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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, 1998
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, 1998, was $10,408,413. .
The number of shares of the Registrant's Common Stock outstanding on June 23,
1998, was 4,293,697.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive proxy statement to be filed with the Securities and Exchange
Commission relating to Company's 1998 Annual Meeting of Shareholders (Part III
of Form 10-K).
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PART I
ITEM 1. BUSINESS
THE COMPANY
Group 1 Software, Inc. and its wholly and majority owned subsidiaries
("Group 1" or "Company") develops, manufactures, licenses, sells and supports
software products for specialized marketing and mail management applications.
Group 1 markets a broad range of software solutions in each of three major
categories: Database Marketing, Electronic Document Systems and Mailing
Efficiency. The operating systems utilized for Group 1's products vary as to
category. Database Marketing products 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 run under MVS and OS/400, as
well as under UNIX , IBM OS/2 and NT. Mailing Efficiency products run on IBM and
IBM compatible mainframe computers, IBM AS/400, Digital, UNIX, NT and IBM OS/2
platforms. 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 certain of
its products throughout the world. 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 by obtaining
maximum postal discounts ensuring name and address data integrity, targeting
marketing campaigns, and printing high impact customer correspondence. On its
own and through its wholly owned subsidiary, Group 1 Europe, Ltd., the company
provides systems for highly effective document preparation of 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 the
efficiency and effectiveness of their business operations.
Group 1 markets its Mailing Efficiency and Database Marketing products
through a direct sales force in the United States and Canada, and, where
appropriate, through distributors in Europe and South America. Electronic
Document Systems Products are marketed directly to its clients in North America,
the United Kingdom, and Scandinavia and through distributors in the remainder of
Europe.
Group 1 Software, Inc. is incorporated under the laws of the state of
Delaware. As of March 31, 1998, COMNET Corporation, ("COMNET") a publicly traded
Delaware corporation, owned approximately 81.2% of the Company's issued and
outstanding shares of common stock. The executive offices of Group 1 are located
at 4200 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 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, hospitality and gaming,
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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 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 more 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.
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 recently has been 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 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
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, 1998, Group 1 offered approximately 60 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 Windows NT and
the DOC 1 production engines can run under MVS, OS/2, MS-DOS, OS/400, UNIX and
NT operating systems. The system is printer independent and supports AFP,
Metacode and PCL output.
Most of the mailing efficiency products are offered in an Open Systems
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.
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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, Oracle 7, runs
under Windows 3.x, 95, or NT, OS/2 and Novell NetWare; the client utilizes
Windows 3.x, 95 or NT. Support for SQLRouters is 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. NADIS products are offered
in open systems format compatible with most mainframe and mid size operating
systems.
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 NT, 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. The Portable
Document Format (PDF) supported by DOC 1 permits on-line document delivery over
the Internet. DOC 1 can be integrated with Group 1's MailStream Plus system to
produce output documents in a sequence that qualifies for USPS presorting
discounts.
Group 1's EZ- Letter Plus and PRES Products offer a complete system to
create, print and manage individualized business documents. The systems use
conditional statement logic and variable processing to generate customized
documents such as statements, invoices, and policies, all based on
customer-unique information. The EZ-Letter Plus system is a tailored solution
for IBM and IBM-compatible mainframes, while the PRES product offers a PC based
solution. EZ-Letter 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.
EZ- Letter Plus and PRES are 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.
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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, Generalized
Selection, List Manager, SmartMatch 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 Plus 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 formats address data to comply
with the formats of all 195 countries recognized by the United Nations.
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 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 GeoTAX system offers
taxing entities great improvement in accurately assigning sales use tax to
customer addresses.
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.
To process name and address data for Customer Information Files (CIF's),
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.
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PRICING
The 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
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 three 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.
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 $8,800 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. 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 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.
CUSTOMERS
Group 1's customer base includes approximately 2,650 clients who have
licensed one or more of its large software systems.
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, Kansas City Power & Light and PEPCO, telecommunication
companies such as AT&T, Iridium, LCI International and MCI; major banks such as
Citibank, National Westminster Bank, Bank One, Chase Manhattan Bank, ABN AMRO
and Banque Nationale du Canada; insurance companies such as The Hartford
Insurance Group, American International Group, Scottish Widows and Metropolitan
Life; 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
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Nordstrom, J.C. Penney, May Department Stores and Wal-Mart; manufacturers such
as GTE, Caterpillar, Eastman Kodak, Lucent Technologies, General Mills and
Xerox; governmental bodies such as the U.S. Senate, U.S. Customs, the Internal
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, 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. 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.
SALES AND MARKETING
Group 1 markets all of its software products in North America and Europe
through a direct sales and sales support organization of 90 employees 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.
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 has entered into joint marketing agreements with a number of
business partners including IBM, Xerox, Data General Corp., R.L. Polk, Campaign
Mail & Data, MapInfo, Software Pursuits, Mastersoft International Pty.,
Geographic Data Technology, Claritas/NPDC, AMS, UNICA Technologies, PrintSoft,
Bell & Howell and OBIMD International, InterTrak Corporation and Data Tech
Business Enterprises. 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 its 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
normal business hours. 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, 1998, 1997 and 1996, maintenance and
enhancement fees represented approximately 35%, 33% and 37%, respectively, of
Group 1's revenue.
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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 US Postal Service
and the Canada Post Corporation. Group 1 may also have to adapt its products to
accommodate future changes in hardware and operating systems. 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 1998, additional enhancements and new product releases including
a new release of Code 1 Plus, were made to help mailing efficiency customers
meet the expanding requirements of the U.S. Postal Service in order to qualify
for postal discounts.
Other major product enhancements begun in FY 1998 include substantial
enhancements to Canadian postal products.
Doc 1 version 3.0 was released in the second quarter of FY 1998
including support for Windows NT, as well as Internet connectivity.
During 1998 a new version of the Data Designs product was released
allowing for application into new vertical market places.
Group 1 continued development of its enhanced Code-1 Plus International
system during FY 1998, including the second-generation product released during
the fourth quarter of FY 1998.
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 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.
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.
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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, CODE-1
Canada, CODE-1, EZ Letter and Mail Canada are registered trademarks of Group 1
Software, Inc. CODE-1 Plus International, SmartMatch, List Manager,
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 registration of Model 1, MOVEforward, DOC1,
DataDesigns and GeoTax are pending. All other trademarks referenced herein are
the property of their respective owners.
EMPLOYEES
As of March 31, 1998, the Company employed 260 persons on a full-time
basis. Of those employees, 127 were in management, professional and technical
positions, 106 in marketing, sales and support and 27 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, 1998, rental expenses for these properties totaled $1,526,975. 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.
COMNET, Group 1 and certain of Group1's directors have been named as
defendants in a purported shareholder class action filed on April 28, 1998 in
the Court of Chancery of the State of Delaware (CA. No. 16349), Brickell
Partners, Individually and on Behalf of All Others Similarly Situated v. Robert
S. Bowen, et al. The suit alleges breaches of fiduciary duties in that COMNET,
as majority stockholder of Group 1, "has greater knowledge of Group 1 than the
public shareholders and has timed the merger transaction to take advantage of
Group 1's increased efficiency and prospects of profitability", to the unfair
disadvantage of Group 1's public shareholders.
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Both COMNET and Group 1 believe that the complaint is meritless and are actively
pursuing dismissal of all the claims made by Plaintiff in the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
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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
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
---------------------------
1998 HIGH LOW 1997 HIGH LOW
- ---- ------------------ ---- -----------------
First - June 30, 1997 $8.00 $6.50 First - June 30, 1996 $11.00 $7.50
Second - September 30, 1997 $7.25 $6.50 Second - September 30, 1996 $16.50 $8.00
Third - December 31, 1997 $11.00 $6.00 Third - December 31, 1996 $11.50 $8.00
Fourth - March 31, 1998 $8.63 $6.00 Fourth - March 31, 1997 $ 9.00 $6.75
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, 1998, there were approximately 520 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,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- --------- --------- ----------
Statement of Earnings Data:
Revenue $ 61,006 $ 54,550 $ 45,875 $ 37,921 $ 31,312
Earnings (loss) from operations $ 2,961 $ (1,803) $ 5,653 $ 5,073 $ 3,548
Net earnings (loss) $ 1,403 $ (1,648) $ 3,701 $ 3,272 $ 2,474
Basic earnings (loss) per share of common stock (1) $ 0.33 $ (0.38) $ 0.86 $ 0.76 $ 0.58
Diluted earnings (loss) per share of common stock (1) $ 0.33 $ (0.38) $ 0.86 $ 0.76 $ 0.57
Basic weighted average number of common shares
outstanding 4,294 4,294 4,293 4,293 4,293
Diluted Weighted average number of shares
outstanding 4,298 4,294 4,323 4,307 4,313
Balance Sheet Data:
Working capital $ 5,874 $ 3,154 $ 5,424 $ 6,970 $ 8,403
Total assets $ 69,462 $ 74,548 $ 65,851 $ 55,181 $ 45,731
Long-term debt $ 389 $ 304 $ 320 $ 561 $ 719
Stockholders' equity $ 30,398 $ 29,059 $ 30,421 $ 26,624 $ 23,378
- --------------------------------------------------------------------------------
(1) See Note 1 of notes to Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1998 as Compared with 1997
Any statements in this annual report on Form 10-K concerning the
Company's business outlook or future economic performance; anticipated
profitability, revenues, expenses or other financial items; together with other
statements that are not historical facts, are "forward-looking statements" as
that term is defined under the Federal Securities Laws. Forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from those stated in such statements.
Such risks, uncertainties and factors include, but are not limited to, changes
in currency exchange rates, changes and delays in new product introduction,
customer acceptance of new products, changes in government regulations, changes
in pricing or other actions by competitors and general economic conditions, as
well as other risks detailed in the Company's filings with the Securities and
Exchange Commission.
For the year ended March 31, 1998, Group 1's revenue was $61.0 million
compared with $54.5 million for the prior year. Group 1 had net earnings for the
year of $1.4 million compared with a net loss of $1.6 million for fiscal 1997.
The increase in profitability is primarily attributed to write downs in the net
realizable value of certain capitalized software products taken during 1997.
All of Group 1's operations are in the one business segment broadly
defined as marketing support software. 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 three years. International revenues account for
15.4% of Group 1's total revenue in fiscal 1998 and 15.7% in fiscal 1997. That
1998 percentage is expected to increase with the continued growth of European
revenue.
Software license fees and related revenue of $32.8 million represented
an increase of 7% over the prior year attributable primarily to increased sales
of the DOC 1 product offset by lower sales of Mailing Efficiency products as
well as the World Trak and PC Postal Products which were licensed on a long term
basis to third parties for distribution during 1998. As a percent of total
revenue, software license and related revenue was 54% and 56% for fiscal years
1998 and 1997, respectively.
Licensing of Electronic Document Systems increased by 40% 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
1998 decreased 34% over the prior year. The decreases were in both mainframe and
open systems platforms resulting from price competition on the open systems
platform.
License fees from Database Marketing Systems increased 138% for the
fiscal year. The increase resulted from higher sales in the Geocoding, Model 1
and NADIS products. The increases were offset by lower sales in the Data Designs
product along with lower sales in other coding products.
License fees for Customer Information Management Systems decreased 94%
in fiscal 1998 due to lower sales of the World Trak products which were licensed
on a long term basis to a third party for distribution during 1998.
Maintenance and other revenue of $28.2 million for the year increased
18% over the prior year. Maintenance and other revenue accounted for 46% of
total revenue in 1998 and 44% of total revenue in 1997. Recognized maintenance
fees were $21.2 million in 1998 and $18.2 million in 1997, an increase of 16%.
Professional service and educational training revenues of $7.0 million in 1998
and $5.7 million in 1997 represented an increase of 23%. The maintenance renewal
rate was 84% for fiscal year 1998 compared with 83% in fiscal 1997.
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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
and increased sales of certain third party products for which maintenance is
provided by the third party. 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 and Data Designs products whose customers typically
request more consulting and professional services than do the Company's
customers for traditional products.
Total operating costs of $58.0 million amounted to 95% of revenue in
1998 compared with $56.4 million or 103% of revenue during 1997.
Software license expense decreased to $10.5 million in fiscal 1998
representing 32% of software license and related revenues compared with $12.5
million in 1997 representing 41% of software license and related revenues. The
decrease was due to the write-downs of software at the end of fiscal 1997 offset
by increases in royalty expense in 1998 from the sale of third party products.
Excluding the write-downs, software license expense in 1997 was $8.3 million or
27% of software license revenue. The Company believes these costs, as a
percentage of revenue will remain at approximately the current levels.
Maintenance and service expense decreased to $12.5 million in 1998 from
$12.9 million in 1997, 44% and 55% of maintenance and service revenue,
respectively. The decrease in expense is due to the new distribution agreements
for the WorldTrak and PC Postal products along with other cost saving measures
taken during the year partially offset by higher costs of professional service
and education training related to these services.
Included in maintenance and service expense above are professional
service and educational training costs of $5.1 million which were 73% of
professional services revenue during 1998 and $4.6 million and 81% of
professional services revenue for the prior year.
Costs of maintenance were $7.4 million for 1998 representing 35% of
maintenance revenue compared with costs of $8.3 million and 45% of revenue in
1997. The decreased costs as a percentage of maintenance revenue were primarily
due to increased maintenance revenue along with the new licensing agreements for
the WorldTrak and PC Postal product lines, which shifted the support costs for
these products to the respective licensees. The company anticipates these costs
to remain relatively close to their current levels.
Research, development and indirect support expenses (after
capitalization of certain development costs) totaled $2.9 million in 1998 and
$2.7 million in 1997, representing 5% of total revenue for both periods. The
company anticipates these costs to remain relatively close to their current
levels.
Selling and marketing expenses totaled $20.9 million or 34% of revenue
in 1998 and $20.2 million or 37% of total revenue in 1997. The decrease in costs
as a percentage of revenue are primarily due to lower costs associated with the
WorldTrak and PC licensing agreements along with other cost saving measures
taken during the year. These savings were offset by slightly higher marketing
costs in fiscal 1998. The company expects these costs to remain relatively close
to current levels as a percentage of revenue.
General and administrative expenses were $7.8 million or 13% of total
revenue in 1998 compared with $6.1 million or 11% for 1997. The increase in the
current year is primarily due to higher executive compensation accruals.
The provision for doubtful accounts was $3.5 million or 5.8% of revenue
in fiscal 1998 as compared with $2.0 million or 3.6% of revenue in fiscal year
1997. The increase in the current year provision is primarily based upon
increased reserves for WorldTrak and PC accounts receivables.
Net non-operating expense was $0.7 million in 1998 compared to net
non-operating expense of $0.6 million in 1997. The difference primarily reflects
higher expense from loss on disposal of assets offset by lower net interest
expense. The company expects this expense to decrease due to lower short-term
borrowing requirements.
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The Company's effective tax rate was 39% in 1998 and 30% in 1997. The
current year's rate is the net effect of a 39% effective rate on domestic
taxable net income and a 35% effective rate on foreign taxable net income.
The Year 2000 Issue
The year 2000 issue affects virtually all companies and organizations.
Many existing computer programs and digital systems used by, and sold by, Group
1 Software, use only two digits to identify a year in the data field. These
programs and systems were designed and developed without considering the impact
of the upcoming change in the century.
In 1997, we formed two special task forces:
The first task force was established to identify and evaluate our internal
systems and applications that may be affected by the year 2000 issue; modify or
replace those systems and applications so they will work properly in the year
2000, and communicate with our suppliers to make sure they are prepared for the
year 2000.
The second task force was established to evaluate the products sold by us, to
ensure they will function as designed after the Year 2000.
We have identified and evaluated all of our systems and applications that my be
affected by the Year 2000 issue, and have developed plans to ready these systems
and applications for the century change. Modification and replacement projects
are currently under way. We plan to have our internal systems and applications
ready for the year 2000 by mid-1999 and to have all of the products sold by us
Year 2000 compliant by December 1998. We do not expect the costs to address the
year 2000 issue to be material
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. 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 $30.6 million represented
an increase of 19% over the prior year attributable primarily to new product
licenses. As a percent of total revenue, software license and related revenue
was 56% for fiscal years 1997 and 1996.
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.
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15
License fees from Database Marketing Systems increased 12% 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. These increases were offset by lower sales of the
NADIS product. During most of fiscal 1997 the NADIS product was sold through a
direct sales force. The NADIS product continues to be sold through a direct
sales; however, it is now sold by the Mailing Efficiency sales force, rather
than a dedicated sales force. 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 $0.1 million for fiscal year 1997 compared with the prior year. As
a result of the decrease in sales of the WorldTrak product acquired in November
1995, the Company has revised its distribution strategy for this product line.
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 $23.9 million for the year increased
19% over the prior year. Maintenance and other revenue accounted for 44% of
total revenue in 1997 and 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 fiscal
year 1997 compared with 85% in fiscal 1996.
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 $12.5 million in 1997 (including
the write-downs) representing 41% of software license and related revenues
compared with $6.1 million or 24% in 1996. Excluding the write-downs to
capitalized software, software license expense increased to $8.3 million in 1997
representing 27% of software license and related revenues.
Maintenance and service expense increased to $12.9 million in 1997 from
$8.1 million in 1996, 54% and 40% of maintenance and service revenue,
respectively. The increase in expense as a percent of maintenance and service
revenue 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 $4.6 million which were 79% of
professional services revenue during 1997 and $2.3 million and 77% of
professional services revenue for the prior year.
Costs of maintenance were $8.3 million for 1997 representing 46% of
maintenance revenue compared with costs of $5.4 million and 32% of maintenance
revenue in 1996. The increased cost as a percentage of maintenance revenue was
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
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16
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 $2.7 million in 1997 and
$1.8 million in 1996, representing 5% and 4% 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 $20.2 million or 37% of revenue
in 1997 and $17 million in 1996 which also represented 37% of revenue. 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.
General and administrative expenses were $6.1 million or 11% of total
revenue in 1997 compared with $5.7 million or 11% for 1996. The increase in the
current year is primarily due to increased expenses for Data Designs and World
Trak.
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 in 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $ 5.9 million at March 31, 1998 as
compared with $3.2 million in the prior year. The current ratio was 1.2 to 1 at
March 31, 1998, compared with 1.1 to 1 at March 31, 1997. 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.
At March 31, 1998, Group 1 maintained a 2-year $10,000,000 bank line of credit
arrangement with Crestar bank expiring August 31, 1998. The line of credit bears
interest at the
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17
bank's prime rate or Libor plus 175 basis points at Group 1's option. The line
of credit arrangement is collateralized by trade accounts receivable and
maintenance and renewal accounts receivable (excluding installment accounts
receivable) and among other things requires Group 1, to maintain an EBIT to
interest expense ratio of at least 1.5 to 1 through March 31, 1998 and at least
2.0 to 1 thereafter. The arrangement also requires Group 1 to maintain a total
liabilities to EBITDA ( earnings before interest, taxes, depreciation and
amortization ratio of no more than 5.0 to 1 through March 31, 1998 and no more
than 4.0 to 1 thereafter. At March 31, 1998, there were no borrowings under the
facility, at March 31, 1997, borrowings under the line of credit were $7.1
million.
During fiscal 1998 net income of $1.4 million along with non-cash
expenses of $11.5 million provided a total of $ 12.9 million cash from operating
activities. A decrease in accounts receivables added $4.1 million cash during
the year from operating activities.. This decrease was due to improved
collections during the year. Deferred revenues increased cash by $0.3 million,
other working capital items increased cash by $1.9 million. Cash flows from
investing activities consist of expenditures for investments in software
development and capital equipment of $9.4 million. Short-term borrowings
decreased by $7.1 million while long-term debt increased $0.1 million and the
note payable to parent company decreased $0.6 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 three
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, 1998, 1997, and 1996, the principal amount of installment agreements entered
into during the year represented 3%, 10%, and 15% of the Company's revenue,
respectively. Installment receivables included in accounts receivable are $8.0
million and $11.9 million at March 31, 1998 and 1997, 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 $5.1 million or 63 %, of the installment receivables at March 31,
1998.
As of March 31, 1998, 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.
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.
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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. (Group 1) and Subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
McLean, Virginia
June 12, 1998
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19
GROUP 1 SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
----------------------------
1998 1997
----------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,669.792 $ 1,499,876
Trade and installment accounts receivable,
less allowance of $3,603,400 and $3,208,000 27,232,842 32,460,267
Deferred income taxes, net 3,319,441 2,437,992
Prepaid expenses and other current assets 2,659,432 4,047,045
----------- --------------
Total current assets 36,881,507 40,445,180
Installment accounts receivable, long-term 3,810,279 6,169,987
Property and equipment, net 3,333,008 3,472,281
Computer software, net 23,316,091 21,749,148
Other assets 2,120,807 2,710,920
----------- --------------
Total assets $ 69,461,692 $ 74,547,516
=========== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ - - - $ 7,096,854
Accounts payable 2,019,456 2,833,086
Current portion of long-term debt 157,017 163,748
Accrued expenses 5,930,536 5,731,859
Accrued compensation 4,267,308 3,576,938
Current deferred revenues 17,484,138 16,169,758
Due to parent company 1,148,744 1,719,016
----------- --------------
Total current liabilities 31,007,199 37,291,259
Long-term debt, net of current portion 389,144 303,504
Deferred revenues, long-term 3,653,055 4,605,606
Deferred income taxes, net 4,014,186 3,287,679
----------- --------------
Total Liabilities 39,063,584 45,488,048
----------- --------------
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 24,879,411 23,476,460
Cumulative foreign currency translation 286,886 351,197
----------- --------------
Total stockholders' equity 30,398,108 29,059,468
----------- --------------
Total liabilities and stockholders' equity $ 69,461,692 $ 74,547,516
============ ==============
See notes to consolidated financial statements.
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GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
Revenue:
Software license and related revenues $32,786,215 $ 30,620,800 $ 25,785,598
Maintenance and other revenue 28,219,683 23,928,816 20,089,892
------------ ------------ -----------
Total revenue 61,005,898 54,549,616 45,875,490
------------ ------------ -----------
Costs and expenses:
Software license expense 10,491,100 12,511,000 6,107,200
Maintenance and service expense 12,544,100 12,914,285 8,109,000
Research, development and indirect support 2,857,700 2,654,500 1,770,100
Selling and marketing 20,893,408 20,243,908 16,952,140
General and administrative 7,753,709 6,072,442 5,666,300
Provision for doubtful accounts 3,505,000 1,956,403 1,617,637
------------ ------------ -----------
Total costs and expenses 58,045,017 56,352,538 40,222,377
------------ ------------ -----------
Operating earnings (loss) 2,960,881 (1,802,922) 5,653,113
Non-operating income (expense), net (650,909) (567,008) 125,131
------------ ------------ -----------
Earnings (loss) before provision for income
taxes 2,309,972 (2,369,930) 5,778,244
Provision (benefit) for income taxes 907,021 (721,630) 2,077,000
------------ ------------ -----------
Net earnings (loss) $ 1,402,951 $ (1,648,300) $ 3,701,244
============ ============ ===========
Basic earnings (loss) per share of common stock $ 0.33 $ (0.38) $ 0.86
============ ============ ===========
Diluted earnings (loss) per share of common
stock $ 0.33 $ (0.38) $ 0.86
============ ============ ===========
Basic weighted average number of common shares
outstanding 4,293,697 4,293,697 4,293,168
============ ============ ===========
Diluted weighted average number of common and
common equivalent shares outstanding 4,297,779 4,293,697 4,323,410
============ ============ ===========
See notes to consolidated financial statements.
-19-
21
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1998, 1997, and 1996
Common Stock
--------------------------------------
Capital Unrealized Cumulative
$0.01 Contributed Gain/(Loss) Foreign
Par in Excess of Retained from Currency
Shares Value Par Value Earnings Investments Translation
------------ ------------- ------------ ------------ ------------- -----------
Balance, March 31, 1995 4,292,947 $ 42,930 $ 5,183,913 $ 21,423,516 $ (44,720) $ 18,486
Issuance of stock upon exercise of 750 8 4,960 - - - - - - - - -
options
Gain on foreign currency translation - - - - - - - - - - - - - - - 47,801
Unrealized gain on investments - - - - - - - - - - - - 42,545 - - -
Net earnings - - - - - - - - - 3,701,244 - - - - - -
------------ ------------ ----------- ------------- ------------ -----------
Balance, March 31, 1996 4,293,697 42,938 5,188,873 25,124,760 (2,175) 66,287
Gain on foreign currency translation - - - - - - - - - - - - - - - 284,910
Unrealized gain on investments - - - - - - - - - - - - 2,175 - - -
Net loss - - - - - - - - - (1,648,300) - - - - - -
------------ ------------ ----------- ------------- ------------ -----------
Balance, March 31, 1997 4,293,697 42,938 5,188,873 23,476,460 - - - 351,197
Loss on foreign currency translation - - - - - - - - - - - - - - - (64,311)
Net earnings - - - - - - - - - 1,402,951 - - - - - -
------------ ------------ ----------- ------------- ------------ -----------
Balance, March 31, 1998 4,293,697 $ 42,938 $5,188,873 $24,879,411 $ - - - $ 286,886
============ ============ =========== ============= ============ ===========
Total
Stockholders'
Equity
-------------
Balance, March 31, 1995 $26,624,125
Issuance of stock upon exercise of 4,968
options
Gain on foreign currency translation 47,801
Unrealized gain on investments 42,545
Net earnings 3,701,244
-----------
Balance, March 31, 1996 30,420,683
Gain on foreign currency translation 284,910
Unrealized gain on investments 2,175
Net loss (1,648,300)
-----------
Balance, March 31, 1997 29,059,468
Loss on foreign currency translation (64,311)
Net earnings 1,402,951
-----------
Balance, March 31, 1998 30,398,108
===========
See notes to consolidated financial statements.
-20-
22
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
-------------------------------------------
1998 1997 1996
------------- ------------- ------------
Cash flows from operating activities:
Net earnings (loss) $ 1,402,951 $ (1,648,300) $ 3,701,244
Adjustments to reconcile net earnings (loss)
from operations to net cash provided
by operating activities:
Amortization expense 7,031,418 10,736,069 5,143,224
Depreciation expense 1,120,028 966,507 837,077
Provision for doubtful accounts receivable 3,505,000 1,956,403 1,634,638
Deferred income taxes (161,813) (802,167) 1,216,150
Net loss on disposal of assets 51,306 - - - - - -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 4,070,387 (10,472,721) (9,428,286)
(Increase) decrease in prepaid expenses
and other current assets 1,231,258 (391,076) 349,396
Increase in other assets 60,711 (502,459) (529,172)
Increase (decrease) in accounts payable (812,350) 465,675 (84,945)
Increase (decrease) in accrued expenses 1,425,036 (590,124) 2,146,428
Increase in deferred revenues 292,385 2,637,602 3,582,854
----------- ------------- ------------
Net cash provided by operating activities 19,216,317 2,355,409 8,568,608
----------- ------------- ------------
Cash flows from investing activities:
Purchase and development of computer
software (8,298,787) (10,584,146) (8,716,693)
Purchase of equipment and improvements (1,083,623) (1,260,943) (1,306,020)
Purchase of marketable securities - - - - - - (18,067,097)
Sale of marketable securities - - - 1,981,341 19,910,100
----------- ------------- ------------
Net cash used in investing activities (9,382,410) (9,863,748) (8,179,710)
----------- ------------- ------------
Cash flows from financing activities:
Proceeds from short-term borrowings 11,853,526 20,961,666 8,384,995
Reduction of short-term borrowings (18,950,380) (13,864,812) (8,384,995)
Increase of long-term debt 199,511 559,295 - - -
Reduction of long-term debt (120,600) (976,124) (331,251)
Increase (decrease) in due to parent company (586,459) 575,482 163,843
Proceeds from exercise of
common stock options and warrants - - - - - - 4,968
----------- ------------- ------------
Net cash provided by (used in) financing
activities (7,604,402) 7,255,507 (162,440)
----------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents 2,229,505 (252,832) 226,458
Effect of currency translation on cash (59,589) 36,213 (129,082)
Cash and cash equivalents at beginning of period 1,499,876 1,716,495 1,619,119
=========== ============= ============
Cash and cash equivalents at end of period $ 3,669,792 $ 1,499,876 $ 1,716,495
=========== ============= ============
See notes to consolidated financial statements.
-21-
23
GROUP 1 SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(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. As of March 31, 1998, COMNET Corporation,
("COMNET") a publicly traded Delaware corporation, owned approximately 81.2% of
the Company's issued and outstanding shares of common stock
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. 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, 1998, to be recognized
during the subsequent years is:
1999 $ 17,484,138
2000 2,477,433
2001 831,003
2002 234,517
2003 7,087
2004 & beyond 103,015
-------------
$ 21,137,193
=============
Contracts for professional services are negotiated individually and are
non-cancelable. The Company generally recognizes revenues from professional
service contracts on a time and materials basis as the work is performed. Fixed
price professional service contracts are recognized using the
percentage-of-completion method as work is performed, measured primarily by the
ratio of labor hours incurred to total estimated labor hours for each
-22-
24
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.
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 three years.
Interest income from such contracts, which is included in software licenses and
related revenue, was $462,000, $468,000, and $440,000 in 1998, 1997, and 1996,
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 1998, 1997, and 1996 were
approximately $11,493,000 $11,985,000, and $9,445,000, respectively. Under FASB
Statement No. 86, software development costs amounting to $ 8,635,000,
$9,331,000, and $7,675,000, respectively, were capitalized. During the years
ended March 31, 1998, 1997, and 1996, amortization of capitalized internally
developed computer software costs, based on an estimated economic life of no
more than five years, was $6,068,000, $8,543,000, and $4,010,000, respectively.
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 $251,000, $171,000, and $71,000,
for 1998, 1997, and 1996, 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,
1998.
-23-
25
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.
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 (loss) per Share of Common Stock
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, issued by the Financial Accounting Standards Board ("FASB") in
February 1997, requiring dual presentation of basic and diluted per share
earnings on the face of the income statement. Basic earnings per share is based
on the weighted average number of shares of common stock outstanding. On a
diluted basis, shares outstanding are adjusted for stock options for each year
presented. The adoption of SFAS No. 128 did not have a material effect on the
Company's financial statements. Prior years' presentations of earnings per share
have been restated to conform to the guidelines of SFAS No. 128.
Calculation of diluted earnings per share:
Year Ended March 31,
------------------------------------------------
Reconciliation of Denominator: 1998 1997 1996
- ------------------------------ -------------- ------------- ------------
Weighted shares outstanding - basic 4,293,697 4,293,697 4,293,166
Effect of dilutive securities
Stock options 4,082 - - - 30,242
-------------- ------------- ------------
Adjusted denominator - diluted 4,297,779 4,293,697 4,323,408
============== ============= ============
There were 17,729 additional potentially dilutive stock options in 1997 which
were not included in the loss per share calculation due to their anti-dilutive
effect.
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 with 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 $5.0 million or 63% of the
installment receivables at March 31, 1998 versus $9.2 million or 78% 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 value must be written down to fair value.
-24-
26
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income", which establishes standards for reporting
and displaying comprehensive income and its components in a full set of
general-purpose financial statements and is required to be adopted by the
Company beginning in fiscal 1999. Additionally, the Financial Accounting
Standards Board issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the way
that public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas and major customers. SFAS 131 will be effective for the Company
for fiscal 1999 and will apply to both annual and interim financial reporting.
The Company will adopt the required disclosures in conjunction with these
statements.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended
by SOP 98-4, which provide guidance on applying generally accepted accounting
principles in recognizing revenue on software and are effective for the
Company's transactions entered into beginning April 1, 1998. The Company does
not expect the adoption of the SOP's to have a material impact on the Company's
financial condition or results of operations.
Fair Value of Financial Instruments
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.
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,
----------------------------------
1998 1997
-------------- --------------
Trade $ 26,610,092 $ 29,974,239
Installment accounts receivable,
interest typically at 8.5% to 13% 8,036,429 11,864,015
Allowance for doubtful accounts (3,603,400) (3,208,000)
-------------- --------------
31,043,121 38,630,254
Less non-current portion of
installment accounts receivable 3,810,279 6,169,987
============== ==============
Current portion $ 27,232,842 $ 32,460,267
============== ==============
-25-
27
(3) PREPAID EXPENSE AND OTHER ASSETS
Prepaid expenses and other current assets are comprised of the
following:
March 31,
----------------------------------
1998 1997
-------------- --------------
Prepaid expense $780,196 $960,012
Prepaid commission 932,764 1,046,266
Prepaid royalty 425,919 545,495
Other assets 520,553 1,495,272
-------------- --------------
$2,659,432 $4,047,045
============== ==============
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,
----------------------------------
1998 1997
-------------- --------------
Data processing equipment $4,841,567 $5,752,491
Furniture and fixtures 2,384,657 2,418,333
Leasehold improvements 711,253 403,119
-------------- --------------
7,937,477 8,573,943
Less accumulated depreciation and
amortization (4,604,469) (5,101,662)
-------------- --------------
$3,333,008 $3,472,281
============== ==============
(5) COMPUTER SOFTWARE
Computer software is comprised of the following:
March 31,
----------------------------------
1998 1997
-------------- --------------
Developed software $50,367,557 $41,858,190
Acquired software 5,877,290 5,708,419
Software purchased for
Internal use 3,419,806 3,144,773
-------------- --------------
59,664,653 50,771,382
Less accumulated amortization (36,348,562) (28,962,234)
-------------- --------------
$23,316,091 $21,749,148
============== ==============
-26-
28
(6) ACCRUED EXPENSES
Accrued expenses are as follows:
March 31,
----------------------------------
1998 1997
-------------- --------------
Accrued sales and other taxes $926,013 $1,456,053
Accrued royalties 1,738,371 1,228,770
Accrued sales incentives 343,882 326,418
Accrued rent abatements 4,438 106,424
Income taxes payable 1,148,744 1,197,669
Other accrued expenses 1,769,088 1,416,525
============== ==============
$5,930,536 $5,731,859
============== ==============
(7) SHORT-TERM BORROWINGS
At March 31, 1998, Group 1 maintained a 2-year $10,000,000 bank line of
credit arrangement with Crestar bank expiring August 31, 1998. The line of
credit bears interest at the bank's prime (8.5% at March, 31 1998) rate or Libor
plus 175 basis points at Group 1's option. The line of credit arrangement is
collateralized by trade accounts receivable and maintenance and renewal accounts
receivable (excluding installment accounts receivable) and among other things
requires Group 1, to maintain an EBIT to interest expense ratio of at least 1.5
to 1 through March 31, 1998 and at least 2.0 to 1 thereafter. The arrangement
also requires Group 1 to maintain a total liabilities to EBITDA (earnings before
interest, taxes, depreciation and amortization) ratio of no more than 5.0 to 1
through March 31, 1998 and no more than 4.0 to 1 thereafter. At March 31, 1998,
there were no borrowings under the facility, at March 31, 1997, borrowings under
the line of credit were $7.1 million.
(8) LONG-TERM DEBT
Long-term debt consists of the following:
March 31,
----------------------------------
1998 1997
-------------- --------------
Installment notes payable $122,339 $363,505
Capitalized lease obligations 423,822 103,747
-------------- --------------
Sub-total 546,161 467,252
Less current portion 157,017 163,748
============== ==============
Long-term portion $389,144 $303,504
============== ==============
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.
-27-
29
As of March 31, 1998, installment notes include uncollateralized
non-interest bearing notes.
The aggregate maturities of the long-term debt during the years
subsequent to March 31, 1998 are:
1999 $157,017
2000 148,929
2001 131,627
2002 94,579
2003 and beyond 14,009
===========
$546,161
===========
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. Incentive 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. No stock appreciation
rights have been granted under this plan. The plan activity was as follows:
March 31,
--------------------------------
1998 1997 1996
--------- ----------- ----------
Shares under option, beginning of year 42,013 --- ---
Options granted - exercise price $6.50 --- 42,013 ---
Options cancelled (938) --- ---
--------- ----------- ----------
Shares under option end of year - exercise
price of $6.50 41,075 42,013 ---
========= =========== ==========
At March 31, 1998 options for 8,215 shares were vested and exercisable.
Options for 8,215 shares become exercisable in the year ending March 31, 1999.
At March 31, 1998, 258,925 shares were available for future grants of options.
The Group 1 Software, Inc. Incentive 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. No stock
appreciation rights have been granted under this Plan. The Plan activity was as
follows:
-28-
30
March 31,
----------------------------------------
1998 1997 1996
----------- ------------ -----------
Shares under option, beginning of
year - exercise price $6.00 - - - 42,063 42,813
Options exercised - exercise price of
$10.125 - $11.00 - - - - - - (750)
Options cancelled - - - - (42,063) - - -
=========== ============ ===========
Shares under option, end of year -
exercise price of $6.00 - - - - - - 42,063
=========== ============ ===========
At March 31, 1998, 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 on the anniversary date 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,
---------------------------------------
1998 1997 1996
----------- ------------- -------------
Shares under option, beginning of
year- exercise price $7.75 - $11.00 30,000 15,000 - - -
Options granted - exercise price $7.75 - $11.00 - - - - - - 20,000
Options granted - exercise price $6.50 - $9.00 - - - 15,000 - - -
Options granted - exercise price of $6.44-$7.25 15,000 - - - - - -
Options canceled - exercise price of $11.00 - - - - - - (5,000)
----------- ------------- -------------
Shares under option end of year -
exercise price of $6.44-$11.00 45,000 30,000 15,000
=========== ============= =============
At March 31, 1998, 9,000 options for shares were vested and exercisable.
Options for 9,000 shares become exercisable in the year ending March 31, 1999.
At March 31, 1998, 55,000 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 automatic grants on the anniversary date 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 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.
-29-
31
March 31,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
Shares under option, beginning of year -
exercise price $7.75 - $18.75 85,000 85,000 100,000
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 85,000
=========== =========== ===========
At March 31, 1998, 76,000 shares under option were exercisable. Options
for 9,000 shares become exercisable in the year ending March 31, 1999. At March
31, 1998, 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,
-----------------------------------------------------------------------------
1998 1997 1996
------------------------- -------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------- -------------------------- ------------------------
Options outstanding beginning of period 157,013 $ 9.39 142,063 $ 9.36 142,813 $ 9.51
Options exercised - - - - - - - - - - - - (750) $ 6.00
Options canceled (938) $ 6.50 (42,063) $ 6.00 (20,000) $ 10.75
Options granted 15,000 $ 6.90 57,013 $ 6.92 20,000 $ 9.56
Options outstanding end of period 171,075 $ 9.19 157,013 $ 9.37 142,063 $ 9.36
Options exercisable at end of period 93,215 $ 10.59 72,000 $ 11.19 98,063 $ 8.92
Weighted-average fair value of options
granted during the Period. $6.90 $4.99 $7.84
As of March 31, 1998, the weighted average remaining contractual life of
the options that range from $6.44 to $18.75 is 6.47 years.
As of March 31, 1998, 1997 and 1996, the pro forma tax effects under
SFAS 109 are not material to the Company's Financial Statements.
The Company accounts for the activity 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 stock
options for awards under the Plans in accordance with SFAS 123, the Company's
net earnings (loss) and earnings (loss) per common share would have been
increased to the pro forma amounts indicated below:
1998 1997 1996
------------- -------------- --------------
Net earnings (loss)
As reported 1,402,951 $(1,648,300) $3,701,244
Pro forma 1,299,932 $(1,699,089) $3,693,422
Earnings (loss) per common share
As reported $0.33 $(0.38) $0.86
Pro forma $0.30 $(0.40) $0.85
-30-
32
The fair value of each option is estimated on the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended March 31, 1998, 1997 and 1996
respectively; dividend yield of 0%, expected volatility of 109% for 1998 and
1997 and 104% for 1996, a risk-free interest rate of 5.58%, 6.27% and 5.46%,
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,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Federal:
Current $ - - - $ (680,783) $ 478,000
Deferred (208,787) (749,132) 803,000
------------- ------------- -------------
(208,787) (1,429,915) 1,281,000
------------- ------------- -------------
State:
Current 115,000 60,000 76,000
Deferred 24,701 3,088 73,000
------------- ------------- -------------
139,701 63,088 149,000
------------- ------------- -------------
Foreign:
Current 989,508 694,926 362,000
Deferred (13,401) (49,729) 285,000
------------- ------------- -------------
976,107 645,197 647,000
------------- ------------- -------------
$ 907,021 $ (721,630) $ 2,077,000
============= ============= =============
The provisions for income taxes varied from that computed using the
statutory federal income tax rate as follows:
March 31,
--------------------------------------
1998 1997 1996
--------- ---------- ----------
Statutory tax rate 34.0% (34.0%) 34.0%
State income taxes, net of federal income tax benefit 4.0 1.8 1.8
Research and development tax credits --- --- (0.9)
Foreign income taxes 0.2 (0.8) 1.4
Other, net 1.1 2.6 (0.4)
========= ========== ==========
Effective tax rate 39.3% (30.4%) 35.9%
========= ========== ==========
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33
The significant components of the net current deferred tax asset and the
net long-term deferred tax liabilities are:
March 31,
------------------------------------
1998 1997
--------------- --------------
Current:
Deferred maintenance revenue $ 530,974 $ 530,974
Allowance for doubtful accounts 1,278,444 1,254,331
Net operating loss carryforward 450,063 ---
Accrued Compensation 995,699 643,762
Other, net 64,261 8,925
=============== ==============
Total net current deferred tax assets $ 3,319,441 $ 2,437,992
=============== ==============
Long-term:
Deferred maintenance revenue - long-term $ (624,767) $ (1,134,164)
Capitalized software 6,257,903 5,854,463
Depreciation (408,853) (408,359)
Research and development tax credit (1,443,769) (1,152,054)
Other, net 233,672 127,793
=============== ==============
Total net long-term deferred tax liabilities $ 4,014,186 $ 3,287,679
=============== ==============
The Company has research and development tax credit carry forwards of
$1,443,769 which will expire in 2001 through 2013 and net operating carry
forwards of $1,323,715 which expire in 2013.
(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, 1998, 1997 and 1996 were $ 240,347,
$235,276, and $171,000, respectively.
(12) QUARTERLY INCOME DATA (UNAUDITED)
Quarterly financial information for the years ended March 31, 1998 and
1997 was as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------- ---------- --------- ---------- ---------
(Dollars in thousands except earnings per share)
Fiscal Year 1998:
Revenue $11,870 $15,365 $15,859 $17,912 $61,006
Earnings (loss) before taxes (1,623) 952 1,115 1,866 2,310
Net Earnings (loss) (1,094) 605 704 1,188 1,403
Basic earnings per share $(0.25) $0.14 $0.16 $0.28 $0.33
Diluted earnings (loss) per share $(0.25) $0.14 $0.16 $0.28 $0.33
Fiscal Year 1997:
Revenue $10,721 $13,059 $14,631 $16,139 $54,550
Earnings (loss) before taxes (190) 345 741 (3,266) (2,370)
Net earnings (loss) (169) 273 477 (2,229) (1,648)
Basic earnings (loss) per share $(0.04) $ 0.06 $0.11 $(0.52) $(0.38)
Diluted earnings (loss) per share $(0.04) $ 0.06 $0.11 $(0.52) $(0.38)
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34
(13) NON-OPERATING INCOME (EXPENSE) AND SUPPLEMENTAL INFORMATION
Non-operating income and expense is comprised of the following:
Year Ended March 31,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
Interest income $ 79,974 $ 119,993 $ 157,274
Interest expense (618,901) (685,549) (144,296)
Gain on sales of investment - - - 14,486 - - -
Other income (expense), net (111,982) (15,938) 112,153
=========== =========== ===========
Total non-operating income (expense), net $ (650,909) $ (567,008) $ 125,131
=========== =========== ===========
The following supplemental information summarizes the disclosure
pertaining to the Statement of Cash Flows:
Year Ended March 31,
-------------------------------------
1998 1997 1996
-------- -------- --------
Cash paid during the year for:
Interest $ 534,650 $ 552,506 $ 144,888
Income taxes $ 123,266 $ 106,797 $ 257,057
Non-cash investing and financing activities:
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 $ 238,289 $ 249,378 $ 47,102
(14) TRANSACTION WITH PARENT COMPANY
COMNET, the parent company, 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, 1998, 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,
----------------------------------------
1998 1997 1996
----------- ------------ -----------
Management services:
Finance and personnel $ 1,334,391 $ 835,708 $ 817,886
Corporate and management 931,024 921,531 1,040,467
Management fee 610,059 545,496 458,755
----------- ------------ -----------
2,875,474 2,302,735 2,317,108
Building and occupancy 956,504 955,968 728,519
=========== ============ ===========
$ 3,831,978 $3,258,703 $3,045,627
=========== ============ ===========
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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, 1998, 1997 and 1996 (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 COMNET in the amount of
$1,148,744 at March 31, 1998 and in the amount of $1,719,016 at March 31, 1997
which carried an interest rate of prime plus 2% (10.50% at March 31, 1998 and
10.25% at March 31, 1997). The note is due and payable twelve months and one day
from demand by the holder. Interest payable to COMNET by the Company totaled
$149,159, $124,788, and $62,349, during the years-ended March 31, 1998, 1997,
and 1996, respectively.
During the year ended March 31, 1998, COMNET granted options to purchase
17,500 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 respectively.
COMNET granted 71,000 and 335,433 options to employees of the Company in the
year ended March 31, 1997 and 1996, respectively.
(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, 1998, 1997, and 1996
were $1,183,600, $1,273,000, and $1,056,000, 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:
Legal
COMNET, Group 1 and certain of Group1's directors have been named as
defendants in a purported shareholder class action filed on April 28, 1998 in
the Court of Chancery of the State of Delaware (CA. No. 16349), Brickell
Partners, Individually and on Behalf of All Others Similarly Situated v. Robert
S. Bowen, et al. The suit alleges breaches of fiduciary duties in that COMNET,
as majority stockholder of Group 1, "has greater knowledge of Group 1 than the
public shareholders and has timed the merger transaction to take advantage of
Group 1's increased efficiency and prospects of profitability", to the unfair
disadvantage of Group 1's public shareholders.
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36
Operating Capital
------------- -----------
1999 $ 2,770,826 $ 124,125
2000 2,431,423 124,125
2001 2,313,733 124,125
2002 1,963,231 84,346
2003and beyond 3,481,403 14,201
============= -----------
Total minimum lease payments $ 12,960,616 $ 470,922
=============
Amount representing interest 47,099
-----------
Net minimum lease payments 423,823
Current portion of capital lease obligations 97,017
-----------
Long-term portion of capital lease obligations $ 326,806
===========
The Company entered into capital lease transactions aggregating
$238,289, $249,378, and $47,102, for the years ended 1998, 1997 and 1996,
respectively. As of March 31, 1998, the book value of assets recorded under
capital leases was $267,690.
Total rent expense, under operating leases for fiscal years ended March
31, 1998, 1997, and 1996 was $3,253,797, $2,861,774 and $1,958,547,
respectively.
(16) GEOGRAPHIC INFORMATION
Year Ended March 31,
-----------------------------------------------
1998 1997 1996
------------ ------------- --------------
Net Revenue
U.S. operations $53,780,626 $50,113,090 $43,145,418
European operations 9,677,885 6,676,498 4,429,531
Eliminations (2,452,613) (2,239,972) (1,699,459)
------------ ------------- --------------
Total net revenue $61,005,898 $54,549,616 $45,875,490
============ ============= ==============
Operating Income
U.S. operations $(53,804) $(3,949,750) $ 3,823,801
European operations 3,014,685 2,146,828 1,829,312
Eliminations - - - - - - - - -
------------ ------------- --------------
Total operating income $2,960,881 $(1,802,922) $ 5,653,113
============ ============= ==============
Identifiable Assets
U.S. operations $61,373,824 $68,718,242 $62,261,154
European operations 9,986,268 8,433,004 6,528,514
Eliminations (1,898,400) (2,603,730) (2,938,500)
------------ ------------- --------------
Total identifiable assets $69,461,692 $74,547,516 $65,851,168
============ ============= ==============
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 15.4%, 15.7% and
13% of total revenue in 1998, 1997, and 1996.
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37
(17) SUBSEQUENT EVENT
In December 1997, COMNET and Group 1 announced their intent to merge the
two companies through the issuance of COMNET common stock to Group 1's minority
shareholders in exchange for their Group 1 common stock. In April 1998, the
companies announced that the exchange ratio of 1.15 shares of COMNET for each
share of Group 1 stock had been agreed to by the independent committees of the
respective boards of directors. The merger is subject to approval by the boards
of both COMNET and Group 1 as well as the shareholders of each company. The
merger will be accounted for under purchase accounting and approximately $4.0
million of identifiable intangible assets will be recorded.
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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 60 Chairman of the Board of Directors
and Chief Executive Officer
Ronald F. Friedman 54 President, Chief Operating Officer
and Director
Mark D. Funston 38 Vice President, Chief Financial
Officer, Treasurer and Director
Edward Weiss 47 Secretary and General Counsel
Steven Bebee 44 Executive Vice President
Alan P. Slater 42 Executive Vice President
Thomas S. Buchsbaum 48 Director
Joseph R. Sullivan 53 Director
Charles A. Mele 41 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 1999.
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
since 1990. He also serves as Secretary and General Counsel of COMNET.
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39
Mr. Steven Bebee has been Executive Vice President since January 1997.
From January 1991 to December 1996 he was Vice President of Sales.
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.
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.
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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 12, 1998
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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 17
Statements
Consolidated Balance Sheets as of March 31, 1998 18
and 1997
Consolidated Statements of Earnings for the
years ended March 31, 1998, 1997 and 1996 19
Consolidated Statements of Stockholders' Equity
for the years ended March 31, 1998, 1997 and 1996 20
Consolidated Statements of Cash Flows for the
years ended March 31, 1998, 1997 and 1996 21
Notes to Consolidated Financial Statements for the
years ended March 31, 1998, 1997 and 1996 22 - 37
2. Financial Statement Schedules
The following financial statement schedule is filed as part of
this report:
Report of Independent Accountants on
Financial Statement Schedule 40
Schedule II: Valuation and Qualifying Accounts
for the Years Ended March 31, 1998, 1997 and 1996 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.
-40-
42
3. List 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 Options, 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
10.03 Tax Sharing 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)
10.04 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 Amendment to 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).
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.
-41-
43
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.
*10.30 Third Amendment to Employment Agreement by and between Robert S.
Bowen and Group 1 Software, Inc., dated August 15, 1997.
*10.31 Fourth Amendment to Employment Agreement by and between Robert S. Bowen and
Group 1 Software, Inc. dated January 12, 1998.
*10.32 Fifth Amendment to Employment Agreement by and between Robert S. Bowen and Group
1 Software, Inc. dated May 11, 1998.
*10.33 Agreement for Purchase and Sale of Assets by and between Intertrak Corporation
and Group 1 Software, Inc. dated September 4, 1997.
*22.0 Subsidiaries of Group 1 Software, Inc.
*23.0 Consent of Independent Accountants.
- -------------------------------
* Filed herewith.
-42-
44
SCHEDULE II
Group 1 Software, Inc.
Valuation and Qualifying Accounts For the Years Ended March 31, 1998, 1997, and
1996
Column A Column B Column C Additions Column D Column E
- --------------------------- ----------- ------------------------- -------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other Deductions at end
Description of Year Expenses Accounts(1) Describe(2) of year
- --------------------------- ----------- ------------ ------------ ------------ -----------
Year ended March 31, 1998
Allowance for doubtful
accounts $3,208,000 $3,505,000 - - - $(3,109,600) $3,603,400
Year ended March 31, 1997
Allowance for doubtful
accounts $2,409,000 $1,956,403 - - - $(1,157,403) $3,208,000
Year ended March 31, 1996
Allowance for doubtful
accounts $1,633,000 $1,617,637 $281,400 $(1,123,037) $2,409,000
(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.
-43-
45
Exhibit 22. Subsidiaries of Group 1 Software, Inc.
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
-44-
46
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 12, 1998, on our audits of the consolidated financial
statements and financial statement schedule of Group 1 Software, Inc. and
Subsidiaries as of March 31, 1998 and 1997 and for each of the three years in
the period ended March 31, 1998, which reports are included in this Annual
Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
McLean, Virginia
June 26, 1998
-45-
47
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 26, 1998 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 26, 1998
Chief Executive Officer -------------
Director
(Principal Executive Officer)
- -----------------------------
Ronald F. Friedman President June 26, 1998
Chief Operating Officer -------------
Director
- -----------------------------
Mark D. Funston Vice President June 26, 1998
Chief Financial Officer -------------
Director
(Principal Accounting Officer)
- -----------------------------
Charles Mele Director June 26, 1998
-------------
- -----------------------------
Thomas S. Buchsbaum Director June 26, 1998
-------------
- -----------------------------
Joseph R. Sullivan Director June 26, 1998
-------------
-46-
48
Index of Exhibits
*10.30 Third Amendment to Employment Agreement by and between Robert S.
Bowen and Group 1 Software, Inc., dated August 15, 1997.
*10.31 Fourth Amendment to Employment Agreement by and between Robert S. Bowen and
Group 1 Software, Inc. dated January 12, 1998.
*10.32 Fifth Amendment to Employment Agreement by and between Robert S. Bowen and Group
1 Software, Inc. dated May 11, 1998.
*10.33 Agreement for Purchase and Sale of Assets by and between Intertrak Corporation
and Group 1 Software, Inc. dared September 4, 1997.
*22.0 Subsidiaries of Group 1 Software, Inc.
*23.0 Consent of Independent Accountants.
-------------------------------
*Filed herewith
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