option, end of year - exercise
price of $7.75 - $18.75 85,000 85,000 100,000
====== ======= =======
At March 31, 1997, 69,000 shares under option were exercisable.
Options for 9,000 shares become exercisable in the year ending March 31, 1998.
At March 31, 1996, the stock option plan for Non-employee Directors had
terminated and no future grants of options will be made under the Plan.
A summary of the status of the Plans is presented below:
Year Ended March 31,
-------------------------------------------------
1997 1996
-------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------- ---------------------
Options outstanding beginning of period 142,063 $ 9.36 142,813 $ 9.34
Options exercised - - - - - - (750) $ 6.00
Options canceled (42,063) $ 6.00 (20,000) $10.75
Options granted 57,013 $ 6.92 20,000 $ 9.56
Options outstanding end of period 157,013 $ 9.37 142,063 $ 9.36
Options exercisable at end of period 72,000 $11.19 98,063 $ 8.92
Weighted-average fair value of options granted
during the Period. $4.99 $7.84
As of March 31, 1997, the weighted average remaining contractual life
of the options that range from $6.50 to $8.75 is 9.82 years and of the options
that range from $9.00 - $11.00 is 9.06 years.
As of March 31, 1997, and 1996, the pro forma tax effects under SFAS
109 are not material to the Company's Financial Statement, respectively.
The Company accounts for the fair value of its grants under the Plans
in accordance with APB 25. Accordingly, no compensation expense has been
recognized for the Plans. Had compensation expense been determined based on
the fair value of the grant dates for awards under the Plans consistent with
the method of SFAS 123, the Company's net loss and loss per common share would
have been increased to the pro forma amounts indicated below:
1997 1996
------------ -----------
Net earnings (loss)
As reported $(1,648,300) $3,701,244
Pro forma $(1,654,855) $3,699,410
Earnings (loss) per common share
As reported $(0.38) $0.86
Pro forma $(0.38) $0.86
31
32
The fair value of each option is estimated on the date of grant using
a type of Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended March 31, 1997 and 1996,
respectively; dividend yield of 0%, expected volatility of 70%, risk-free
interest rate of 6.69% and 5.85%, respectively, and an expected term of 7
years.
(10) INCOME TAXES
The provision for income taxes for continuing operations consists of
the following components:
Year Ended March 31,
--------------------------------------------------------
1997 1996 1995
--------------- ---------------- ----------------
Federal:
Current $ (680,783) $ 478,000 $ 477,000
Deferred (749,132) 803,000 886,000
--------------- ---------------- ----------------
(1,429,915) 1,281,000 1,363,000
--------------- ---------------- ----------------
State:
Current 60,000 76,000 66,000
Deferred 3,088 73,000 157,000
--------------- ---------------- ----------------
63,088 149,000 223,000
--------------- ---------------- ----------------
Foreign:
Current 694,926 362,000 157,000
Deferred (49,729) 285,000 132,000
--------------- ---------------- ----------------
645,197 647,000 289,000
--------------- ---------------- ----------------
$ (721,630) $ 2,077,000 $ 1,875,000
=============== ================ ================
The provisions for income taxes varied from that computed using the
statutory federal income tax rate as follows:
March 31,
------------------------------------------
1997 1996 1995
-------- ------ -------
Statutory tax rate (34.0%) 34.0% 34.0%
State income taxes, net of federal income tax benefit 1.8 1.8 3.0
Research and development tax credits --- (0.9) (4.1)
Foreign income taxes (0.8) 1.4 2.1
Other, net 2.6 (0.4) 1.4
-------- ------ -------
Effective tax rate (30.4%) 35.9% 36.4%
======== ====== =======
32
33
The significant components of the current deferred tax asset and the
long-term deferred tax liabilities are:
March 31,
--------------------------------------
1997 1996
------------- -------------
Current:
Deferred maintenance revenue $ 530,974 $ 531,000
Allowance for doubtful accounts 1,254,331 853,000
Other, net 652,687 547,000
------------- -------------
Total current deferred tax assets $ 2,437,992 $ 1,931,000
============= =============
Long-term:
Deferred maintenance revenue - long-term $ 1,134,164 $ 1,439,000
Capitalized software (5,854,463) (5,930,000)
Depreciation 408,359 (85,000)
Other, net 1,024,261 993,000
------------- -------------
Total long-term deferred tax liabilities $ (3,287,679) $ (3,583,000)
============= =============
The Company's research and development tax credit carry forwards of
$1,152,000, which will expire in 2005 through 2012.
(11) BENEFIT PROGRAMS
The Company maintains a 401(k) retirement savings plan and trust for
the benefit of the Company's employees which provides for a contribution to be
made by the Company out of current operating earnings based upon the
contributions made by participating Company employees with established limits.
Company contributions for the years ended March 31, 1997, 1996 and 1995 were
$235,276, $171,000, and $147,000, respectively.
(12) QUARTERLY INCOME DATA (UNAUDITED)
Quarterly financial information for the years ended March 31, 1997 and
1996 was as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------- ---------- ----------- ----------- ---------
(Dollars in thousands except earnings per share)
Fiscal Year 1997:
Revenue $10,721 $13,059 $14,631 $16,139 $54,550
Earnings (loss) before taxes (182) 553 741 (3,482) (2,370)
Net Earnings (loss) (169) 273 477 (2,229) (1,648)
Earnings per share(1) $ (0.04) $ 0.06 $ 0.11 $ (0.51) $ (0.38)
Fiscal Year 1996:
Revenue $ 9,385 $10,081 $10,854 $15,555 $45,875
Earnings before taxes 865 1,275 1,015 2,623 5,778
Net Earnings 539 808 641 1,713 3,701
Earnings per share(1) $ 0.12 $ 0.19 $ 0.15 $ 0.40 $ 0.86
- ------------------------------------------------------------------------------------------------------------------
(1) See Note 1 of notes to consolidated financial statements
33
34
(13) NON-OPERATING INCOME (EXPENSE) AND SUPPLEMENTAL INFORMATION
Non-operating income and expense is comprised of the following:
Year Ended March 31,
------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
Interest income $ 119,993 $ 157,274 $ 265,428
Interest expense (685,549) (144,296) (116,789)
Gain (loss) on sales of investment 14,486 - - - - - -
Other income (expense), net (15,938) 112,153 (74,021)
-------------- -------------- --------------
Total non-operating income (expense), net $ (567,008) $ 125,131 $ 74,618
============== ============== ==============
The following supplemental information summarizes the disclosure
pertaining to the Statement of Cash Flows:
Year Ended March 31,
-----------------------------------------
1997 1996 1995
---------- --------- ----------
Cash paid during the year for:
Interest $ 552,506 $ 144,888 $ 107,059
Income taxes $ 190,597 $ 257,057 $ 120,516
Non-cash investing and financing activities:
Note payable incurred in connection with the purchase of
the assets of PostSaver Systems, Inc. $ - - - $ - - - $ 563,795
Notes payable incurred in connection with the purchase of
the assets of Data Designs, Inc. $ - - - $ 180,000 $ - - -
Notes payable incurred in connection with the purchase of
the assets of WorldTrak, Inc. $ - - - $ 100,000 $ - - -
Capital lease obligations incurred $ 249,378 $ 47,102 $ 138,341
(14) TRANSACTION WITH PARENT COMPANY
COMNET provides significant management and other services to the
Company under a Management and Services Agreement ("Agreement") entered into in
September, 1986 and renewed as of April 1, 1991, April 1, 1994, and April 1,
1997, on substantially equivalent terms except for certain changes in
determination of the management fee percentage. For the three years ended
March 31, 1996, the amounts charged to the Company by COMNET for these services
in the accompanying consolidated financial statements are consistent with the
arrangements of this Agreement and are summarized as follows:
Year Ended March 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
Management services:
Finance and personnel $ 928,732 $ 817,886 $ 917,515
Corporate and management 740,789 1,040,467 959,706
Management fee 506,691 458,755 379,314
----------- ----------- -----------
2,176,212 2,317,108 2,256,535
Building and occupancy 955,370 728,519 674,854
----------- ----------- -----------
$3,131,582 $3,045,627 $2,931,389
=========== =========== ===========
34
35
Management Services
COMNET provides finance, legal, personnel, corporate, stockholder
relations and general management services for the Company. These services
include senior management services of COMNET's chief executive officer, chief
financial officer and general counsel. COMNET charges the Company its actual
cost, including allocation of COMNET's overall costs to perform these services.
COMNET also charged management fees based on total Company revenue of
1% for the years ended March 31, 1997, 1996 and 1995 (see Note 1). Under the
Agreement, as renewed, the management fee can range from 1% to 2% of total
Company revenue depending upon Company pretax profit as a percentage of
revenue.
Building and Occupancy
COMNET charges the Company for office space occupied by the Company in
Maryland and Virginia and for related occupancy services. COMNET charges the
Company its actual cost for this office space and these services based on an
allocation of COMNET's cost. The charge includes an allocation of property
taxes and facility maintenance expenses.
Other Transactions
The Company held a demand note payable to its parent in the amount of
$1,719,016 at March 31, 1997 and in the amount of $1,159,721 at March 31, 1996,
which carried an interest rate of prime plus 2% (10.25% at March 31, 1997 and
1996). The note is due and payable twelve months and one day from demand.
Interest payable to COMNET by the Company totaled $124,788, $62,349, and
$58,129, during the years ended March 31, 1997, 1996, and 1995, respectively.
During the year ended March 31, 1997, COMNET granted options to
purchase 71,000 shares of its common stock to employees of the Company at fair
market value on the grant date. These options were granted at the request of
the Company's Board of Directors, consistent with COMNET's policy of granting
options to employees of COMNET and its majority-owned subsidiaries. COMNET
granted 335,433 options to employees of the Company in the year ended March 31,
1996. No options were granted in the year ended March 31, 1995.
(15) COMMITMENTS
Purchased Services
Effective April 6, 1994, Group 1 entered a three-year contract with a
supplier of computer time-sharing services. Effective April 6, 1997 the
agreement was extended for two additional years. The agreement requires Group
1 to purchase all of its internal IBM mainframe computer requirements, from
this supplier. The Agreement provides for a fixed monthly fee. Group 1's
actual costs of services with this vendor for the years ended March 31, 1997,
1996, and 1995 were $1,273,000, $1,056,000, and $1,017,000, respectively.
Leasing Arrangements
The Company leases its office facilities and some of its equipment
under operating and capital lease arrangements, some of which contain renewal
options and escalation clauses for operating expenses and inflation. The
Company is obligated for the following minimum operating and capital lease
rental payments that have initial and remaining non-cancelable lease terms in
excess of one year:
35
36
Operating Capital
--------------- -------------
1998 $ 2,903,037 $ 133,111
1999 2,411,078 63,216
2000 2,122,621 63,216
2001 1,991,599 63,216
2002 and beyond 3,801,147 18,169
--------------- -------------
Total minimum lease payments $ 13,229,482 $ 340,928
===============
Amount representing interest (59,271)
-------------
Net minimum lease payments 281,657
Current portion of capital lease obligations 103,747
-------------
Long-term portion of capital lease obligations $ 177,910
=============
The Company entered into capital lease transactions aggregating
$249,378, $47,102 and $138,341, for the years ended 1997, 1996 and 1995,
respectively. As of March 31, 1997, the book value of assets recorded under
capital leases was $268,308.
Total rent expense, under operating leases for fiscal years ended
March 31, 1997, 1996, and 1995 was $2,632,074, $1,958,547 and $523,000,
respectively.
Acquisition Agreements
In December 1994, Group 1 acquired all of the outstanding shares of
capital stock of Archetype Systems, for $400,000 cash (net of cash acquired)
plus a percentage of Archetype Systems' sales of the Archetype products, if
sales exceed pound sterling 2,000,000 in a 12-month period after closing. On
April 25, 1996, Group 1 paid an additional $372,019 cash under the latter
provision. The acquisition was accounted for as a purchase and, accordingly,
the purchase price was allocated to the post closing assets and liabilities
based on their estimated fair values, resulting in $1,072,000 in goodwill,
which is included in other assets. The goodwill will be amortized over a
period not to exceed nine years. The assets acquired and the liabilities
assumed have been included in the accompanying consolidated balance sheet.
Archetype Systems has changed its name to Group 1 Software Europe, Ltd.
("Group 1 Europe") and will continue its operations based in London, England.
In August 1995, Group 1 entered into an agreement with DataDesigns,
Inc. of Las Vegas, Nevada to acquire certain assets including title to all of
its software products. Group 1 paid $484,000 in cash at closing and will pay a
percentage of the Group 1's sales of these products during the subsequent five
years. For the years-ended March 31, 1997 and 1996 such payments were $259,000
and $99,000, respectively. Such amounts are recorded as adjustments to
goodwill and amortized over a period not to exceed nine years.
In November 1995, Group 1 entered into a definitive agreement with
Premier One Consultants, Inc. of Minneapolis, Minnesota to acquire certain
assets including title to all of its software products. Group 1 paid $319,000
in cash at closing and will pay a percentage of the Group 1's sales of these
products during the subsequent three years. No contingent payments were due
for the years ended March 31, 1997 or 1996.
36
37
(16) GEOGRAPHIC INFORMATION
Year Ended March 31,
--------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Net Revenue
U.S. operations $50,113,090 $43,145,418 $37,085,333
European operations 6,676,498 4,429,531 1,370,778
Eliminations (2,239,972) (1,699,459) (534,652)
----------- ----------- -----------
Total net revenue $54,549,616 $45,875,490 $37,921,459
=========== =========== ===========
Operating Income
U.S. operations $(3,949,750) $ 3,823,801 $ 4,483,965
European operations 2,146,828 1,829,312 588,536
Eliminations - - - - - - - - -
----------- ----------- -----------
Total operating income $(1,802,922) $ 5,653,113 $ 5,072,501
=========== =========== ===========
Identifiable Assets
U.S. operations $68,718,242 $62,261,154 $53,606,828
European operations 8,433,004 6,528,514 4,840,880
Eliminations (2,603,730) (2,938,500) (3,267,078)
----------- ----------- -----------
Total identifiable assets
$74,547,516 $65,851,168 $55,180,630
=========== =========== ===========
It is management's belief that the Company's sales between geographic
areas are accounted for at prices consistent with market conditions with
unaffiliated transactions. "U.S. operations" include shipments to customers in
the United States, licensing to OEMs, and exports of finished goods directly to
international customers, primarily in Canada. International revenue which
includes European operations, U.S. operations and exports, were 15.7%, 13% and
7.4% of total revenue in 1997, 1996, and 1995.
37
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and executive officers of the Company are as follows:
Name Age Position
------------------------------ -------- --------------------------------------------
Robert S. Bowen 59 Chairman of the Board of Directors
and Chief Executive Officer
Ronald F. Friedman 53 President, Chief Operating Officer
and Director
Mark D. Funston 37 Vice President, Chief Financial Officer,
Treasurer and Director
Edward Weiss 46 Secretary and General Counsel
Alan P. Slater 41 Executive Vice President
Thomas S. Buchsbaum 47 Director
Joseph R. Sullivan 52 Director
Charles A. Mele 40 Director
The Company knows of no family relationships between any of the above.
The Board of Directors is divided into three classes. One class of
the Directors will be elected annually, and Directors serve until the annual
meeting of stockholders three years following their election and until their
successors are elected and qualified. The terms of Mr. Bowen and Mr. Funston
will expire at the next shareholder's meeting. The terms of Mr. Mele and Mr.
Sullivan will expire in 1998 and the terms of Mr. Friedman and Mr. Buchsbaum
expire in 1979. Each of the officers shall continue in his capacity until his
successor is appointed and qualified.
Mr. Robert S. Bowen has been Chairman of the Board and Chief Executive
Officer ("CEO") of the Company since September 1986 and a Director since its
inception. Mr. Bowen has also been President and Chief Executive Officer of
COMNET since 1984, and has, in the past year, devoted approximately 80% of his
professional time to the Company. This allocation of time can increase as
required. Mr. Bowen also serves as a director of COMNET.
Mr. Ronald F. Friedman has been a Director since the Company's
inception, and President and Chief Operating Officer of the Company and its
predecessor since December 1985. Mr. Friedman also serves as a director of
COMNET.
Mr. Mark D. Funston has been Chief Financial Officer of Group 1 since
September 1996 and a Director since December 1996. He also serves as Vice
President, Chief Financial Officer and a Director of COMNET.
Mr. Edward Weiss has been Secretary and General Counsel of the Company
for more than five years. He also serves as Secretary and General Counsel of
COMNET.
Mr. Alan P. Slater has been Executive Vice President since April 1992.
From October 1987 to April 1992 he was Vice President, Sales.
Mr. Thomas S. Buchsbaum has been a Director for more than five years.
Since April 1997 he has been Vice President of Education at Dell Computer
Corporation. Prior to that, for more than 5 years, he was Executive Vice
President of Zenith Data Systems. Mr. Buchsbaum is also a Director of Dick
Blick Company.
38
39
Mr. Joseph R. Sullivan has been a Director of the Company since its
inception. He has been Vice President, Marketing and Business Development,
Network Systems with Zenith Electronics Corporation since 1990.
Mr. Charles A. Mele has been a Director of the Company since November
1991. He is Vice President/General Counsel and a Director of Synetic, Inc.
Prior to April 1994, he was Executive Vice President and General Counsel of
Medco Containment Services, Inc., for more than five years.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is contained in the
registrant's definitive proxy statement, to be filed pursuant to Regulation
14A, under the caption, "Executive Compensation," and such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is contained in the
registrant's definitive proxy statement, to be filed pursuant to Regulation
14A, under introductory paragraphs and under the captions, "Principal
Stockholders" and "Election of Directors," and such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is contained in the
registrant's definitive proxy statement, to be filed pursuant to Regulation
14A, under the caption, "Executive Compensation - Certain Transactions," and
such information is incorporated herein by reference.
39
40
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
-----------------
To the Stockholders and Board of Directors Group 1 Software, Inc.
Our report on the consolidated financial statements of Group 1
Software, Inc. and Subsidiaries is included elsewhere in this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule as listed in the index to the
financial statement schedule of this Form 10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
McLean, Virginia
June 27, 1997
40
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
Page Number
-----------
1. Financial Statements:
The following financial statements are submitted in Item 8:
Report of Independent Accountants on Financial Statements 18
Consolidated Balance Sheets as of March 31, 1997 and 1996 19
Consolidated Statements of Earnings for the
years ended March 31, 1997, 1996 and 1995 20
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1997, 1996 and 1995 21
Consolidated Statements of Cash Flows for the
years ended March 31, 1997, 1996 and 1995 22
Notes to Consolidated Financial Statements for the
years ended March 31, 1997, 1996 and 1995 23 - 24
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this
report:
Report of Independent Accountants on
Financial Statement Schedule 43
Schedule II: Valuation and Qualifying Accounts
for the Years Ended March 31, 1997, 1996 and 1994 44
Schedules other than those listed above have been omitted since they
are either not required or the information is included elsewhere in the
financial statements or notes thereto.
41
42
Listing of Exhibits
3.1 Certificate of Incorporation.
3.2 By-laws, as amended.
3.3 Certificate of Amendment of Certificate of Incorporation of
Group 1 Software, Inc., dated January 22, 1993.
3.4 Amendment to By-Laws.
4.01 1995 Incentive Stock Option, Non-Qualified Stock Option and
Stock Appreciation Unit Plan
4.02 1995 Non-Employee Directors' Stock Option Plan
10.01 Distribution Agreement with the Computing Group, Ltd.
(incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1991).
10.02 Management and Services Agreement with COMNET Corporation -
1994, (incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year ended March
31, 1991).
10.03 Tax Sharing Agreement with COMNET Corporation - 1991
(incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1991).
10.04 Employment Agreement between Ronald F. Friedman and Group 1
Software - 1990, (incorporated by reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the year ended
March 31, 1991).
10.05 Intentionally deleted.
10.06 Agreement with R. L. Polk & Company, (incorporated by reference
to Exhibit 10.19 to the Company's Annual Report on Form 10-K for
the year ended March 31, 1991).
10.07 First Amendment to Employment Agreement by and between Group 1
Software, Inc. and Ronald F. Friedman dated June 24, 1991,
(incorporated by reference to Exhibit 10.24 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1991).
10.08 Amended and Restated Employment Agreement dated January 28, 1992
by and between Group 1 Software, Inc. and Robert S. Bowen
(incorporated by reference to Exhibit 10.25 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1991).
10.09 Product Development Agreement by and between Deos, Inc. and
Group 1 Software, Inc. dated November 1, 1990, as amended
(incorporated by reference to Exhibit 10.12 to the Company's
Annual Report for the year ended March 31, 1992).
10.10 Intentionally deleted.
10.11 Agreement for the purchase and sale of assets by Group 1
Software, Inc. and Arc Tangent, Inc. signed on October 15, 1992
(incorporated by reference to Exhibit 10.14 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1992).
10.12 Definitive Agreement for purchase of assets of Promark Software,
Inc., dated as of October 14, 1993 (incorporated by reference to
Exhibit 10.15 of the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.)
42
43
10.13 Agreement for computer services with Computer Data Systems, Inc.
dated April 6, 1994.
10.14 Agreement for purchase and sale of assets by and among Post
Saver Systems, Inc., Theodore Kruse and Group 1 Software, Inc.,
dated June 23, 1994.
10.15 Intentionally deleted.
10.16 Agreement between Group 1 Software, Inc. and Archetype Systems,
Ltd. for acquisition of the entire share capital of Archetype
Systems, Ltd., dated as of December 30, 1994.
10.17 Fourth Amendment to Employment Agreement, dated as of March 1,
1994, by and between Group 1 Software, Inc., and Ronald F.
Friedman.
10.18 Sublease, dated March 1, 1994, by and between COMNET Corporation
and Group 1 Software, Inc.
10.19 Agreement to Extend Management and Services Agreement, dated
April 1, 1994, by and between COMNET Corporation and Group 1
Software, Inc.
10.25 First Amendment to Sublease dated April 15, 1994, by and between
Group 1 Software, Inc. and COMNET Corporation
*10.26 First Amendment to Employment Agreement with Robert S. Bowen,
dated as of July 17, 1996.
*10.27 Line of Credit Loan Agreement with Crestar Bank, dated October
10, 1996.
*10.28 Agreement to Extend Management and Services Agreement, dated
April 1, 1997, by and between Group 1 Software, Inc. and COMNET
Corporation.
*10.29 First Amendment to Agreement with CDSI dated as of April 1,
1997.
16.1 Change in Registrant's Independent Accountant on Form 8-K dated
January 26, 1990, (incorporated by reference to Exhibit 16.1 of
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991.)
*11.0 Computation of earnings per share.
*22.0 Subsidiaries of the Registrant.
*23.0 Consent of Independent Accountants.
- -------------------------------
* Filed herewith.
43
44
SCHEDULE II
Group 1 Software, Inc.
Valuation and Qualifying Accounts For the Years Ended
March 31, 1997, 1996, and 1995
Column A Column B Column C Additions Column D Column E
- ------------------------------ ---------- ---------- ----------- ------------- ----------
Balance at Charged to Charged to Balance
Beginning Costs and Other Deductions (2) at end
Description of Year Expenses Accounts(1) Describe of year
- ------------------------------ ---------- ---------- ----------- ------------- ----------
Year ended March 31, 1997
Allowance for doubtful $2,409,000 $1,956,403 - - - $(1,157,403) $3,208,000
accounts
Year ended March 31, 1996
Allowance for doubtful $1,633,000 $1,617,637 $281,400 $(1,123,037) $2,409,000
accounts
Year ended March 31, 1995
Allowance for doubtful $1,620,000 $1,836,344 - - - $(1,823,344) $1,633,000
accounts
- -----------------------------
(1) Items charged to other accounts were for the recoveries of prior year
accounts receivable written off during the year.
(2) The decrease in allowance for doubtful accounts is the result of accounts
receivable written-off during the year.
44
45
EXHIBIT 11
Group 1 Software, Inc.
Computation of Earnings Per Share
For the Years Ended March 31, 1997, 1996 and 1995
1997 1996 1995
------------ ---------- ----------
Net earnings $(1,648,300) $3,701,244 $3,272,119
Primary earnings (A) $(1,648,300) $3,701,244 $3,272,119
------------ ---------- ----------
Fully diluted earnings (B) $(1,648,300) $3,701,244 $3,272,119
------------ ---------- ----------
Weighted average shares outstanding 4,293,697 4,292,947 4,292,947
Dilutive common stock equivalents for
primary earnings per share using the
treasury stock method 13,899 31,962 16,944
------------ ---------- ----------
Weighted average shares and common
equivalent shares outstanding for primary
earnings per share (C) 4,307,596 4,324,909 4,309,891
Additional equivalent shares assuming full
dilution (4,967) (20,598) 7,011
------------ ---------- ----------
Weighted average shares and common
equivalent shares outstanding for fully
diluted earnings per share (D) 4,302,629 4,304,311 4,316,902
------------ ---------- ----------
Earnings (loss) per share
Primary (A)/(C) $(0.38) $0.86 $0.76
------------ ---------- ----------
Fully Diluted (B)/(D) $(0.38) $0.86 $0.76
------------ ---------- ----------
45
46
Exhibit 22. Subsidiaries of Group 1 Software, Inc.
Group 1 Software, Inc., a Delaware corporation
Group 1 Europe, Ltd., a United Kingdom corporation
Gruco, Inc., a Delaware corporation
ARCU, Inc. a Delaware corporation
Group One FSC, Ltd., a Barbados corporation
Group 1 Software - Latin America, Inc., a Puerto Rico corporation
46
47
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Group 1 Software, Inc. on Form S-8 (File No. 33-28057) of our
reports, dated June 27, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Group 1 Software, Inc. and
Subsidiaries as of March 31, 1997 and 1996 and for each of the three years in
the period ended March 31, 1997, which reports are included in this Annual
Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
McLean, Virginia
June 30, 1997
47
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GROUP 1 SOFTWARE, INC.(Registrant)
Date: June 30, 1997 By:
---------------------------
Robert S. Bowen
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
- ------------------------------------
Robert S. Bowen Chairman of the Board June 30, 1997
Chief Executive Officer -------------
Director
(Principal Executive Officer)
- ------------------------------------
Ronald F. Friedman President June 30, 1997
Chief Operating Officer -------------
Director
- ------------------------------------
Mark D. Funston Vice President June 30, 1997
Chief Financial Officer -------------
Director
- ------------------------------------
Charles Mele Director June 30, 1997
-------------
- ------------------------------------
Thomas S. Buchsbaum Director June 30, 1997
-------------
- ------------------------------------
Joseph R. Sullivan Director June 30, 1997
-------------
48
49
Index of Exhibits
- -----------------
PAGE NUMBER
*10.26 First Amendment to Employment Agreement with Robert S. Bowen,
dated as of July 12, 1996.
*10.27 Line of Credit Loan Agreement with Crestar Bank, dated October 10,
1996.
*10.28 Agreement to Extend Management and Services Agreement, dated April
1, 1997, by and between Group 1 Software, Inc. and COMNET
Corporation
*10.29 First Amendment to Agreement with CDSI dated as of April 1, 1997.
*11.0 Computation of earnings per share.
*22.0 Subsidiaries of COMNET Corporation.
*23.0 Consent of Independent Accountants.
- -------------------------------
* Filed herewith.
49