<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K/A
(MARK ONE)
X AMENDMENT NO. 1 TO
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
------
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--- ---
COMMISSION FILE NUMBER 0-6355
COMNET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-0852578
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
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. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on June 23, 1997, was $22,650,626.
The number of shares of the Registrant's Common Stock outstanding on June 23,
1997 was 3,186,006.
<PAGE> 2
The undersigned registrant hereby amends the following items, exhibits
or other portions of its Annual Report on Form 10-K for the fiscal year ended
March 31, 1997 as set forth in the pages attached hereto.
This Amendment No. 1 to the registrant's Annual Report on Form 10-K/A
is being filed in accordance with General Instruction G(3) to Form 10-K to
include the information required by Part III, because the registrant's
definitive proxy statement pursuant to Regulation 14A will not be filed with
the Commission within 120 days after the end of the registrant's fiscal year.
2
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information at June 30, 1997
concerning the directors and their ownership of the voting securities of the
Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF VOTING
NAME OF DIRECTOR OF DIRECTOR PRINCIPAL OCCUPATION, BUSINESS SECURITIES AND PERCENT OF
THE COMPANY (AGE) SINCE EXPERIENCE AND DIRECTORSHIPS CLASS (AT JUNE 30, 1997)
------------------- -------- ---------------------------- ------------------------
<S> <C> <C> <C>
Robert S. Bowen 1983 President and Chief Executive Officer of the 301,167(1)
(59) Company for more than five years and a director, 8.9%
Chairman of the Board and Chief Executive
Officer of Group 1 Software, Inc. ("Group 1"),
for more than five years.
Ronald F. Friedman 1987 Director, and Chief Operating Officer of 157,998(2)
(53) Group 1 for more than five years. He is also a 4.7%
director of Group 1.
Mark D. Funston 1997 Vice President, Chief Financial Officer and -0-
(37) Treasurer of the Company since September , *
1997. Prior to that and for more than five
years, he was Chief Financial Officer of
COMSAT/RSI. He is also a director of Group 1.
Charles J. Sindelar 1992 Vice President and previously Staff-Vice 12,000(3)
(60) President of the Business Development Network *
Systems Division of Zenith Electronics
Corporation since December, 1990.
James P. Marden 1992 Chairman of The Entertainment Connection, Inc., 12,000(4)
(44) since January, 1995. He was Vice President - *
Acquisitions of Medco Containment Services, Inc.
("Medco") and Vice President - Acquisitions of
Synetic, Inc. ("Synetic") from 1992 to 1994.
</TABLE>
3
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<TABLE>
<CAPTION>
NUMBER OF SHARES OF VOTING
NAME OF DIRECTOR OF DIRECTOR PRINCIPAL OCCUPATION, BUSINESS SECURITIES AND PERCENT OF
THE COMPANY (AGE) SINCE EXPERIENCE AND DIRECTORSHIPS CLASS (AT JUNE 30, 1997)
------------------- -------- ---------------------------- ------------------------
<S> <C> <C> <C>
Charles A. Mele 1992 Executive Vice President - General Counsel and a 12,000(5)
(41) director of Synetic for more than five years. *
For more than five years, up through July, 1994,
he was Executive Vice President and General
Counsel or Co-General Counsel of Medco. He is
also a director of
Group 1.
James V. Manning 1992 Chief Executive Officer of Synetic, since 12,000(6)
(50) September, 1994. Prior to that, he was Senior
Executive Vice President - Finance and *
Administration and a director of Medco for more
than five years. He has also been a director
of Synetic for more than five years.
Richard H. Eisenberg 1994 President of Great Northern Brokerage 6,000(7)
(59) Corporation for more than five years. From *
1992 to 1995, he was also Senior Vice President
of Kaye Insurance Association, L.P.
</TABLE>
- -------------
* Less than 1%
(1) Includes options to purchase 197,300 shares of Common Stock exercisable
within 60 days of June 30, 1997.
(2) Includes options to purchase 157,998 shares of Common Stock exercisable
within 60 days of June 30, 1997.
(3) Includes options to purchase 12,000 shares of Common Stock exercisable
within 60 days of June 30, 1997.
(4) Includes options to purchase 12,000 shares of Common Stock exercisable
within 60 days of June 30, 1997.
(5) Includes options to purchase 12,000 shares of Common Stock exercisable
within 60 days of June 30, 1997.
(6) Includes options to purchase 12,000 shares of Common Stock exercisable
within 60 days of June 30, 1997.
(7) Includes options to purchase 6,000 shares of Common Stock exercisable
within 60 days of June 30, 1997.
Mr. Charles A. Crew resigned from the Board of Directors effective
January 1, 1997.
The business address of Messrs. Manning and Mele is River Drive Center
2, 669 River Drive, Elmwood, New Jersey 07407-1361. Mr. Marden's business
address is 100 Red Schoolhouse Road, Suite C5, Chestnut Ridge, New York 10799.
Mr. Eisenberg's business address is 122 East 42nd Street, New York, New York
10168. Mr. Sindelar's business address is 1000 Milwaukee Avenue, Glenview,
Illinois 60025. The business address of Messrs. Bowen, Friedman and Funston is
4200 Parliament Place, Suite 600, Lanham, Maryland 20706.
FAMILY RELATIONSHIPS
There are no family relationships between any director or executive
officer of the Company.
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COMPENSATION OF DIRECTORS
No cash payments have been made to directors for attendance at
meetings of the Board or any committee thereof since April, 1985. In
September, 1995, stockholders approved the 1995 Non-Employee Directors' Stock
Option Plan (the "1995 Directors' Plan"), which provides for the annual,
automatic grant of options to non-employee directors, and in January 1993,
stockholders approved Fee Agreements with certain directors. During the year
ended March 31, 1997, Messrs. Manning, Marden, Mele, Sindelar and Eisenberg
were each granted options under the 1995 Directors' Plan to purchase 5,000
shares of the Common Stock. Further details concerning the Fee Agreements are
provided herein. See "Executive Officers and Compensation -- Fee Agreements
with Messrs. Manning, Bowen and Friedman".
COMMITTEES AND MEETINGS
The Bylaws of the Company provide for the Board to appoint the Audit
and Compensation Committees. The Compensation Committee's functions include
establishing principles for setting executive compensation, and reviewing
management proposals pertaining to executive compensation, profit sharing and
stock options. The Compensation Committee recommends management bonuses to the
Board for the Company's officers and employees. The Committee has granted
options to employees under and in accordance with the Company's 1986 Incentive
Stock Option, Non-Qualified Stock Option and Stock Appreciation Unit Plan (the
"1986 Incentive Plan") and, since September 12, 1995, the Company's 1995
Incentive Stock Option, Non-Qualified Stock Option and Stock Appreciation Unit
Plan (the "1995 Incentive Plan"). The Compensation Committee is comprised of
Messrs. Manning, Marden and Mele. None of the members of the Compensation
Committee has ever been an employee of the Company.
The Audit Committee's functions include recommending to the Board the
selection of the Company's independent public accountants and reviewing with
such accountants the plan, scope and results of their audit of the financial
statements and the adequacy of the Company's system of internal accounting
controls. The Audit Committee is comprised of Messrs. Manning, Marden and
Sindelar.
During the fiscal year ended March 31, 1997, the Board of Directors of
the Company held 4 meetings, the Compensation Committee held 2 meetings and the
Audit Committee held 2 meetings. No director attended less than 75% of all
meetings of the Board and the committees on which such director served during
that fiscal year.
ITEM. 11 EXECUTIVE OFFICERS AND COMPENSATION
EXECUTIVE OFFICERS
The Executive Officers of the Company are Robert S. Bowen, Ronald F.
Friedman, Mark D. Funston and Edward Weiss. The business experience during at
least the past five years for Messrs. Bowen, Friedman and Funston is set forth
herein (see "Directors and Executive Officers of the Registrant"). Mr. Weiss,
46, has been General Counsel and Secretary to the Company for more than five
years.
EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Company has established an executive compensation program based on
the following on-going principles and objectives: (i) provide compensation
opportunities that will help attract, motivate and retain highly qualified
managers and executives, (ii) link executive's total compensation to Company
performance and the individual performance of the executive and (iii) provide
an appropriate balance between incentives focused on achievement of annual
business plans and longer-term incentives linked to increases in shareholder
value. To effectuate these principles and objectives, compensation for each of
the executives of the Company consists of base salary compensation, annual
incentive compensation (based in most cases on profit performance measured
against internal profit targets) and stock option grants.
For Fiscal Year 1997, the Compensation Committee did not review the
base salary nor incentive compensation program for Mr. Bowen since these
matters are fixed by the employment agreement between the Company and Mr.
Bowen. Grants of options to executive officers, and the compensation programs
for executive officers other than Mr. Bowen are
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reviewed annually by the Compensation Committee, including the review conducted
for the most recent fiscal year.
Compensation Committee
James V. Manning
James Marden
Charles A. Mele
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
Name and Principal --------------------------- -----------------------------
Stock All other
Position Year Salary Bonus Options Compensation(1)
------------------ ---- ------ ----- -------- ----------------
<S> <C> <C> <C> <C> <C>
Robert S. Bowen, 1997 $311,057 --- 18,750(2) $ 58,736
CEO; Director 1996 $309,193 $564,519(3) 12,500 $ 75,122(4)
1995 $296,892 $489,192(3) --- $676,366(4)(5)
Ronald F. Friedman 1997 $177,052 --- 27,000(2) $4,056
President - Group 1 1996 $183,400 $123,740 10,000 $3,000
Software; Director 1995 $173,088 $307,237 --- $3,000
Charles A. Crew(6) 1997 $59,809 --- --- ---
Chief Financial Officer; 1996 $119,736 $37,383 7,500 $3,000
Director 1995 $111,404 $104,265 --- $2,083
Mark D. Funston 1997 $64,616(7) $16,500(7) 16,500 $533
Chief Financial Officer, 1996 --- --- --- ---
Director 1995 --- --- --- ---
</TABLE>
(1) Includes Company contributions to Defined Contribution Savings Plan
(401(k)).
(2) Includes Group 1 options to purchase its common stock granted to Mr.
Bowen and Mr. Friedman of 18,750 and 15,000, respectively. All other options
were granted by COMNET to purchase its common stock. All options vest ratably
over five years and expire in ten years.
(3) Mr. Bowen elected to defer $197,582 and $161,421 of bonus compensation
in 1996 and 1995, respectively, in accordance with the Company's deferred
compensation plan.
(4) Includes Company contributions to Defined Contribution Savings Plan
(401(k)) and calculated debt forgiveness of Company loan to Mr. Bowen. See "
- -- Bowen Loan Agreement".
(5) Includes $602,242 gain on exchange of shares upon exercise of stock
options.
(6) Mr. Crew resigned as Chief Financial Officer of the Company in
September , 1996.
(7) Mr. Funston's compensation covers only part of FY '97 (September 3,
1996 - March 31, 1997).
STOCK OPTION GRANTS IN FISCAL YEAR 1997
COMNET
<TABLE>
<CAPTION>
% OF TOTAL AT 0% AT 5% AT 10%
OPTIONS GRANTED TO EXERCISE OR ANNUAL ANNUAL ANNUAL
GRANTED EMPLOYEES BASE PRICE EXPIRATION GROWTH GROWTH GROWTH
NAME # IN 1997 ($/SHARE) DATE RATE RATE RATE
---- -------- -------- --------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
RONALD F. FRIEDMAN 12,000 11.76% $8.25 04/29/06 $0 $75,480 $191,280
MARK D. FUNSTON 16,500 16.18% $13.00 09/04/06 $0 $103,785 $263,010
</TABLE>
6
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OPTION/SAR EXERCISES AND YEAR-END
OPTION/SAR VALUES
04/01/96 TO 03/31/97
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options/SARs at FY-End Options/SARS at FY-End(1)
------------------------- ----------------------------
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
COMNET
- ------
Robert S. Bowen 14,000 $140,000 197,300 10,000 $295,013 $ 8,100
Charles A. Crew None None 53,480 7,320 $ 87,718 $ 4,860
Ronald F. Friedman None None 157,918 24,002 $261,720 $37,200
Mark D. Funston None None --- 16,500 --- ---
GROUP 1
- -------
Robert S. Bowen None None --- 18,750 --- $4,688
Ronald F. Friedman None None --- 15,000 --- $3,750
Charles A. Crew None None --- --- --- ---
Mark D. Funston None None --- --- --- ---
</TABLE>
(1) These values are based upon the difference between the exercise prices
of all options awarded and the average price of $10.81 per share for
COMNET common stock and $6.75 per share for Group 1 common stock at
March 31, 1997.
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, PEER GROUP AND BROAD MARKET
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Comnet 100 60.53 23.03 26.64 26.32 22.37
Peer Group 100 103.41 102.14 177.01 187.59 210.57
Broad Market 100 111.91 129.33 137.21 184.56 206.47
</TABLE>
This analysis assumes $100 was invested on April 1, 1992 and that any
dividends were reinvested. This analysis is based on fiscal years ending March
31, 1997.
The broad market index chosen was the NASDAQ Market Index. The
industry peer group consisted of BGS Systems, Inc., Hathaway Corp., Hyperion
Software, Inc. and Timberline Software, CP. Stockholders are cautioned against
drawing any conclusions from the data contained therein, as past results are
not necessarily indicative of future performance. This data in no way reflects
the Company's forecast of future financial performance. The performance
information set out directly above is presented in accordance with requirements
of the Securities and Exchange Commission.
The performance information set out in this section should not be
incorporated by reference into any prior filings by the Company under the
Securities and Exchange Act of 1934 that incorporated future filings or
portions thereof.
EMPLOYMENT AGREEMENTS
ROBERT S. BOWEN
COMNET Agreement. The Company has entered into an amended and
restated employment agreement with Mr. Bowen, as President and Chief Executive
Officer of the Company, dated as of January 28, 1992 (the "COMNET Agreement").
The COMNET Agreement was ratified by the stockholders at the January 22, 1993
meeting. The COMNET Agreement expires on June 30, 1998, and provides for a
current total base salary of $340,100 per annum adjusted annually (effective
each July 1) by the greater of changes in the area cost of living or the
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average salary percentage increase for Company employees as part of the annual
budget presented to the Board as part of the annual budget. The COMNET
Agreement provides for a bonus payable to Mr. Bowen equal to 7-1/2% of the
first $1,000,000 of consolidated net income before taxes, with certain
adjustments as defined, and 10% of all such consolidated net income in excess
of $1,000,000. Consolidated net income includes all earnings attributable to
Group 1 and any of the Company's business operations or subsidiaries directly
related to the particular lines of business engaged in by Group 1 or any other
COMNET subsidiary as of July 1, 1991, from any source, including gain or loss
on the sale of stock or assets of the Company and its subsidiaries, but subject
to certain specified deletions, including the Cap Amount provisions, described
below. Specified deletions from earnings include, among other items, any
provisions for taxes, any bonus payable under the COMNET Agreement, any excess
of interest income over interest expense from the Company's or its affiliates'
investments, any charge to income associated with the exercise of stock options
and any interest or dividend income from, or gain from the sale of, securities
held for investment at the time Mr. Bowen joined the Company. The 7-1/2% and
10% calculations apply to gain realized upon a sale of Group 1 and included in
consolidated net income only to the extent that such gain does not exceed an
amount (the "Cap Amount") equal to the gain that the Company would realize on a
disposition, if any, of its interest in Group 1 at a price per share of
$21.125. The COMNET Agreement provides that with respect to any pretax gain
(net of expenses) realized upon a disposition of Group 1 in excess of the Cap
Amount described above, Mr. Bowen will be entitled to the following percentages
of such gain: $0 to $3.3 million - 1%; above $3.3 to $6.6 million - 2%; above
$6.6 to $9.9 million - 3%; above $9.9 to $13.2 million - 4%; and above $13.2
million - 5%. Further, any bonus under the COMNET Agreement will be offset by
40% of all fees theretofore received by Mr. Bowen under the Bowen Fee Agreement
(described below).
If Mr. Bowen terminates his employment with the Company during the
term of the COMNET Agreement because of his disability, he will be entitled to
receive his base salary and his bonuses, prorated through the date of
termination, and any options previously granted to him will, to the extent
exercisable on Mr. Bowen's date of employment termination, continue to be
exercisable for 12 months following such termination date. If Mr. Bowen's
employment with the Company is terminated during the term of the COMNET
Agreement because of his death, his estate will be entitled to receive his base
salary and his bonuses, prorated through the date of termination, and any
options previously granted to Mr. Bowen will, to the extent exercisable on Mr.
Bowen's date of termination of employment, continue to be exercisable for six
months following Mr. Bowen's death.
If Mr. Bowen terminates his employment with the Company for any reason
other than death or disability or is discharged by the Company for cause, Mr.
Bowen will be entitled to receive his base salary, prorated through his date of
termination, and his bonus earned and all of his options will be treated as
provided in the instruments or agreements governing such options. If the
Company terminates Mr. Bowen's employment without cause, Mr. Bowen will be
entitled to receive his salary, as adjusted, fringe benefits and bonuses
throughout the remaining term of the COMNET Agreement, as if it had not been
terminated, and all of his options, including those that had not yet vested,
will continue to vest or be exercisable as if Mr. Bowen's employment had not
been terminated but had continued for the outstanding balance of the term of
the COMNET Agreement, and Mr. Bowen will be afforded the maximum length of time
permissible to exercise such options; provided, however, that if such vesting
of options after termination is prohibited, the Company shall, at such time as
the options would have vested (the "Vesting Date"), pay Mr. Bowen in cash the
difference between the average reported price for the Common Stock over the 20
days immediately preceding the Vesting Date and the exercise price of the stock
options on the Vesting Date.
Group 1 Agreement. Group 1 entered into an amended and restated
employment agreement with Mr. Bowen, a director, as Chief Executive Officer of
Group 1 dated as of January 28, 1992, as subsequently amended (collectively,
the "Group 1 Agreement"). Salary and incentive compensation paid under the
Group 1 Agreement are not to be duplicated by payments under the COMNET
Agreement, so long as the COMNET Agreement is effective. The Group 1 Agreement
expires on July 1, 2000 and provides for a salary of not less than $272,080 per
annum subject to adjustments (effective each July 1) depending upon the amount
of professional time dedicated to Group 1 vis-a-vis the Company and adjusted
annually by the greater of any changes in the area cost of living index or the
average salary percentage increase for employees approved by the Group 1 Board
as part of its annual budget.
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The Group 1 Agreement also includes an annual incentive bonus equal to
7-1/2% of the first $1,000,000 of consolidated net income of Group 1 before
taxes with certain adjustments as defined, and 10% of such income in excess of
$1,000,000, such bonus to be no greater than that determined under a similar
bonus program related to the consolidated earnings of the Company as long as
the program relating to the Company is effective. Consolidated net income as
defined in the Group 1 Agreement includes all earnings of Group 1 and its
subsidiaries from any source, subject to certain specified deletions but
including gain or loss on the sale of stock or assets of Group 1 and/or a
subsidiary. Specified deletions from net income include, among other items,
any provision for taxes, any bonus payable under the Group 1 Agreement, any
excess of interest income from bank and other cash deposits over interest
expense from loans or other financing, and any charge to income associated with
the exercise of stock options.
If Mr. Bowen's employment with Group 1 during the term of the Group 1
Agreement is terminated because of his disability or death, his base salary and
bonus will be prorated through the date of termination. If Mr. Bowen
terminates his employment with Group 1 for any reason other than death or
disability or he is discharged by Group 1 for cause, Mr. Bowen is entitled to
his base salary, equitably prorated, and any bonuses earned for any fiscal year
prior to the fiscal year in which his termination of employment occurred. If
Group 1 terminates Mr. Bowen's employment without cause, Mr. Bowen is entitled
to receive his salary, fringe benefits and bonuses throughout the remaining
term of the Group 1 Agreement. Upon any termination of Bowen's employment
under the Group 1 Agreement, all options held by Bowen to purchase Group 1's
common stock will be treated as provided in the instruments or agreements
governing such options.
The Group 1 Agreement also provides that as long as the Company owns
25% or more of Group 1's common stock, Mr. Bowen will receive no additional
compensation under the Group 1 Agreement, but Mr. Bowen's aggregate
compensation payable under his employment agreement with the Company will be
allocated between the Company and Group 1 based on the proportion of his time
spent working for each of such companies. If the Company ceases to own 25% or
more of Group 1's common stock, (i) Mr. Bowen's annual salary under the Group 1
Agreement is increased to the greater of $240,000 or 160% of the then current
base salary of Group 1's Chief Operating Officer, adjusted upward or downward
to the extent that the proportion of Mr. Bowen's time spent working for Group 1
is greater or lesser than 50% and adjusted for changes in the cost of living,
(ii) Mr. Bowen's annual salary under his employment agreement with the Company
is reduced to reflect only the proportion of his time spent working for the
Company's businesses other than Group 1 and (iii) Mr. Bowen becomes entitled to
receive incentive bonus compensation from Group 1 as follows: (A) if the
Company disposes of its interest in Group 1 in a registered public offering,
then for each fiscal year, if Group 1's earnings equal budget targets
established by Group 1's board of directors in its reasonable business
judgment, then Mr. Bowen's bonus shall be the greater of $200,000 or 160% of
the bonus payable to Group 1's Chief Operating Officer, and if Group 1's
earnings are greater or lesser than such targets, then Mr. Bowen's bonus will
vary from the amount payable to him at the target earnings level to the same
proportional extent as the variation in the bonus payable to Group 1's Chief
Operating Officer; and (B) if the Company disposes of its interest in Group 1
other than in a registered public offering, then Mr. Bowen's bonus shall be as
determined by Group 1's board of directors, without the participation of any
directors affiliated with the Company.
RONALD F. FRIEDMAN
Group 1 has entered into an employment agreement dated October 31,
1990, with Ronald F. Friedman, a director, as President and Chief Operating
Officer of Group 1. The agreement, as amended, expires on March 31, 1999 and
provides for annual base compensation of $183,400 per annum (adjusted as of
April 1, 1996) which may be further adjusted annually for merit increases upon
approval of Group 1's compensation committee. Under his employment agreement,
Mr. Friedman was entitled to receive an annual bonus for the fiscal year ending
March 31, 1997 based on a percentage of Group 1's net income before income
taxes, interest expense, management fees and bonus amounts paid to or for the
benefit of Mr. Friedman and Group 1's Chief Executive Officer and Chief
Financial Officer ("Adjusted Net Income"), which bonus plan for fiscal year
1997 varied from 7.4% of Adjusted Net Income over $5.6 million, up to a
maximum of 9% of Adjusted Net Income over $9.0 million. The bonus was based
upon both achievement of a certain level of Adjusted Net Income and
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<PAGE> 10
satisfactory growth over actual prior year results in the opinion of Group 1's
compensation committee and board of directors. A bonus plan has not yet been
put in place for the current fiscal year. If Mr. Friedman retires or becomes
totally and permanently disabled, Mr. Friedman shall be entitled to receive all
earned but unpaid bonuses and any subsequent bonus installments. In the case of
death, all earned but unpaid bonuses and subsequent bonus installments shall be
paid promptly in one sum. If Mr. Friedman is terminated for cause or resigns
under circumstances which would justify termination for cause, all unpaid
bonuses will be forfeited and no longer be payable. If a change in control of
Group 1 occurs, Mr. Friedman, at his option, has the right to resign his
position with Group 1 and Group 1 will continue to pay his compensation and
provide him with employee benefits for one year or until the expiration date of
the employment agreement, whichever is the shorter period, and will pay Mr.
Friedman, as a lump sum, all earned but unpaid bonuses. In addition, bonuses
will be paid on a pro-rata basis for the period through the nearest full fiscal
quarter prior to resignation.
FEE AGREEMENTS WITH MESSRS. MANNING, BOWEN AND FRIEDMAN
The Company has agreed, pursuant to separate fee agreement dated as of
January 28, 1992, to pay Mr. Manning fees of 1/2% of the total consideration
paid on acquisitions, and 1/2% of the pre-tax gain (net of expenses) on
dispositions of the Company's or its subsidiaries' businesses. Fees payable
with respect to a disposition, if any, by the Company of its holdings in Group
1 would be payable only if, and to the extent that, the consideration the
Company receives exceeds $50,000,000. The term of this agreement extends until
January 27, 2002, unless earlier terminated because Mr. Manning is no longer a
director, officer or employee of the Company. This agreement was approved by
the stockholders at the January 22, 1993 meeting. Mr. Manning has earned
$4,466 according to this fee agreement during fiscal year 1997.
The Company has entered into a fee agreement dated as of January 28,
1992 (the "Bowen Fee Agreement") with Mr. Bowen. The Bowen Fee Agreement was
approved by the stockholders at the January 22, 1993 meeting. Under the Bowen
Fee Agreement, Mr. Bowen will be entitled to a fee of 1/2% of the total
consideration payable on acquisitions and 1/2% of the pre-tax gain (net of
expenses) on dispositions of the Company's or its subsidiaries' businesses.
However, this fee will not be paid with respect to a disposition, if any, of
Group 1 or any of the Company's business operations or subsidiaries directly
related to the particular lines of business engaged in by such companies as of
July 1, 1991, which shall remain subject to the incentive compensation
arrangements in Mr. Bowen's amended and restated employment agreement with the
Company.
The term of the Bowen Fee Agreement extends until January 27, 2002,
unless Mr. Bowen is no longer a director, officer or employee of the Company,
provided that if Mr. Bowen's employment is terminated without cause (as defined
in his amended and restated employment agreement), the Company must either
continue this agreement until January 27, 2002 or pay Mr. Bowen the incentive
bonus upon a disposition, if any, of the Company's interests in Group 1 to
which Mr. Bowen would have been entitled under his employment agreement with
the Company as in effect prior to its January 28, 1992 amendment and
restatement. Mr. Bowen has earned $4,466 according to this fee agreement during
fiscal year 1997.
The Company has entered into a fee agreement with Mr. Friedman dated
as of January 28, 1992, which was approved by the stockholders at the January
22, 1993 meeting. Pursuant to this fee agreement, Mr. Friedman will be
entitled to receive on disposition, if any, of the Company's interest in Group
1 or on the sale by Group 1 or any of its subsidiaries of any business unit or
line of business of Group 1 or any of its subsidiaries, a fee in an amount
equal to the following percentages of the Company's pre-tax gain (net of
expenses) to the extent such gain exceeds $21.125 per share of Group 1: $0 to
$3.3 million - 0.5%; above $3.3 to $6.6 million - 1%; above $6.6 to $9.9
million 1.5%; above $9.9 to $13.2 million - 2%; and above $13.2 million - 2.5%.
Such fee shall only be payable, however, if Group 1's net operating income
increases at an average annualized rate of 20% or more from 1991 until such
disposition. If Group 1's net operating income increases at an average
annualized rate of 15% or more, but less than 20%, Mr. Friedman will be
entitled to one-half the fee set forth above. The term of this agreement
extends until January 27, 2002, unless Mr. Friedman is no longer a director,
officer or employee of the Company. Because no such disposition has been made,
no payments have been made to Mr. Friedman under his fee agreement.
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<PAGE> 11
BONUS PROGRAMS TO OTHER EXECUTIVES
Mr. Funston is entitled to an annual incentive bonus for the fiscal
year ended March 31, 1998 to be calculated on the basis of the Company's profit
performance as compared to internal profit targets. Mr. Weiss is entitled to
an annual bonus for fiscal year ended March 31, 1998 calculated on the basis
the Company's profit performance as compared to internal profit targets and the
achievement of certain other objectives.
DEFERRED COMPENSATION ARRANGEMENTS
The Company has adopted a Deferred Compensation Plan by which certain
members of senior management have the option of deferring the receipt of
amounts of their annual bonus compensation, if any, and/or their base
compensation (the "Deferred Compensation Plan"). The Deferred Compensation
Plan is intended by the Company to qualify as an unfunded plan for federal
income tax purposes and the Employee Retirement Income Security Act (ERISA).
The Deferred Compensation Plan is administered by the Company. The expenses
associated with the establishment and administration of the Deferred
Compensation Plan are borne by the Company. Any expenses, however, of
implementing any investment option selected by a participant are charged
against that participant's account.
The compensation, that is deferred, is paid into a trust designated
solely to administer the Deferred Compensation Program. Currently, Mr. Bowen
is the only participant in the Company's Deferred Compensation Plan.
EXECUTIVE SUPPLEMENTARY BENEFITS
The Company provides certain of its executive officers with group
health insurance and disability insurance policies that are not available to
all salaried employees. These supplementary benefits to such executive
officers are limited to the cost of the premiums for the coverage. The
aggregate cost is less than $25,000 per year for each covered executive
officer.
BOWEN LOAN AGREEMENT
On January 23, 1992, the Company entered into a Loan Agreement with
Mr. Bowen under which the Company agreed to loan him $235,000 on the following
terms: (i) the loan was made in three installments ($78,334 on the date of the
Loan Agreement and $78,333 on the first and second anniversary dates
thereafter); (ii) in consideration of each advance of funds, Mr. Bowen
delivered a promissory note to the Company; (iii) each promissory note will be
deemed satisfied in full and canceled if, as of its due date, July 1, 1998, Mr.
Bowen has complied with certain conditions set forth in the Loan Agreement
including, without limitation, Mr. Bowen tendering his services to the Company
or an affiliate of the Company and complying with certain provisions of his
employment agreement with the Company; and (iv) upon Mr. Bowen's death or
disability, such promissory notes will be deemed satisfied and canceled
provided the conditions in clause (iii) above have been satisfied up to the
date of such death or disability.
FRIEDMAN LOAN AGREEMENT
On March 1, 1993, the Company entered into an agreement under which it
loaned Mr. Friedman $375,000. Mr. Friedman has delivered promissory notes to
the Company for the loan amount, plus interest. The loan is secured by a
second mortgage on Mr. Friedman's residence and by any proceeds from the
exercise of stock options and subsequent disposition of such option shares that
Mr. Friedman holds in the Company or Group 1. Effective with January 15, 1997
amendments, the loan was modified so that its term is now the earlier to occur
of 20 years or his termination of employment with Group 1; the principal
balance is now subject to interest at the rate charged to the Company by its
primary commercial lender (adjusted quarterly); interest is payable quarterly;
30% of Mr. Friedman's incentive bonus from Group 1 (after salary draw is
satisfied) shall be applied to annual principal payments. The principal and
interest balance on the loan outstanding as of March 31, 1997 was $434,765.
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<PAGE> 12
INDEMNIFICATION AGREEMENTS; DIRECTORS AND OFFICERS LIABILITY INSURANCE
INDEMNIFICATION AGREEMENTS. Each current member of the Board of
Directors is signatory to an indemnification agreement (the "Indemnification
Agreement") with the Company. Each Indemnification Agreement provides that the
Company shall indemnify the director or officer who is a party to the agreement
(an "Indemnitee") if he was or is a party to or threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (except a
derivative proceeding) by reason of the fact that he is or was a director or
officer of the Company, or is or was serving at its request in certain
capacities for another entity, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company) incurred in connection with such actions, suits or
proceedings. The indemnification is limited to instances where the Indemnitee
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Company, and with respect to any criminal
action, had no reasonable cause to believe his conduct was unlawful. With
respect to derivative proceedings, the Indemnification Agreement provides
indemnification similar to that provided in the Indemnification Agreement for
non-derivative proceedings discussed above, except that indemnification is
allowed only to the extent determined to be fair and reasonable by the court.
The Indemnification Agreement provides that if a director or officer
is entitled to indemnification for some or a portion of the expenses,
judgments, fines or penalties actually or reasonably incurred by him in the
investigation, defense, appeal or settlement of any civil or criminal action,
suit or proceeding, the Company shall nevertheless indemnify him to the extent
to which he is entitled. By the terms of the Indemnification Agreement, its
benefits are not available for expenses or liabilities paid directly to the
Indemnity under a policy of officers' and directors' insurance maintained by
the Company or in several other instances such as if a court determines that
each material assertion made by the Indemnitee in that proceeding was not made
in good faith or was frivolous, or if the claim arises from the purchase and
sale by the Indemnitee of securities in violation of Section 16(b) of the
Exchange Act, or similar successor statute.
DIRECTORS AND OFFICERS LIABILITY INSURANCE. The Company currently
maintains a Directors and Officers liability policy with an aggregate limit of
liability of $5,000,000. Deductibles under this policy range from $5,000 per
officer or director for each claim to $50,000 in the aggregate for certain
covered claims. This policy does not cover, among other matters, dishonest,
fraudulent, or criminal behavior.
401(k) PLAN
In January, 1994, the Company adopted the COMNET Corporation and
Subsidiaries 401(k) Retirement Savings Plan and Trust (the "401(k) Plan"). The
401(k) Plan provides for a contribution to be made by the Company and its
subsidiaries out of current operating earnings based upon the contributions
made by participating employees.
All employees of the Company or its subsidiaries who have been
employed for at least three months are eligible to participate in the 401(k)
Plan. Participants in the 401(k) Plan may contribute from 1% to 15% of their
compensation from the Company or its subsidiary (up to a limit of $9,500) in a
calendar year. The Company or the relevant subsidiary will make contributions
to an employee's 401(k) Plan account equal to the sum of the following: (i)
$.75 for each $1.00 a participant contributes up to 2% of the participant's
compensation and (ii) $.50 for each $1.00 the participant contributes for the
next 1% of the participant's compensation. Participants are 100% vested in the
contributions, and earnings thereon, they make to the 401(k) Plan out of their
compensation. Participants vest in Company contributions, and earnings
thereon, at a rate of 20% per year of employment with the Company or its
subsidiary, up to 100%. However, if a participant's employment with the
Company or its subsidiary terminates because of retirement, death or disability
(as defined in the 401(k) Plan), 100% of the Company contributions, and their
earnings thereon, become 100% vested.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 30,
1997, as to all persons who, to the knowledge of the Company, were beneficial
owners of five percent or more of the Common Stock or 6% Convertible Preferred
Stock of the Company, and all directors and officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK NUMBER OF SHARES OF 6%
NAME AND ADDRESS OF BENEFICIAL OWNER AND PREFERRED STOCK AND
NUMBER OF PERSONS IN GROUP PERCENT OF CLASS PERCENT OF CLASS
------------------------------------ ---------------- ----------------
<S> <C> <C>
Medco Containment Services, Inc. 543,345 100,000
100 Summit Avenue 17.0% 67.8%
Montvale, NJ 07645 (1)
Robert S. Bowen 301,167(2) 5,937
4200 Parliament Place 8.9% 4.1%
Suite 600
Lanham, MD 20706
John Spohler 236,875(3) 11,875
One Liberty Plaza 7.4% 8.1%
New York, NY 10292
Milton Kaplan * 11,875
1920 Ocean Avenue 8.1%
Brooklyn, NY 11230
Leonard J. Smith * 11,875
451 Ives Dairy Road, #A202 8.1%
North Miami Beach, FL 33179
All directors and officers as a group 578,145 11,875
(9 persons) 15.92% 8.1%
</TABLE>
* Less than 5%.
(1) Pursuant to an Agreement and Plan of Merger, dated as of July 27,
1993, as amended, by and among Merck & Co., Inc., a New Jersey corporation
("Merck"), M Acquisition Corp. ("Merger Sub") and Medco Containment Services,
Inc., a Delaware corporation ("Medco"), Medco was merged with and into Merger
Sub and Medco became a wholly owned subsidiary of Merck. Merck is a worldwide
organization engaged primarily in the business of discovering, developing,
producing and marketing products and services for the treatment of disease, and
the maintenance or restoration of health. The principal executive offices of
Merck are located at One Merck Drive, Whitehouse Station, New Jersey. As of
June 30, 1997, Merck may be deemed to be the indirect beneficial owner, through
its ownership of Medco, of 543,345 shares of Common Stock, representing
approximately 17.0% of the out-standing shares of Common Stock and Merck may
also be deemed to be the indirect beneficial owner, through its ownership of
Medco, of 100,000 shares of 6% Preferred Stock, which is convertible into
100,000 shares of Common Stock. Merck effectively has the sole power to vote
and direct the vote of such shares of Common Stock and 6% Preferred Stock, and
to dispose and direct the disposal of such shares.
(2) Includes Common Stock purchase options for 197,300 shares exercisable
within 60 days of June 30, 1997.
(3) Includes Common Stock purchase options for 18,750 shares exercisable
within 60 days of June 30, 1997, but does not include 10,000 shares of Common
Stock held by Mr. Spohler on behalf of his wife and as to which he disclaims
beneficial ownership.
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company, all directors, officers and beneficial owners of more
than ten percent of any class of stock have filed on a timely basis Forms 3,
Forms 4 and Forms 5 as required in the fiscal year ended March 31, 1997, except
for the following persons who inadvertently filed a late Form 3 and 4,
respectively, regarding stock options granted to them pursuant to the Company's
1995 Incentive Stock Option, Non-Qualified Stock Option and Stock Appreciation
Rights Plan: Mark D. Funston (16,500) and Ronald F. Friedman (12,000).
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<PAGE> 13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has used the services of Kaye Insurance Associate, L.P.
("Kaye Insurance") of New York, New York to obtain directors and officers
liability insurance coverage for the current fiscal year. A description of
this coverage is set out above. Richard H. Eisenberg, a director of the
Company, had also been a Senior Vice President of Kaye Insurance until 1995.
The Company's payment for this coverage is $90,800 - which includes
compensation to Kaye Insurance for its services that does not exceed $5,000.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMNET Corporation
(Registrant)
/s/ MARK D. FUNSTON
--------------------
Mark D. Funston
Vice-President,
Chief Financial
Officer
Dated: July 28, 1997
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