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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, 1996
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
COMNET Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 52-0852578
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
4200 Parliament Place, Suite 600, Lanham, MD 20706-1860
(Address of principal executive offices)
(ZIP Code)
Registrant's telephone number, including area code: (301) 918-0400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.50 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 21, 1996 was $26,216,888.
The number of shares of the Registrant's Common Stock outstanding on June 21,
1996 was 3,161,282.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive proxy statement to be filed with the Securities and Exchange
Commission relating to Company's 1996 Annual Meeting of Shareholders (Part III
of Form 10-K).
Part I
Item 1. Business
The Company
COMNET Corporation ("COMNET" or "Company") through its subsidiary, Group 1
Software, Inc. ("Group 1") develops, acquires, markets and supports specialized
marketing and mail management software. On December 31, 1994, Group 1 acquired
all of the outstanding shares of capital stock of Archetype Systems, Ltd. of
the United Kingdom. Archetype Systems, Ltd. has changed its name to Group 1
Software Europe, Ltd.("Group 1 Europe") and will continue its operations based
in London, England.
COMNET owns 81.2% of Group 1's issued and outstanding shares of common
stock, with the remaining 18.8% or 809,109 shares held by others. The trading
of the common stock of Group 1 is reported on the Nasdaq National Market System
under the symbol GSOF. During the fiscal year ended March 31, 1996, Group 1's
common stock price ranged from a high of $26.00 to a low of $7.50. Based on
the closing price of Group 1's common stock on June 21, 1996, of $8.50,
COMNET's holdings in Group 1 represented a market value of approximately $29.6
million.
As of March 31, 1995, the Company disposed of its other subsidiary, COM-
MED Systems, Inc. ("COM-MED Systems") that provided turnkey management and
operations support systems and consulting services for the long-term care
industry.
COMNET Corporation is incorporated under the laws of the state of
Delaware. Unless otherwise indicated, the term "Company" shall refer to COMNET
and its subsidiaries, exclusive of discontinued operations. The executive
offices of COMNET are located at 4200 Parliament Place, Suite 600, Lanham, MD
20706-1860, and the telephone number at that location is (301) 918-0400.
Group 1 Software, Inc. ("Group 1") develops, acquires, markets and
supports specialized marketing and mail management software. Group 1 markets a
broad range of software solutions in each of four major categories: Customer
Information Management, Database Marketing, Electronic Document Composition and
Mailing Efficiency. The operating systems utilized for Group 1's products vary
as to category. Products in the first two categories - Customer Information
Management and Database Marketing - operate in client/server mode for UNIX or
NT server or workstations with client support in Windows 3.x, 95 and NT.
Electronic Document Systems currently run under MVS on IBM and IBM-compatible
mainframe computers as well as under UNIX and IBM OS/2 on the PC. Mailing
Efficiency products run on IBM and IBM compatible mainframe computers, IBM
AS/400, Digital, UNIX, Microsoft NT and IBM OS/2 platforms as well as on IBM
and IBM-compatible microcomputers (PCs). Group 1's Electronic Document Systems
support Kodak, IBM and Xerox print architectures (AFP and Metacode) for high-
speed, high-volume production laser printing.
Group 1 distributes all of its products in North America and its
Electronic Document Systems throughout the world as well; plans are underway to
distribute additional Group 1 products in Europe. Group 1 has recently
undertaken initiative to distribute its products in Latin American and the
Pacific rim. Group 1 believes it is a leading vendor of mailing efficiency
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, manufacturing, retailing,
hospitality, publishing and mail order industries, plus service bureaus,
associations and various activities of educational institutions and
governmental agencies. In general, Group 1's software systems are designed to
minimize the costs and maximize the opportunity to sell products and services
to existing and potential customers. Group 1's software systems also provide
solutions where a need exists for highly accurate name and address data or
where address information must be correlated with demographic or geographic
data. Other Group 1 systems provide highly effective document preparation for
customized forms or personalized correspondence. This is achieved through the
use of advanced document design workstation software coupled with sophisticated
host-based document composition software, resulting in highly targeted and
individualized documents (e.g., statements, invoices, policies, direct mail,
etc.). Group 1 believes that the continuing growth of database marketing, data
warehousing and targeted, direct communication, together with increased postal
rates and postage discounts for coded and/or sorted mail, can expand the market
potential for Group 1's existing and future products.
Group 1 also offers a broad variety of professional services to its
clients, including systems and business analysis, installation assistance,
operations support, programming services, technical education and training and
operational reviews. These services are designed to assist clients in
obtaining maximum utilization from their Group 1 products and/or in improving
efficiency and effectiveness of their business operations.
Group 1 markets its Customer Information Management, Database Marketing,
and Electronic Document System directly to its clients in North America and in
the United Kingdom and through distributors in Europe. Mailing Efficiency
products are marketed directly for large system configurations and through a
dealer and distributor network for PC applications.
Markets Served
Group 1 markets its products within a broad span of industries to fulfill
customer information manage-ment, database marketing, database
publishing/electronic printing and mailing efficiency requirements. Included
among the industry groups served by Group 1 are banking, insurance, credit card
companies and financial institutions, retailers, hotels, catalog mailers,
publishers, manufacturers, telecommunication companies, associations,
educational institutions, fund raisers and governmental activities. 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 fund raisers are also extensive
users of Group 1's list management and personalization products. The Smart
Marketing Suite (recently introduced for the PC) integrates mailing efficiency,
file merge and deduplication, and mail preparation functions in an integrated
desktop marketing tool for small businesses.
The banking and insurance segments, while requiring address correction
products, additionally use Group 1's products to build and maintain Customer
Information Systems (CIS) and to clean transaction based, operational data
prior to loading into a data warehouse. Both CIS and data warehouses are
being built by these organizations primarily to provide a complete picture of
their customers and their business. Geographic and demographic overlays may be
used to gauge market penetration, demographic targets and competitive position.
Cross-selling opportunities among groups can also be identified. While banking
and insurance organizations have led in the CIS applications of Group 1
products, such applications have potential within many other market segments as
well. Banking and insurance organizations also have increasing need for
software tools to assist in certain record keeping and analysis used to
demonstrate compliance with government regulations. These industry segments
use Group 1's geocoding and demographic coding products for Credit Reporting
Act and Home Mortgage Disclosure Act compliance.
Enterprises with large sales organizations are increasingly in need of a
closed-loop sales and marketing automation systems that can track every
communication with a prospect or existing customer. Group 1's multi-module
sales and marketing automation system supports complex global territories, plus
direct and indirect sales channels, allowing businesses to manage sales
opportunities more effectively. Businesses may now fully integrate account,
contact, activity and resource management functions with Oracle Office,
Microsoft Office, Lotus Smart Suite and knowledge based support products to
maximize sales results.
Many industries who have adopted database marketing utilize Group1
products that append demographic and geographic data to provide enhancements to
existing customer databases. Use of other Group 1 systems provides automated
predictive modeling to identify more precise buying patterns, or by clustering,
identify differences in behavioral characteristics across product lines or over
time. Hospitality and gaming organizations are becoming aggressive marketers.
Group 1's database marketing system extracts raw customer data from existing
client systems for conversion it 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.
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 and others, use Group 1's electronic document
composition software (plus, in many instances, Group 1's consulting services)
to generate and manage customized statements using conditional statement logic.
The format, content and language of each statement may be individually
structured relative to specific information contained in each customer record;
individualized marketing messages can also be 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, 1996, Group 1 offered a total of 89 software products.
The sales and marketing automation products operate in a true two-tiered
client/server mode. Client support includes Windows 3.x, 95, and NT. Server
operating systems may be UNIX, NT or Novell. WorldTrak supports Oracle,
SYBASE, SQLServer, SQLBASE databases. The data repository structure features
dynamic configuration. Data sources may be accessed and drilled on RDBMS
through a single interface to all customer-related data.
The database marketing products are offered for a variety of operating
systems. The DataDesigns database marketing system with a proprietary database
operates in a client/server environment. The server software is the SQLBase
RDMS which runs under Windows 3.x ,95 or NT, OS/2 and Novell Netware; the
client utilizes Windows 3.x or 95. Support for SQLRouters are available to
access Oracle, SYBASE and SQLBASE databases.
The 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.
DOC1 can operate in centralized, or distributed, departmental or desktop
environments under MVS, OS/2, OS/400, and UNIX operating systems. The system
is printer independent and supports AFP, Metacode and PCL output.
The newest releases of the PC products are developed in a 32-bit Windows
environment. All Group 1 PC products support ".dbf" files, the industry
standard PC database software format.
Most of the mailing efficiency products are offered in an Open System
format which ensures that the specific application operates 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.
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.
In October, 1993, Group 1 purchased the Canadian mail management and
postal qualification PC software, plus certain related technology and assets of
Promark Software, Inc. In June, 1994, Group 1 purchased the postal discount
and POSTNET Barcoding PC software from PostSaver Systems, Inc. In December,
1994, Group 1 purchased Archetype Systems, Ltd. Archetype Systems, Ltd. has
been renamed Group 1 Software Europe, Ltd. (Group 1 Europe). In August, 1995
Group 1 purchased the database marketing software and other assets of
DataDesign, Inc. In November, 1995 , Group 1 purchased the sales and marketing
automation software and certain other assets of Premier One, Inc.
Customer Information Management
Group 1's WorldTrak sales and marketing automation system provides closed-
loop tracking of all prospect and customer inquiries. WorldTrak's user-
definable workflow allows clients to tailor the system to match their sales and
marketing processes. Enhanced reporting, campaign management, sales pipeline
management and sales forecasting are streamlined to provide improved market
analysis. A client-server based system, it maintains closed-loop sales,
marketing and service information to allow for improved management of the
prospect, customer and supplier relationship. WorldTrak records the
characteristics of all types of marketing, sales and support efforts, including
media advertising and telemarketing. This relationship-driven system
consolidates all activity to enable measurement of the quality of leads, return
on marketing investment and total cost of marketing and selling. WorldTrak
supports international business disciplines, helping to ensure that language,
cultural and geographic issues affecting global business operations are
properly addressed.
To process name and address data for Customer Information Files (CIF's)
reliably, Group 1 offers the NADIS System (Name and Address Data Integrity
Software). An expert system technology, NADIS offers the most advanced
capabilities to ensure data integrity and to identify all relationships within
and across files.
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.
Group 1 offers an automated predictive modeling tool permitting the
analysis of volumes of data quickly, to identify buying patterns of individuals
for more precise, profitable targeted marketing. This sophisticated system is
easy to use, without the need for complex formulas. Other Group 1 products
provide data analysis and decision support tools to identify motivational
behavioral characteristic and changes across products or over time.
Electronic Document Systems
Group 1's Electronic Document Composition system (DOC1) makes possible
advanced applications of electronic preparation of individualized documents for
worldwide markets. The software supports all major printing architectures and
can operate in centralized, distributed or desktop environments under OS/2,
OS/400, MVS, and UNIX operating systems. DOC1 produces individualized
statements, insurance policies, invoices, medical bills, letters, etc. that
allow one-on-one communication with the recipient. The system is a truly
visual application that allows the user to place text, images and graphics on
the page in a dynamic WYSIWYG process. DOC1 can be integrated with Group1's
MailStream Plus system to produce output documents in a sequence that provides
USPS presorting discounts.
Group 1's Automated System for Advanced Printing (ASAP) is a complete
system comprising batch and on-line components to create, print and manage
individualized business documents. The system uses conditional statement logic
and variable processing to generate customized documents such as statements,
invoices, and policies, all based on customer-unique information. The system
is a tailored solution for IBM and IBM-compatible mainframes, implemented to
client specifications. ASAP features a menu-driven interface that lets users
define documents interactively, as well as manage printer resources and
documents within a secure environment. The system supports all major printing
architectures.
ASAP is used to create, compose, edit and produce direct mail, mass
correspondence and other forms of written material on a highly individualized
basis. Specific information for each individual can be extracted from computer
databases for incorporation into a mail piece. Words, sentences and/or entire
paragraphs can be automatically added, changed or deleted based upon the target
recipient's information file and the creative wishes of the user. The
resulting personalized letters, forms, coupons, reports, labels and other
correspondence can be produced economically on high-speed laser, impact or ink-
jet printers.
Postal Discount and Mailing Efficiency
Group 1's postal discount and 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 and produce the necessary United States Postal Service (USPS)
reports and Canada Post Corporation (CPC) statements of mailing.
All appropriate Group 1 products are Coding Accuracy Support System (CASS)
and Presort Accuracy Validation and Evaluation (PAVE) certified by the USPS.
These products allow mailers to qualify for enhanced carrier route, presort and
automation postal discounts and to optimize discounts among various postal rate
categories. Clients can currently save nearly 28% of the cost of First-Class
mail and up to 48% of the cost of Standard mail by presorting and coding.
Significant savings can also be achieved with other classes of mail. Similar
benefits are provided to Canadian mailers using Group 1's products accepted
under the Software Evaluation and Recognition Program (SERP) of CPC. Canadian
clients can avoid the $0.05 per piece surcharge by demonstrating an address
accuracy level of at least 90%, and can qualify for certain other postal rate
incentives.
Group 1's list management systems 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 and
to make targeted demographic and test-cell selections. This software also adds
or verifies ZIP Codes and postal codes for the United States and Canada.
Group 1's PC-based products include a specialized database management
system designed specifically to handle mailing lists, and postal discount
systems which allow mailers to qualify for various discounts depending on
various postal rate category. A stand-alone product is also available that is
designed to remove duplicates from address lists on the most popular database
management systems. The system can print virtually any type of label.
Professional Services and Customer Support Services
Professional services are available including operations support, systems
analysis, 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 in improving other areas of
their operations.
Group 1 offers with its product licenses an annual service agreement which
provides telephone support and continuing updates and enhancements, as
available, to its products and documentation. Educational and training
seminars specific to Group 1 products are offered as part of the initial
product licensing agreement at no additional charge; thereafter, such seminars,
together with a variety of more general educational seminars, are available for
a fee.
Pricing
The Customer Information Management and Database Marketing software
products offered by Group 1 carry one-time perpetual license fees of $5,000 to
$175,000 except for the Demographic Coding System for which a full national
package is priced on an annual license basis at $50,500 (regional editions are
available). A complete Group 1 mail and list management system would have a
list price of more than $136,000. For PCs, products are offered for suggested
retail prices from $295 to $5,995.
The DOC1 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 DOC1 are available at additional costs generally
exceeding $250,000.
License agreements and products sold to distributors generally call for
payment in full, 30 days after execution, although extended payment terms may
be granted. Alternatively, a customer may elect an installment payment program
(typically from one to five years) with a minimum down payment of 10% 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 of Group
1's software products, a customer must pay an annual fee in advance which is
presently 16.5% (currently 15% in the U.K. and the European marketplace) of the
then-current license fee for the product. U.S. and Canadian postal master
files are available for an additional fee. A service and enhancement agreement
is available for an annual fee of $295 each for certain of Group 1's PC
products.
Licensing
With the exception of the Demographic Coding System, Group 1's products
are licensed on a perpetual "right to use" basis pursuant to non-exclusive
license agreements. The Demographic Coding System is licensed on an annual
basis. Group 1 does not sell or transfer title to its software products to
clients. A client is generally entitled to use a product only for internal
purposes on a single computer at a single location. Client/server
implementations are available for DataDesign and WorldTrak; LAN network
versions for PC products are also available. Multi-site, multi-computer
corporate license agreements are available as well. Certain postal products
are required by the USPS and CPC regulations ("CASS" and "SERP", respectively)
to have an expiration date (quarterly or monthly) and must be under
subscription or re-licensing arrangements with Group 1 in order to be used for
postal discounts or price qualification.
Group 1 warrants that the majority of 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. Microcomputer software is warranted for ninety
days from date of purchase against defects in material and workmanship and
against operational failures.
Customers
Group 1's customer base includes approximately 2,100 clients who have
licensed one or more of its large software systems. In addition, over 26,600
of Group 1's PC software systems have been licensed. Group 1 believes that it
is a leading vendor of list and mail management software in North America.
Group 1's clients range from small businesses to a large number and broad
variety of the foremost businesses and other organizations in North America and
internationally. Included are utilities such as Pacific Gas and Electric and
PEPCO, telecommunication companies such as AT&T and MCI; major banks such as
Citibank, National Westminster Bank, Bank One, Chase Manhattan Bank and Banque
Nationale du Canada; insurance companies such as The Hartford Insurance Group,
Metropolitan Life, and Standard Life of Scotland; publishers such as Time,
Inc., McGraw-Hill and Encyclopedia Britannica; computer services companies such
as EDS and Neodata; financial services companies such as Prudential Securities,
Charles Schwab and General Electric Credit; retailers such as Nordstrom and Wal-
Mart; manufacturers such as GTE, Caterpillar, Eastman Kodak, General Mills and
Xerox; governmental bodies such as the U.S. Senate, U.S. Customs and U.S.
Government Printing Office; credit companies such as GE Data Services and TRW
Information Services; direct marketers such as Publishers Clearing House, Lands
End and L.L. Bean; service companies such as American Express, Trans World
Airlines, Avis and Tru Green Chem Lawn; educational institutions such as The
Johns Hopkins University and MIT; health and leisure companies such as Nordic
Track; non-profit service groups such as The Girl Scouts of America, National
Geographic Society and AARP; cultural organizations such as the Metropolitan
Museum of Art and Metropolitan Opera Association; and hospitality and
entertainment companies such as Marriott, Mirage Resorts and Westin Hotels.
The United States Postal Service is also a client of Group 1.
All of Group 1's operations are in the one business segment broadly
defined as marketing support software; during the fiscal year ended March 31,
1996, four customers individually accounted for more than 1% of Group 1's
revenue. No customer accounted for 3% of revenue. Traditionally, Group 1 does
not have a material order backlog for its software products at any given time.
Group 1 recognizes maintenance and enhancement revenue over the life of the
service agreement, usually from one to five years. International revenues
account for less than 10% of Group 1's total revenue, although that percentage
is expected to increase with the continued growth of European revenue and
penetration into the South American market
Sales and Marketing
Group 1 markets its software products in North America and Europe through
a direct sales and sales support force of 94 representatives located in the
U.S., Canada 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 nine regional offices in the New York City,
Chicago, Los Angeles, Las Vegas, Atlanta, Dallas, Minneapolis, Toronto and San
Juan metropolitan areas. A European office is located in the London, England
metropolitan area.
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, which was attended by over 400
customers in fiscal 1996.
Group 1 has entered into a software distribution agreement with a Swedish
company to serve Scandinavia and an Australian company to serve the Australian
and New Zealand markets. Through its Group 1 Europe subsidiary, Group 1 has
entered into software distribution and support agreements for the DOC1 product
with companies throughout Europe. These agreements provide for a royalty
payment to Group 1, with the distributor performing sales and marketing,
customer service and support activities. Group 1 continues to pursue
additional international sales and marketing opportunities for its products.
Group 1's PC software products are marketed to end-users through Group 1's
developing U.S. and Canadian dealer and distributor network.
Group 1 has entered into joint marketing agreements with a number of
business partners including IBM, Xerox, Data General Corp., R.L. Polk, Campaign
Mail & Data, the Harris Group, MapInfo, Advanced Software Application Corp.,
Software Pursuits, Mastersoft International Pty., Geographic Data Technology,
Claritas/NPDC and OBIMD International. Generally, the agreements provide for
distribution of Group 1 products in conjunction with the business partner's
products. A sale may arise from either sales organization, and territories are
non-exclusive. The agreements provide for a commission payment to Group 1 when
it has contributed to a sale of the other company's products. Conversely,
Group 1 may pay a commission when a partner contributes to a sale of Group 1
products or services.
Support
Group 1 believes that effective support of its customers and products has
been a substantial factor in Group 1's success to date and will continue to be
so in the future. As of March 31, 1996, over 85% of Group 1's large systems
customers were enrolled in the product maintenance and enhancement program.
Customer support for these software products is provided by telephone for
assistance in product installation and problem resolution during normal
business hours. A telephone support help line is also provided for PC
products. Automated call tracking, client-specific call routing and on-line
bulletin board services are also provided for maintenance customers. Customer
support is provided by telephone and, if necessary for large systems, on-site
by qualified Company personnel. Group 1 Europe also has modem links with many
of its worldwide customers to provide even higher levels of mission-critical
support. In the fiscal years ended March 31, 1996, 1995 and 1994, maintenance
and enhancement fees represented approximately 37%, 42% and 43%, respectively,
of Group 1's revenue.
Professional services, including operations support, business analysis,
programming services, technical education and training, and operational
reviews, are provided at the client's location and at Group 1 training
facilities throughout the U.S., Canada and the U.K.
Product Development
The computer industry is characterized by rapid change in hardware and
software technology and in user needs, requiring a continuing expenditure for
product development. It is likely that such circumstances will continue in the
future. Accordingly, Group 1 must be able to provide new products and to
modify and to enhance existing products on a continuing basis to meet the
requirements of its customers and of regulatory agencies, particularly the USPS
and CPC. Group 1 may also have to adapt its products to accommodate future
changes in hardware. To date, Group 1 has been able to adapt its products to
such changes and believes that it will be able to do so in the future. Group 1
also evaluates externally developed products that can be acquired or licensed
and subsequently marketed through the Group 1 sales force and distribution
network. Whether the product is developed internally or acquired from another
company, Group 1 considers it important to control the quality, marketing,
distribution, enhancement and evolution of each of its 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.
New product development during fiscal year 1996
Significant investment was made during the year in new software
development for migration of a variety of products to the Open Systems
platform. Additionally, extensive work was performed on enhancing existing
mainframe, midrange and open system products.
New Open Systems Products
During the year, Group 1 released Open Systems versions of Canadian Code-
1 Plus, Mail Canada Plus, Generalizes Selection Plus and I/O Jet Plus for use
on a variety of platforms.
Existing Open Systems, IBM mainframe and midrange Products
Enhancements were made during fiscal 1996 to on-line and batch products to
improve functionality and ease of use, to accommodate changes in the
marketplace and in postal regulations. The personalization products were
enhanced to increased functionality and to take advantage of a broader range of
electronic printing technologies. Additionally, improvements were made to
Group 1's existing CODE-1 Plus and the Canadian mail products to meet new USPS
and CPC certification and regulatory requirements. Significant investment was
made in the MailStream products for all platforms to implement a major revision
in the classifications of mail and the discount structures related to mail
preparation. These products were released to market in May, 1996.
Enhancements were also made to the previously released Open Systems
versions of CODE-1 Plus, Geographical Coding System, MailStream Plus,
Palletization Plus, POSTNET Barcoding, Labels Printing Plus, EZ Case Plus and
Merge/Purge Plus.
Group 1 also committed substantial resources to the development and
enhancement of new products:
DOC1 version 2.2 was integrated with Group 1's MailStream Plus presorting
product, and also provides additional operational efficiencies such as direct
importation of IBM and Xerox printer resources, the provision of multiple
libraries of document objects, and enhanced post-processing capabilities. The
new release also has more desktop publishing-like document design capabilities,
eliminating costly design and testing of conditional documents. Version 2.2
provides dynamic page layout and direct text importation from PC word
processors. Multi-lingual versions of documents may now be processed within a
single print run.
A Graphical User Interface (GUI) to the Open Systems product line was
introduced to provide enhanced ease of use and reduced training needs for a
large segment of the customer base. Utilizing Microsoft Windows based
technology, these productivity workstations seamlessly interface with most of
the supported Open Systems hardware platforms.
The DataDesigns database marketing system was integrated with Group 1's
Canadian PC address standardization product. Automation of the data import and
installation and system configuration was undertaken, with completed elements
delivered with current installations. Enhanced reporting and additional
interfaces to third party systems were also completed during the year. User
interfaces were improved to current SQL Windows standards.
WorldTrak version 3.0, to be released in mid-FY97, will provide support
for Windows 95 and a completely new user interface. Also included will be
enhanced channel management, opportunity management, reporting and scheduling
modules.
PC Products
In March, 1996 Group1 released the Smart Marketing Suite which seamlessly
integrates the individual applications of AccuMail and ProSort, with
anticipated future functionality of database management and intelligent data
merging. The suite is Windows 95 compliant, using the latest 32-bit technology
with a common interface that allows ease-of-use task processing.
AccuMail 5.0 in 32-bit Windows was released with a smaller database
configuration and improved coding accuracy. Changes were also made to comply
with CASS and other regulatory requirements.
ProSort 2.0 was released in September, 1995 with increased speed, second
class mail sortation and ASCII file support. ProSort was also PAVE certified
by the USPS. In March 1996 a 32-bit Windows version was released.
The Canadian PC products for Windows and DOS were enhanced for additinoal
functionality and compliance with CPC regulatory changes. SmartSort 5.0, to be
released in early fiscal 1997, is the first Windows-based mail sortation
software for Canadian address lists.
Products acquired during fiscal year 1996
The DataDesigns system is a desktop database marketing system designed
specifically for the hotel and gaming industries but adaptable to other
industry applications. Developed utilizing GUPTA's SQL Windows and C++ , data
is captured from virtually all computing platforms - from standalone PCs to
networks to midrange and mainframe computers. Data can come from any
relational or non-relational database system including Informix, Oracle,
SYBASE, SQLBASE and DB2. The DataDesigns system is a client/server
configuration; the server can be any NT server or workstation with a Windows PC
as the client.
The WorldTrak sales and marketing automation system supports all
client/server architectures including Intel and RISC-based systems, and
operating systems supported by RDBMS vendors. Developed utilizing GUPTA's SQL
Windows, the system supports the most popular databases, including SYBASE,
Oracle, Microsoft SQL Server and SQLBASE. The client system operates under
Windows 3.x, 95 and NT.
Products licensed for distribution
In May, 1996 Group 1 and OBIMD International of Paris, France entered into
a joint venture under which Group 1 will market PC-based Universal Mailing
software for address correction, postal coding, postal sortation and an
extensive postal database developed by OBIMD. The software and database will
allow businesses to manage mailing lists and prepare mail for more than 190
countries.
Group 1's portfolio of USA and foreign registered and common law
trademarks exceeds seventy marks. Included among those marks are AccuMail,
ArcList, CODE -1 Plus, DOC1 and Group 1 Software (name and logo). All other
trademarks and respective marks referenced in this report are the property of
their respective owners.
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 which
offer products competitive with one or more of Group 1's products. Group 1
believes that six companies offer customer information management systems and
at least twelve companies offer database marketing systems. At lease four
competitors are in the document composition and production marketplace. For
mailing efficiency products, at least two competitors offer products that
compete with Group 1 on open system and mainframe platforms. During the year,
Group 1 continued to experience strong competition in the market for postal
coding and presorting software from these competitors. Group 1 believes that
at least ten companies offer PC products competitive with one or more of Group
1's products. There can be no assurance that one or more of these competitors
will not develop products that are equal or superior to the products Group 1
expects to market. In addition, many potential clients for which Group 1's
products are targeted have in-house capability to develop computer software
programs.
Group 1 believes that the principal, distinguishing competitive factors in
the selection of its software products are price/performance characteristics,
marketing and sales expertise, ease of use, product features and functions,
reliability and quality of technical support, integration of the product line
and the financial strength of the publisher. Group 1 believes that it competes
favorably with regard to these factors including pricing and credit terms.
Group 1's primary strengths are the technical capabilities of its personnel and
products, marketing and sales expertise, service and support, and industry
product leadership.
Product Protection
Group 1 regards its software, in source and object code, as proprietary
and relies upon a combination of contract, trade secret and copyright laws to
protect its products and related manuals and documentation. The license
agreements under which clients use Group 1's products generally restrict the
client's use to its own operations and always prohibit unauthorized disclosure
to third persons. Notwithstanding these restrictions, it may be possible for
other persons to obtain copies of Group 1's products. Group 1 believes that
because of the rapid pace of technological change in the computer industry and,
in addition, changes in postal regulations that affect several core products,
copyright and trade secret protection are less significant than factors such as
the knowledge and experience of Group 1's management and other personnel and
their ability to develop, enhance, market and acquire new products.
Employees
As of March 31, 1996, the Company employed 311 persons on a full-time
basis. Of those employees, 164 were in management, professional and technical
positions, 102 in marketing, sales and support and 45 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.
COM-MED Systems
COM-MED Systems, a wholly-owned subsidiary of the Company, provided the
long-term health care industry with computer software systems for management
and operations support. As of March 31, 1995, the Company sold the assets of
COM-MED Systems for up to $4,500,000, to be paid as a percentage of the
acquiring company's future revenues. Additionally, the Company was issued
warrants to acquire up to 25% of the acquiring company's common stock. In
September, 1995 the acquiring company ceased operations, whereupon the Company
repossessed those assets and sold them, in turn, to another entity for up to
$4,500,000, to be paid as a percentage of that company's future earnings.
Reserves in the amount of $108,000 have been established to cover
disposition cost and contingencies associated with the sale of the assets. Any
gain on the sale will be recognized as payments are received. During fiscal
year 1994, the Company wrote off approximately $1,100,000 in capitalized
software and other assets relating to COM-MED Systems. The Company's
Consolidated Statements of Earnings have been restated to reflect COM-MED
Systems as a discontinued operation.
Item 2. Properties
The Company's executive and administrative offices are located in Lanham,
Maryland, a Washington, DC suburb, where the Company leases 51,900 square feet
under a lease that expires in 2004. These facilities also include Group 1's
headquarters and principal operations base. COMNET has options to lease
additional space at specified periods during the term and to extend its lease.
Group 1 leases additional sales and support offices in Chicago, Dallas, Los
Angeles, Las Vegas, Atlanta, New York City, Sterling, Minneapolis, San Juan,
Puerto Rico, London, England and Toronto, Canada metropolitan area. See Note
13 of notes to consolidated financial statements.
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.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to, and approved by, the required
vote of security holders of the Company at the Company's most recent annual
Shareholder's meeting held on September 12, 1995.
(1) To elect three (3) directors to hold office until the third
annual meeting of stockholders of Group 1 following their
election and until the election and qualification of their
successors.
Nominees For Withheld
Richard H. Eisenberg 2,878,251 95,570
Carl I. Kanter* 2,878,251 97,168
James V. Manning 2,878,251 95,570
*Resigned December 8, 1995
(2) To approve the adoption of Company's 1995 Incentive Stock
Option, Non-Qualified Stock Option and Stock Appreciation
Unit Plan.
For Against Abstain
2,764,542 194,559 14,720
(3) To approve the adoption of Company's 1995 Non-Employee
Directors' Stock Option Plan.
For Against Abstain
2,756,383 194,253 23,185
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The trading of the common stock of the Company is reported on the Nasdaq
National Market System under the symbol CNET. 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
1996 High Low 1995 High Low
First-June 30, 1995 $10.50 $9.00 First-June 30, 1994 $11.50 $8.00
Second-September 30, Second-September 30,
1995 $20.50 $9.13 1994 $10.75 $9.75
Third-December 31, Third-December 31,
1995 $17.00 $10.00 1994 $11.00 $9.00
Fourth-March 31, 1996 Fourth-March 31, 1995
$14.00 $10.00 $10.75 $9.75
No cash dividends have been paid on the Company's common stock. The
Company pays dividends on the 6% Convertible Preferred Stock discussed in Note
8. The Board of Directors intends to retain, for the foreseeable future, the
Company's remaining earnings for use in the development of the business.
At June 21, 1996, there were approximately 1,050 holders of record of the
Company's common stock, including persons who wish 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,
1996 1995 1994 1993 1992
Statement of Earnings Data:
Revenue $45,873 $37,883 $31,370 $32,099 $30,430
Earnings from continuing
operations $ 5,472 $ 5,241 $ 3,303 $ 5,548 $ 5,068
Net earnings from continuing
operations $ 2,832 $ 2,658 $ 1,776 $ 3,075 $ 2,795
Net loss from discontinued
operations - - - $ (282) $(1,571) $ (921) $(1,818)
Net earnings $ 2,832 $ 2,376 $ 204 $ 2,154 $ 976
Earnings per share (primary):
Earnings from continuing $ 0.82 $ 0.76 $ 0.54 $ 0.83 $ 0.78
operations per share of common
stock
Loss from discontinued
operations per share of common
stock - - - $ (0.08) $ (0.53) $ (0.24) $ (0.51)
Net earnings per share $ 0.82 $ 0.68 $ 0.01 $ 0.59 $ 0.27
Weighted average number of
common shares: 3,717 3,617 2,941 3,884 3,566
Balance Sheet Data:
Working capital $ 6,829 $ 6,787 $ 8,958 $ 9,499 $ 6,711
Total assets $67,192 $57,148 $49,047 $45,541 $38,954
Long-term debt $ 320 $ 561 $ 719 $ 1,206 $ 1,273
Stockholders' equity $27,433 $22,866 $20,337 $17,251 $13,926
The year ended March 31, 1992, includes a provision of $1.2 million
(pretax) for expenses arising from the disposition of AIM operations
which occurred in October 1992 (Fiscal Year 1993).
Restated to report separately, as a discontinued operation, the
results of operations of COM-MED Systems.
See Notes 1 and 9 of notes to consolidated financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
1996 as Compared with 1995
The Company sold its COM-MED Systems subsidiary as of March 31, 1995. The
Company's consolidated financial statements have been restated to report
separately, as a discontinued operation, the results of operations of COM-MED
Systems. The Company's remaining business unit is Group 1 Software, Inc., an
81% owned subsidiary, which develops, acquires, markets and supports
specialized marketing and mail management software. For the year ended March
31, 1996, the Company's revenue was $45,873,000 compared with $37,883,000 the
prior year. The Company's net earnings from continuing operations were
$2,832,000 or $0.82 per share compared with $2,658,000 or $0.76 per share the
prior year.
For the year ended March 31, 1996, Group 1's revenue was $45,875,000
compared with $37,921,000 for the prior year. Net earnings for the year were
$3,701,000 compared with $3,272,000 for fiscal 1995. On December 31, 1994,
Group 1 acquired Archetype Systems, Ltd. (renamed Group 1 Software Europe,
Ltd.). The results of operations from that subsidiary subsequent to the
acquisition did not have a material effect on the consolidated financial
statements for fiscal 1995.
All of Group 1's operations are in the one business segment broadly
defined as marketing support software; during the fiscal year ended March 31,
1996, four customers individually accounted for more than 1% of Group 1's
revenue. No customer accounted for 3% of revenue. Traditionally, Group 1 does
not have a material order backlog for its software products at any given time.
Group 1 recognizes maintenance and enhancement revenue over the life of the
service agreement, usually from one to five years. International revenues
account for less than 10% of Group 1's total revenue, although that percentage
is expected to increase with the continued growth of European revenue and
penetration into the South American market
Software license fees and related revenue of $25,786,000 represented an
increase of 24% over the prior year attributable primarily to new product
sales. As a percent of total revenue, software license and related revenue was
56% and 55% for fiscal years 1996 and 1995, respectively.
License fees from Customer Information Management Systems software
increased by $808,000 over the prior year due mostly to NADIS revenues;
Database Marketing Systems license fees decreased by $127,000 due to lower
geographic and demographic licenses fees offset in part by revenue from the
newly acquired DataDesigns system. Licensing of the Electronic Document
Systems contributed increased revenue of $1,780,000, due primarily to a full
year of European operations versus only four months the prior year. Mailing
Efficiency software revenues increased $2,609,000 over the prior year due to
the continued growth of the Open Systems product suite; the increase also
reflects a growth of $850,000 in PC software revenue.
Maintenance and other revenue in fiscal 1996 of $20,087,000 increased by
17% over the prior year. Maintenance and other services accounted for 44% of
total revenue in 1996 versus 45% of total revenue in 1995. Recognized
maintenance contract revenue increased over the prior year by $1,826,000, due
primarily to the continuing growth in the number of customers under maintenance
contracts. The maintenance renewal rate was 85% for the fiscal year 1996
compared with 83% in fiscal 1995.
Total operating costs and expenses for fiscal year 1996 were $40,640,000
or 89% of total revenue compared with $32,825,000 or 87% of total revenue
during the prior year. The increase in operating costs and expenses as a
percent of revenue is primarily due to increased selling and marketing
expenses.
Software license expense increased to $7,582,000 in fiscal 1996 from
$6,453,000 the prior year, representing 30% and 31% of software license and
related revenue, respectively. The increase in software license expense was
related to increased amortization of product development and acquisition cost
as well as the direct sales support activity related the DOC1 and NADIS
products. PC cost of sales also increased for the year due to the cost of
production and shipping.
Maintenance and other service expense increased to $7,569,000 in the
current year from $6,171,000 in 1995, representing 37% and 36% of maintenance
and other revenue, respectively. The incremental cost was due primarily to an
increase of $1,309,000 in amortization expenses for the current year reflecting
the new and enhanced products released during fiscal 1996 and fiscal 1995 for
all computer platforms. Amortization was 11% of total revenue in both years.
Group 1 expects the amortization of software costs to continue to increase due
to development expenditures capitalized and to recent software acquisitions.
Other direct costs to fulfill new customer orders and provide updates for
existing customers increased to 6% of total revenue from 5% the prior year due
to an increase in internal product distribution support personnel. Group 1
expects the cost of maintenance and other service to increase as Group 1's
customer base expands.
Research, development and indirect support expenses totaled $2,628,000 in
fiscal 1996 and $1,895,000 in the prior year, representing 6% and 5% of
revenue, respectively. Expenses during fiscal 1996 increased due to additional
internal management and technical support requirements for the growing number
of computer platforms and specialized product applications. Group 1 expects
these expenses to continue to increase as Group 1's product applications
increase.
Selling and marketing expenses totaled $15,897,000 or 35% of revenue in
fiscal year 1996, compared with $12,208,000 or 32% of revenue the prior year.
The increase in expenses reflects higher sales compensation travel and direct
marketing expenses to support increased sales activity for new products and
markets.
General and administrative expenses increased $682,000 to $5,291,000 or
12% of revenue, primarily as a result of increased costs associated with a full
year of Group 1's operations in Europe and establishing operations in Puerto
Rico to address the South American market. Additionally, compensation and
professional services increased over the prior year.
The provision for doubtful accounts of $1,618,000 represented an increase
of $130,000 from the prior year. This increase over the prior year reflects a
reduction in that year of reversal of reserves associated with a note
receivable for which payment was received.
Net non-operating income for the Company totaled $239,000 in fiscal year
1996, which represents an increase of $55,000 as compared with fiscal 1995.
Interest income and gains on investments increased $199,000, as compared with
fiscal 1995 as a result of the improved invested cash position of the Company
throughout the year. Interest expense increased $12,000 due to increased
capital lease obligations. Other expense increased by $27,000 for foreign
exchange losses and $105,000 for other items.
The Company's effective tax rate for the 1996 fiscal year was 36% as
compared with 38% for fiscal 1995 reflecting the lower state tax rates in
addition to lower foreign tax rates on a larger proportion of foreign income
versus the prior year.
1995 as Compared with 1994
As stated previously, the Company sold its COM-MED Systems subsidiary as
of March 31, 1995. The Company's consolidated financial statements have been
restated to report separately, as a discontinued operation, the results of
operations of COM-MED Systems. The Company's remaining business unit is Group
1 Software, an 81% owned subsidiary. For the year ended March 31, 1995, the
Company's revenue was $37,883,000 compared with $31,370,000 the prior year.
The Company's net earnings from continuing operations were $2,658,000 or $0.76
per share compared with $1,776,000 or $0.54 per share the prior year.
For the year ended March 31, 1995, Group 1's revenue was $37,921,000
compared with $31,312,000 for the prior year. Net earnings for the year were
$3,272,000 compared with $2,474,000 for fiscal 1994. On December 31, 1994,
Group 1 acquired Archetype Systems, Ltd. (renamed Group 1 Software Europe,
Ltd.). The results of operations from that subsidiary subsequent to the
acquisition did not have a material effect on consolidated financial statements
for the fiscal year 1995.
Software license fees and related revenue for the Company of $20,754,000
represented an increase of 27% over the prior year attributable primarily to
new product sales. As a percent of total revenue, software license and related
revenue was 55% and 52% for fiscal years 1995 and 1994, respectively.
License fees from Customer Information Management systems software
increased by $115,000 over the prior year due mostly to NADIS revenues;
Database Marketing systems license fees increased by $896,000 due to geographic
and demographic licenses fees. Licensing of Electronic Document Systems
contributed increased revenue of $2,449,000, due primarily to one fiscal
quarter of the new European operations plus six months of DOC1 revenues in the
U.S. versus none in the prior year. Mailing Efficiency software revenues
decreased $413,000 versus the prior year due to the decline in mainframe
license which was partially offset by the growth of the Open Systems product
suite plus an increase of $1,317,000 in PC software revenue as a result of new
products added during this and the prior year.
Maintenance and other revenue of $17,128,000 increased by 14% over the
prior year. Maintenance and other services accounted for 45% of total revenue
in 1995 versus 48% of total revenue in 1994. Recognized maintenance contract
revenue increased over the prior year by $2,133,000, due primarily to the
continuing growth in the number of customers under maintenance contracts. The
maintenance renewal rate was 83% for the fiscal year as compared with 82% in
fiscal 1994.
Total operating costs and expenses for the Company for fiscal year 1995
were $32,825,000 or 87% of total revenue compared with $27,991,000 or 89% of
total revenue during the prior year. The decrease in operating costs and
expenses as a percent of revenue is due to many operating costs not increasing
in proportion to the revenue increase.
Software license expense increased to $6,453,000 in fiscal 1995 from
$4,921,000 the prior year, representing 31% and 30% of software license and
related revenue, respectively. Software license expense increased primarily
due to a greater mix of royalty related products distribured by the Company.
PC cost of sales also increased for the year due to the increases in sales
volume. The Company expects that royalty expense will continue to insrease as
the sales of these products increases.
Maintenance and other service expense increased to $6,171,000 in the
current year from $5,076,000 in 1994, representing 36% and 34% of maintenance
and other revenue, respectively. The incremental cost was due primarily to an
increase of $882,000 in amortization expenses for the current year reflecting
the new and enhanced products released during fiscal 1995 and fiscal 1994 for
all computer platforms. Amortization was 9% of total revenue in both years.
Group 1 expects the amortization of software costs to continue to increase due
to the development expenditures capitalized and from recent software
acquisitions. Other direct costs to fulfill new customer orders and provide
updates for existing customers decreased to 5% of total revenue due to the
Company's cost containment efforts in the current year from 6% the prior year.
The Company expects the cost of maintenance and other service to increase as
the Company's customer base expands.
Research, development and indirect support expenses totaled $1,895,000 and
$1,830,000 in the prior year, representing 5% and 6% of revenue, respectively.
Although the percent of revenue has declined, actual expenses during fiscal
1995 increased due to a reduced rate of total research and development
expenditures capitalized as software development costs. This increased expense
reflects additional internal management and technical support requirements for
the growing number of computer platforms and specialized product applications.
Selling and marketing expenses totaled $12,208,000 or 32% of revenue in
fiscal year 1995, compared with $11,113,000 or 35% of revenue the prior year.
The increase in expenses reflects higher sales compensation and direct
marketing expenses to support the increased sales activity for new products and
markets.
General and administrative expenses increased $1,489,000 to $4,609,000,
primarily as a result of increased profitability-based compensation and
professional services costs.
The provision for doubtful accounts of $1,488,000 represented a decrease
of $442,000 from the prior year. The decrease in this expense reflects a lower
incidence of Group 1 client payment defaults in the current year versus the
prior year and the receipt of payments for notes receivable for sale of
business assets that was previously fully reserved.
Net non-operating income for the Company totaled $184,000 in fiscal year
1995, as compared with an expense of $77,000 for fiscal 1994. Interest expense
decreased $40,000 due to capital lease obligations; additionally, a $50,000
reduction of accrued penalty associated with a state tax claim, and other
income items of $17,000 were offset by an investment loss of $140,000.
Interest income increased by $141,000 as a result of the improved invested cash
position of the Company throughout the year. The Company did not incur the
$95,000 interest and penalty associated with state sales tax audit claims
experienced in fiscal 1994. The net change in foreign currency between the
years was a gain of $59,000.
The Company effective tax rate for the 1995 fiscal year was 38% compared
with 32% for fiscal 1994. The increase in the current year was due to lower
research and development credits versus those in the prior year. The prior
year included retroactive research and development credits available as a
result of changes in the then current tax regulations.
Seasonality and Inflation
Group 1 in the past has experienced greater sales and earnings in the
January-March quarter, the fourth quarter of its fiscal year, although 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. Group 1'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 Group 1's products. Inflation directly affects
Group 1'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 $6,829,000 at March 31, 1996 as compared
with $6,786,000 the prior year. The current ratio was 1.3 to 1 at March 31,
1996 and 1995. 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, the Company's Group 1 subsidiary
maintains an uncollateralized $5,000,000 line of credit arrangement with Signet
Bank (Maryland), a major Mid-Atlantic regional bank, with interest at the
bank's prime rate. The terms of this line of credit allow Group 1 to lend
money from this arrangement to the Company. At March 31, 1996 and 1995 there
were no short-term borrowings under this line of credit.
During fiscal 1996 net earnings of $2,832,000 plus non-cash expenses of
$9,783,000 provided a total of $12,615,000 cash from operating activities.
This amount was offset by increased accounts receivable that required
$9,978,000 which is the combined result of higher year-end sales over the prior
year-end, increases in the amount of installment receivables, and the increased
mix of large dollar contracts with extended collection cycles versus the prior
year. Deferred revenues increased cash by $2,396,000, and other working
capital items increased cash provided by operating activities by $1,724,000.
Cash flows from investing activities are primarily expenditures for investments
in software development and capital equipment of $10,058,000. Cash of
$1,843,000 was generated from the sale of marketable securities. Proceeds
from the exercise of the Company's stock options generated cash of $1,823,000.
Long-term debt was reduced by $328,000, and dividends of $177,000 were paid.
Group 1's practice of accepting license agreements under installment
payment arrangements substantially increases its working capital requirements.
Generally, these arrangements are for a period of one to five years after a
minimum down payment of 10% of the principal amount of the contract. Interest
currently ranges from 10% to 12%. In the years ended March 31, 1996, 1995 and
1994, the principal amount of installment agreements entered into during the
year represented 15%, 17% and 20% of Group 1's revenue, respectively.
Installment receivables included in accounts receivable are $11,769,000 and
$8,995,000 at March 31, 1996 and 1995, respectively. Group 1 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 Group 1'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.
Group 1 continually evaluates the credit and market risks associated with
outstanding receivables. In the course of this review, Group 1 considers many
factors specific to the individual client as well as to the concentration of
receivables within industry groups. Group 1's installment receivables are
predominately with clients (service bureaus) who provide computer services to
the direct marketing industry. Many of these clients have limited capital and
insufficient assets to secure their liability with Group 1. The service
bureaus are highly dependent on Group 1's software and services to offer their
customers the economic benefit of postal discounts and mailing efficiency. To
qualify for the U.S. Postal Service and Canada Post Corporation postal
discounts, service bureaus require continuous regulatory product updates from
Group 1. The service bureau industry is also highly competitive and subject to
general economic cycles, as they impact advertising and direct marketing
expenditures. Group 1 is aware of no current market risk associated with the
installment receivables. Service bureaus represent approximately $8,978,000,
or 76%, of the installment receivables at March 31, 1996.
As of March 31, 1996, 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. 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 34.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
REPORT OF INDEPENDENT ACCOUNTANTS
___________________
To the Stockholders and
Board of Directors
COMNET Corporation
We have audited the accompanying consolidated balance sheets of COMNET
Corporation and Subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company'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 COMNET
Corporation and Subsidiaries as of March 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
June 26, 1996
COMNET CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 1,844,521 $ 1,938,796
Marketable securities 1,979,166 3,779,624
Trade and installment accounts receivable,
less allowance of $2,409,000 and $1,703,000
24,488,730 18,457,360
Income tax benefit - - - 1,314,774
Deferred income taxes 1,923,000 1,489,000
Prepaid expenses and other current assets 2,793,129 2,824,848
---------- ----------
Total current assets 33,028,546 29,804,402
Installment accounts receivable, long-term 5,985,291 3,656,520
Property and equipment, net 3,269,206 2,867,193
Computer software, net 22,425,814 18,726,275
Other assets 2,482,964 2,093,922
---------- ----------
Total assets $ 67,191,821 $ 57,148,312
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,483,356 $ 2,801,166
Current portion of long-term debt 564,934 652,157
Accrued expenses 6,760,472 4,861,327
Accrued compensation 3,743,954 3,803,307
Current deferred revenues 12,646,877 10,899,993
---------- ----------
Total current liabilities 26,199,593 23,017,950
Long-term debt, net of current portion 320,115 560,940
Deferred revenues, long-term 4,363,429 3,713,854
Deferred income taxes 3,147,000 1,922,000
Minority interest in net earnings of
consolidated subsidiary 5,728,613 5,068,068
---------- ----------
Total liabilities $ 39,758,750 $ 34,282,812
---------- ----------
Commitments and contingent liabilities
Stockholders' equity:
6% cumulative convertible preferred stock
(Note 8) 2,845,857 2,845,857
Common stock $0.50 par value; 10,000,000
shares authorized; 3,562,690 and 3,383,748
issued and outstanding 1,781,345 1,691,874
Capital contributed in excess of par value 17,471,861 15,738,644
Retained earnings 7,285,246 4,630,709
Unrealized loss on investments, net (2,175) (44,720)
Cumulative foreign currency translation 66,287 18,486
---------- ----------
29,448,421 24,880,850
Less treasury stock at cost, 316,267 shares (2,015,350) (2,015,350)
---------- ----------
Total stockholders' equity 27,433,071 22,865,500
Total liabilities and stockholders' equity $ 67,191,821 $ 57,148,312
========== ==========
See notes to consolidated financial statements.
COMNET CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31,
1996 1995 1994
Revenue:
Software license and related revenues $ 25,785,598 $ 20,754,197 $ 16,397,575
Maintenance and other revenue 20,087,224 17,128,462 14,971,991
---------- ---------- ----------
Total revenue 45,872,822 37,882,659 31,369,566
---------- ---------- ----------
Costs and expenses:
Software license expense 7,582,297 6,453,283 4,920,535
Maintenance and service expense 7,569,039 6,170,855 5,076,139
Research, development and indirect 2,627,627 1,895,315 1,830,401
support
Selling and marketing 15,897,343 12,208,007 11,113,418
General and administrative 5,345,635 4,609,469 3,120,795
Provision for doubtful accounts 1,617,637 1,487,878 1,929,424
---------- ---------- ----------
Total costs and expenses 40,639,578 32,824,807 27,990,712
---------- ---------- ----------
Operating earnings 5,233,244 5,057,852 3,378,854
Non-operating income (expense), net 238,871 183,552 (76,251)
---------- ---------- ----------
Earnings from continuing operations
before provision for income taxes 5,472,115 5,241,404 3,302,603
Provision for income taxes 1,985,000 1,968,539 1,061,832
Minority interest in net earnings of
consolidated subsidiary 655,578 615,158 465,103
---------- ---------- ----------
Net earnings from continuing
operations $ 2,831,537 $ 2,657,707 $ 1,775,668
========== ========== ==========
Discontinued operations:
Loss from discontinued operations
(net of tax benefits of $83,000 and
$873,000 for 1995 and 1994,
respectively) - - - (161,504) (1,571,226)
Loss on disposal of discontinued
operations (net of tax benefit of
$61,000) - - - (120,282) - - -
Net earnings 2,831,537 2,375,921 204,442
Preferred stock dividend
requirements (177,000) (177,000) (177,683)
---------- ---------- ----------
Net earnings available to common
stockholders $ 2,654,537 $ 2,198,921 $ 26,759
========== ========== ==========
Earnings per share of common stock
Continuing operations 0.82 0.76 0.54
Discontinued operations - - - (0.08) (0.53)
---------- ---------- ----------
Net earnings per common share $ 0.82 $ 0.68 $ 0.01
========== ========== ==========
See notes to consolidated financial statements.
COMNET CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1996, 1995 and 1994
Common Stock
6% Capital Unrealized Equity
Cumulative $0.05 Contributed Treasury Gain/(Loss) Adjustment Total
Convertible Par In Excess of Retained Stock from for Currency Stockholders'
Preferred Stock Value Par Value Earnings at Cost Investments Translation Equity
Balance, March 31, 1993 2,845,857 1,554,909 13,975,436 2,405,029 (684,470) -.-.- -.-.- 20,096,761
Dividends to preferred
stockholders - - - - - - - - - (177,683) - - - - - - - - - (177,683)
Repurchase of common
stock - - - - - - - - - - - - (467,520) - - - - - - (467,520)
Issuance of stock upon
exercise of options - - - 54,328 627,100 - - - - - - - - - - - - 681,428
Gain on foreign
currency translation - - - - - - - - - - - - - - - - - - 18,486 18,486
Net earnings for the
year - - - - - - - - - 204,442 - - - - - - - - - 204,442
--------- ------- ---------- --------- ------- -------- -------- -----------
Balance, March 31, 1994 2,845,857 1,609,237 14,602,536 2,431,788 (1,151,990) - - - - - - 20,337,428
Dividends to preferred
stockholders - - - - - - - - - (177,000) - - - - - - - - - (177,000)
Repurchase of common
stock - - - - - - - - - - - - (863,360) - - - - - - (863,360)
Issuance of stock upon
exercise of options - - - 82,637 1,136,108 - - - - - - - - - - - - 1,218,745
Gain on foreign
currency translation - - - - - - - - - - - - - - - - - - 18,486 18,486
Unrealized loss on
investments - - - - - - - - - - - - - - - (44,720) - - - (44,720)
Net earnings for the
year - - - - - - - - - 2,375,921 - - - - - - - - - 2,375,921
--------- ------- ---------- --------- ------- -------- ----------- -----------
Balance, March 31, 1995 2,845,857 1,691,874 15,738,644 4,630,709 (2,015,350) (44,720) 18,486 22,865,500
Dividends to preferred
stockholders - - - - - - - - - (177,000) - - - - - - - - - (177,000)
Issuance of stock upon
exercise of options - - - 89,471 1,733,217 - - - - - - - - - - - - 1,822,688
Gain on foreign currency
translation - - - - - - - - - - - - - - - - - - 47,801 47,801
Unrealized gain on
investments - - - - - - - - - - - - - - - 42,545 - - - 42,545
Net earnings - - - - - - - - - 2,831,537 - - - - - - - - - 2,831,537
--------- ------- ---------- --------- ------- -------- ----------- -----------
Balance, March 31, 1996 $2,845,857 $1,781,345 $17,471,861 $7,285,246 $ (2,015,350) $ (2,175) $66,287 $27,433,071
========= ======= ========== ========== ======== ======== =========== ===========
See notes to consolidated financial statements.
COMNET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
1996 1995 1994
Cash flows from operating activities:
Net earnings $ 2,831,537 $ 2,375,921 $ 204,442
Adjustments to reconcile earnings
from operations to net cash
provided by operating activities:
Amortization expense 5,095,487 3,796,982 4,284,934
Depreciation expense 861,499 749,036 827,404
Provision for doubtful accounts
receivable 1,617,637 1,906,184 2,367,506
Provision for doubtful notes
receivable - - - - - - 60,259
Net gain (loss) on disposal of - - - 7,999 (350)
asset
Deferred income taxes 1,548,022 1,112,000 (424,000)
Minority interest in earnings of
consolidated subsidiary 655,578 615,158 470,445
Changes in assets and liabilities:
Increase in accounts receivable (9,977,778) (6,068,215) (1,969,171)
Decrease in notes receivable 276,072 183,614 538,321
(Increase) decrease in other
current assets (201,546) (166,758) 1,030,158
(Increase) decrease in other
assets 125,903 (111,590) (152,243)
Increase in deferred revenues 2,396,459 2,097,704 2,886,632
Increase (decrease) in accounts
payable (317,810) 665,744 362,677
Increase in accrued expenses 2,866,923 3,444,937 152,286
Increase (decrease) in taxes
payable - - - (381,556) - - -
Increase (decrease)in accrued
expenses 1,839,794 2,515,293 (147,218)
---------- ---------- ----------
Net cash provided by operating
activities 6,750,854 9,297,516 10,339,796
---------- ---------- ----------
Cash flows from investing activities:
Purchase and development of computer
software (8,758,547) (5,902,737) (5,081,358)
Purchase of equipment and
improvements (1,299,991) (726,166) (1,351,570)
Purchase of marketable securities (18,066,997) (3,824,344) - - -
Sale of Marketable securities 19,910,000 - - - - - -
Advances to and payment for
acquisition of subsidiary, net of
cash acquired - - - (2,514,945) - - -
Sale of assets - - - 354,689 - - -
---------- ---------- ----------
Net cash used in investing activities (8,215,535) (12,613,503) (6,432,928)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from short-term borrowings 8,384,995 3,307,458 3,268,812
Reduction of short-term borrowings (8,384,995) (3,307,458) (3,268,812)
Proceeds from exercise of stock
options 1,822,688 355,395 213,908
Proceeds from exercise of subsidiary
stock options 4,967 - - - 2,250
Principal payments of long-term debt (328,050) (788,339) (645,892)
Dividends paid on preferred stock (177,000) (177,000) (166,408)
---------- ---------- ----------
Net cash provided by (used in)
financing activities 1,322,605 (609,944) (596,142)
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents (142,076) (3,925,931) 3,310,726
Loss on currency translation 47,801 30,659 - - -
Cash and cash equivalents at beginning
of period 1,938,796 5,834,068 2,523,342
---------- ---------- ----------
Cash and cash equivalents at end of
period $ 1,844,521 $ 1,938,796 $ 5,834,068
========== ========== ==========
See notes to consolidated financial statements.
COMNET Corporation
Notes to Consolidated Financial Statements
Years Ended March 31, 1996, 1995 and 1994
(1) Organization and Summary of Significant Accounting Policies
Organization
COMNET Corporation ("COMNET" through its subsidiary, Group 1
Software, Inc. ("Group 1") 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. The
Company has recently undertaken an initiative to distribute its
products in Latin American and the Pacific rim.
Principles of Consolidation
The consolidated financial statements of the Company include
the accounts of COMNET Corporation and its wholly and majority
owned subsidiaries ("the Company"). All material intercompany
transactions and balances have been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with the
American Institute of Certified Public Accountants' Statement of
Position 91-1 on Software Revenue Recognition. Revenue from
perpetual licenses and the portion of royalty revenues not
subject to future obligations is generally recognized after
execution of a licensing agreement and shipment of the product
provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management.
Maintenance and enhancement (post contract support) revenues
are deferred and recognized ratably over the life of each
contract. Costs related to performance under post-contract
support agreements are expensed as incurred.
The amount of deferred revenue at March 31, 1996, to be
recognized during the subsequent years is:
1996 $12,646,877
1997 2,550,088
1998 1,218,991
1999 411,381
2000 & beyond 182,969
-----------
$17,010,306
===========
Contracts for professional services are negotiated
individually and are non-cancelable. The Company recognizes
revenues from professional service contracts using the percentage-
of-completion method as work is performed, measured primarily by
the ratio of labor hours incurred to total estimates labor hours
for each specific contract. When the total estimated cost of a
contract is expected to exceed the contract price, the total
estimated loss is charged to expense in the period when the
information is known.
Contract professional services revenue in the year ended
March 31, 1996 was recognized primarily using the percentage-of-
completion method as the work was performed. For the period
ended March 31, 1995 the completed contract was used; any
difference in revenue resulting from this change in accounting
method was immaterial to the consolidated financial statements
for 1995 and 1994.
Cash Equivalents
Cash equivalents consist of investments with original
maturities of 90 days or less, which are readily convertible into
cash.
Installment Accounts Receivable
License agreements may be executed under installment
contracts, which provide for interest charges and monthly
payments, with terms up to five years. Interest income from such
contracts, which is included in software licenses and related
revenue, was $440,000, $406,000 and $391,000 in 1996, 1995 and
1994, 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.
Costs for research and development incurred in 1996, 1995
and 1994 were approximately $9,068,000, $6,948,000, and
$6,563,000, respectively. Under FASB Statement No. 86, software
development costs amounting to $7,675,000, $5,089,000 and
$4,476,000, respectively, were capitalized. During the years
ended March 31, 1996, 1995 and 1994, amortization of capitalized
internally developed computer software costs, based on an
estimated economic life of no more than five years, was
$4,010,000, $3,430,000 and $2,665,000, respectively.
Marketable Securities
Concurrent with its purchase of investments during fiscal
1995, Group 1 adopted Statement of Financial Accounting Standards
("SFAS") Statement No. 115, "Accounting for Certain Investments
and Debt and Equity Securities." Group 1 has classified its
investments as "available for sale" securities which require that
all unrealized gains and losses be reported, net of tax, as a
separate component of stockholders' equity. The cost basis of
Group 1's investment portfolio as of March 31, 1996, which
consisted of money market funds and mutual funds exceeded its
market value by approximately $2,100.
In management's opinion, the decline in the value of the
investments was a temporary decline.
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 $70,000, $44,000 and $23,000, for 1996,
1995 and 1994, 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, The Company believes that no
impairment of goodwill existed at March 31, 1996.
Foreign Currency Translation
Assets and liabilities of the Company's foreign operation
are translated into U.S. dollars using rates of exchange in
effect at the balance sheet date. Revenues and expenses are
translated at the monthly average exchange rate. Gains and
losses from foreign currency transactions are included in the
results of operations currently, while those resulting from
translation of financial statement amounts are included as a
separate component of stockholders' equity.
Sale of Stock of and by a Subsidiary
Gains arising from both the public sale by the Company of
stock in a subsidiary and the issuance to the public by a
subsidiary of the Company of its own stock have been recognized
as non-operating income.
Income Taxes
The Company uses the liability method of accounting for
income taxes. Under the liability method, deferred income taxes
are recognized for the tax consequences of temporary differences
by applying currently enacted statutory tax rates applicable to
future years to differences between the financial statements
carrying amounts and the tax bases of existing assets and
liabilities.
Minority Interest
Minority interest of approximately 18.8% for each of the
years ending March 31, 1996, 1995 and 1994,
is reflected in consolidation and is the portion of Group 1
Software, Inc. ("Group 1") that is not owned by the Company.
Earnings per Share of Common Stock
Earnings per share of common stock have been computed for
the years ended March 31, 1996, 1995, and 1994 on net earnings,
after deducting dividends using the weighted average number of
common and dilutive common equivalent shares outstanding during
the respective years. Common equivalent shares result from the
dilutive effect of stock options, calculated under the treasury
stock method. The weighted average number of common shares and
equivalents used for primary earnings per share was 3,716,794 in
1996, 3,616,578 in 1995 and 2,941,325 in 1994.
Concentration of Credit Risk
The Company designs, develops, manufactures, markets and
supports computer software systems to customers in diversified
industries. The Company performs ongoing credit evaluations of
its customers' financial condition and generally requires no
collateral. The Company's installment receivables are
predominately to clients (service bureaus) who provide computer
services to the direct marketing industry. Many of these clients
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 $8,970,000 or 76% of the
installment receivables at March 31, 1996.
New Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 121
regarding accounting for asset impairments. This statement,
which must be adopted by the Company for fiscal years beginning
April 1, 1996, requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Adoption of SFAS No. 121 is not expected to have a material
impact on the Company's financial statements.
The Financial Accounting Standards issued SFAS No. 123
regarding accounting for stock compensation. The Company plans
to adopt the proforma note disclosure requirements as prescribed
in SFAS No. 123 in fiscal year 1997.
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,
1996 1995
Trade $21,114,071 $14,872,261
Installment accounts receivable,
interest typically at 8.5% to 13%
11,768,950 8,944,619
Allowance for doubtful accounts (2,409,000) (1,703,000)
------------ ------------
30,474,021 22,113,880
Less non-current portion of
installment accounts receivable 5,985,291 3,656,520
------------ ------------
Current portion $24,488,730 $18,457,360
============ ============
(3) Prepaid Expense and Other Assets
Prepaid expenses and other current assets are comprised of
the following:
March 31,
1996 1995
Prepaid expense $ 563,418 $ 712,651
Prepaid commission 801,911 646,934
Prepaid royalty 695,003 989,115
Net assets of discontinued
operations - - - 123,648
Other assets 732,797 352,500
------------ ------------
$2,793,129 $2,824,848
============ ============
Prepaid commissions and royalties primarily relate to
amounts paid, as of the balance sheet date, on maintenance and
enhancement revenues deferred into future periods.
(4) Property and Equipment
Property and equipment is comprised of the following:
March 31,
1996 1995
Data processing equipment $ 4,663,216 $ 4,140,768
Furniture and fixtures 2,513,106 1,839,471
Leasehold improvements 667,033 326,350
------------ ------------
7,843,355 6,306,589
Less accumulated depreciation and
amortization (4,574,149) (3,439,396)
------------ ------------
$ 3,269,206 $ 2,867,193
============ ============
(5) Computer Software
Computer software is comprised of the following:
March 31,
1996 1995
Developed software $30,247,944 $22,529,822
Acquired software 6,317,931 5,753,165
Software purchased for internal
use 3,382,908 2,933,728
------------ ------------
39,948,783 31,216,715
Less accumulated amortization (17,522,969) (12,490,440)
------------ ------------
$22,425,814 $18,726,275
============ ============
(6) Accrued Expenses
Accrued expenses are as follows:
March 31,
1996 1995
Accrued sales and other taxes $ 734,798 $ 818,470
Accrued royalties 953,636 1,160,294
Accrued sales incentives 301,556 255,494
Accrued rent abatements 39,402 214,888
Accrued dividends 44,250 44,250
Income taxes payable 176,537 72,073
Other accrued expenses 4,338,101 1,649,499
Accrued expense for disposition
of AIM operations 63,750 354,359
Accrued expense for disposition
of COM-MED operations 108,441 292,000
------------ ------------
$6,760,472 $4,861,327
============ ============
(6) Short-term Borrowings
At March 31, 1996, the Company's Group 1 Software, Inc.
subsidiary, maintained an uncollateralized $5,000,000 bank line
of credit arrangement with interest at the bank's prime rate
(8.25% at March 31, 1996). As of March 31, 1996 and 1995, there
were no borrowings under this line. The line of credit
arrangement requires Group 1, among other things, to maintain
certain financial ratios. Group 1 was in compliance with all
terms of the credit arrangement during the reporting period.
(7) Long-term Debt
Long-term debt consists of the following:
March 31,
1996 1995
Installment notes payable $ 702,035 $1,007,671
Capitalized lease obligations 183,014 205,426
------------ ------------
Sub-total 885,049 1,213,097
Less current portion 564,934 652,157
------------ ------------
Long-term portion $ 320,115 $ 560,940
============ ============
Installment notes and capital lease obligations are payable
monthly and bear interest at rates ranging from 6.0% to 10.0%
and mature in the years ending March 31, 1997 through 1998. The
notes are collateralized by certain equipment with a net book
value that approximates the outstanding loan balance. These lease
obligations were entered into at then current market rates.
Installment notes include two notes with no interest. These
notes have been discounted to reflect the present value of the
debt. The note for the acquisition of certain assets of Arc
Tangent, Inc. has been discounted at 6% to $291,220 at March 31,
1996. The note payable for the acquisition of certain assets of
PostSaver, Inc. has been discounted at 7.25% to $167,360 at March
31, 1996. (See Note 13).
The aggregate maturities of the long-term debt during the
years subsequent to March 31, 1996 are:
1997 $ 564,934
1998 320,115
-----------
$ 885,049
===========
The Company believes that there are no material differences
between carrying amounts and market value of its long-term
obligations.
(8) Stockholders' Equity
Preferred Stock
On January 22, 1993, the Company issued a series of
Preferred Stock par value $0.25 per share, to be designated "6%
Cumulative Convertible Preferred Stock" consisting of 147,500
shares. Dividends have been paid semi-annually in January and
July since July, 1993. The 6% Preferred Stock shall be
convertible at any time at the sole option of the Company into
fully paid and non-assessable Common Stock, at the rate of one
share of Common Stock for each share of preferred stock, subject
to a specified adjustment rate.
The Company shall have the right to redeem the outstanding
6% Preferred Stock, in whole or in part, at any time and from
time to time after March 31, 1993, by paying to the holders
thereof in cash the redemption price per share, 110% through
March 31, 1994, and decreasing 2% per year through April 1, 1998,
together with all accrued and unpaid dividends thereon through
the Redemption Date.
Stock Option Plans
The Company has five stock option programs currently in
effect, and two predecessor plans for which option grants are
still outstanding:
The COMNET Corporation 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 600,000 shares of
common stock for issuance on exercise of options under the Plan.
The option and rights vest over five years; however, all options
and rights expire ten years after the date of the grant. The
plan activity was as follows:
Option
Shares
Shares under option, beginning of year - - -
Options granted - exercise price $10.00 315,100
-------
Shares under option end of year - exercise
price of $10.00 315,100
=======
At March 31, 1996 none of these options were exercisable.
Options for 63,020 shares become exercisable in the year ending
March 31, 1997. At March 31, 1996, 284,900 shares were available
for future grants of options.
The COMNET Corporation Stock Option and Stock Appreciation
Unit Plan of 1986 for employees permitted the grant of options to
purchase common stock of the Company, or stock appreciation
rights redeemable in cash or common stock at the sole discretion
of the Compensation Committee of the Board of Directors, at
prices not less than fair market value on the date of grant. The
options and rights vest over five years; however, all options and
rights expire ten years after the grant date. The plan's
activity was as follows:
Option
Shares
Shares under option, March 31, 1993 - exercise
prices of $5.1875 - $32.25 880,034
Options granted - 1994 - exercise prices of
$14.00 - $15.75 250,200
Options exercised - 1994 - exercise prices $5.185
- $10.00 (108,656)
Options canceled - 1994 (47,250)
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Shares under option, March 31, 1994 - exercise
prices of $6.625 - $30.25 974,328
Options granted - 1995 - exercise price of $7.50 17,500
Options exercised - 1995 - exercise prices $6.625
- $8.25 (165,274)
Options canceled - 1995 (178,450)
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Shares under option, March 31, 1995 - exercise
prices of $6.625 - $30.25 648,104
Options granted - 1996 - exercise prices of
$10.00 67,383
Options exercised - 1996 - exercise prices $5.375
- $14.00 (78,983)
Options canceled - 1996 (29,100)
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Shares under option, March 31, 1996 - exercise
prices of $6.625 - $30.25 607,404
=======
As of March 31, 1996, options for 427,269 shares were
exercisable at prices ranging from $6.625 to $30.25. Options
outstanding at March 31, 1996 expire in years ending March 31,
1997 through 2006. Options for 51,825 shares become exercisable
in the year ending March 31, 1997. No stock app