<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
OR
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-6355
GROUP 1 SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-0852578
(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. (x)
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on June 21, 2000 was $101,236,870
The number of shares of the Registrant's Common Stock outstanding on June 21,
2000 was 5,784,964
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive proxy statement to be filed with the Securities and Exchange
Commission relating to Company's 2000 Annual Meeting of Shareholders (Part III
of Form 10-K).
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PART I
ITEM 1. BUSINESS
THE COMPANY
Group 1 Software, Inc., including its wholly owned subsidiaries ("Group 1"), is
a leading provider of software solutions for data quality, database marketing,
electronic document composition, and direct marketing and mailing efficiency
applications. Group 1 supports most mainframe, Unix and Windows operating
systems, including MVS, VSE, OS/400, Linux, Windows NT, Windows 2000 and other
operating systems running on various computer platforms. Group 1 has offices
throughout the United States and in Canada, the United Kingdom, and Continental
Europe. The Company addresses Latin America and is also represented in Asia and
Australia.
Group 1 distributes all of its products in North America and certain of its
products throughout the world. Group 1 is a leading vendor of Electronic
Document Composition, Direct Marketing and Mailing Efficiency software products
in North America.
Group 1's products and services help over 3,000 businesses find, communicate
with, and keep their customers. The Company provides software solutions to
corporate leaders in the financial services, banking, retail, e-business,
telecommunications, hospitality, publishing, utilities, and insurance
industries. Group 1's software systems are designed to minimize the costs and
maximize the opportunity to sell products and services. The Company's products
enable businesses to implement highly targeted marketing campaigns, ensure the
integrity and accuracy of customer and prospect data, obtain maximum postal
discounts, ensure delivery of goods and services purchased on-line, and create
high-impact customer focused documents quickly and easily.
Group 1's believes that it's product market-leading positions in Data Quality,
Electronic Document Composition, and Direct Marketing and Mailing Efficiency
applications have placed the company in an excellent position to address the
burgeoning e-commerce market worldwide. Many of Group 1's existing customers
utilize its software in a real-time environment. The Company is adapting its
industry-standard software solutions for the e-commerce arena by developing
ASP-based offerings and supporting innovative technologies such as Java, Active
X, HTML, XML, and PDF. In addition, Group 1 has announced an agreement with
USinternetworking, an industry-leading Application Services Provider (ASP), to
provide its new DataQuality.net offering. DataQuality.net is a web-accessible
Enterprise Information Portal (EIP) for real-time customer and prospect data
quality.
Group 1 markets its Data Quality, Database Marketing, Direct Marketing and
Mailing Efficiency applications through a direct sales force in the United
States and Canada. Electronic Document Composition Systems are marketed directly
to clients in the Americas and throughout Europe. Where appropriate,
distributors are used to supplement direct sales channels worldwide.
The Company believes that the increasing need for customer-centric
communication, coupled with the mission-critical requirement for enterprise
customer and prospect data quality, can expand the market potential for Group
1's existing and future products.
MARKETS SERVED
Group 1 markets its products within a broad span of industries to meet the needs
of businesses in the areas of Data Quality, Database Marketing, Direct Marketing
and Mailing Efficiency, and Electronic Document Composition Systems. Group 1
addresses the Database Marketing, Data Quality and Direct Marketing and Mailing
Efficiency markets through a single operating segment, its Enterprise Solutions
Division. Group 1 addresses the Electronic Document Composition market through a
separate operating segment, its Electronic Document Composition Division.
Industry leaders in banking, insurance, financial services, retail, hospitality
and gaming, catalog mailing, publishing, manufacturing,
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telecommunications, as well as non-profit associations, educational
institutions, fund raisers and governmental agencies, utilize Group 1's software
solutions.
Electronic Document Composition Systems
Group 1's Electronic Document Composition Systems allow businesses to create
high-impact, customer-focused documents quickly and easily. They enable
companies to produce dynamic statements, letters and invoices for print, fax,
e-mail and Internet delivery. These innovative software applications help
companies differentiate themselves to their customers by creating attractive,
easy-to-read and personalized business documents. Aside from building brand
awareness and customer loyalty, these solutions help companies facilitate the
cross selling of products and services.
The Company believes that there is substantial demand for automated solutions
that combine customer data with today's advanced printing and Web-based
technologies to produce highly personalized business documents.
Telecommunications companies, brokerages, credit card processors, insurance
companies, public utilities, health care providers, banks and others use Group
1's electronic document composition software and consulting services to generate
and manage large volumes of personalized documents.
DOC1, Group 1's core electronic document composition system, produces dynamic
individualized business documents for print and on-line delivery. Designed for
seamless, one-to-one customer communication, DOC1 is an interactive development
environment that facilitates the production of customer-focused communication.
DOC1 is a visual application development tool allowing the user to extract
back-office customer data and format it with text, images and graphics in a
dynamic WYSIWYG process. DOC1 also facilitates deployment of Electronic Bill
Presentation and Payment (EBPP) and Electronic Statement Presentation (ESP)
solutions by generating XML, HTML, and enhanced PDF.
DOC1 for Workgroups allows multiple developers to share resources (fonts, images
and forms), as well as application logic, thereby increasing productivity and
reducing potential errors. DOC1 for Workgroups provides an integrated
development environment and accelerates and simplifies the development of large,
complex DOC1 applications.
Message1, a messaging subsystem of DOC1, offers unprecedented flexibility to
develop, manage, and deliver personalized marketing messages. Increasing numbers
of organizations are integrating complete marketing strategies with automated
document design and composition systems to improve sales and customer
satisfaction. With Message1, relatively non-technical users and marketers can
control message content, format, and selection criteria. By inserting
cross-selling messages on bills, statements, and invoices, routine customer
communications can become strategic selling tools.
The software supports all major printing architectures and can operate in
centralized, distributed or desktop environments under NT, OS/400, MVS, Open
VMS, and UNIX operating systems. When integrated with Group 1's MailStream Plus
and CODE-1 Plus, DOC1 produces documents in a sequence that qualifies for United
States Postal Service presorting discounts.
DIRECT MARKETING AND MAILING EFFICIENCY APPLICATIONS
Improving the integrity of name and address information, while identifying
duplicate addresses, provides accurate, on time mail delivery, lowest mailing
costs, increased customer satisfaction and more effective target marketing.
Group 1's Direct Marketing and Mailing Efficiency applications are the most
accurate and comprehensive software solutions currently available for worldwide
mailing. Using Postal Address Data obtained from postal administrations around
the world, these solutions validate, correct, and/or format customer and
prospect addresses for the United States, Canada, and over 200 countries
worldwide. For companies conducting direct marketing in the U.S. and Canada,
these applications enable businesses to maximize available postal discounts for
significant savings from the United States Postal Service (USPS) and Canada Post
Corporation (CPC).
Group 1's direct marketing and mailing efficiency application software includes
CODE-1 Plus, CODE-1 Plus International, Canadian CODE-1 Plus, MailStream Plus,
Mail Canada, and MOVEforward, along with many optional value-added products.
Group 1's CODE-1 Plus and MailStream Plus products are Coding Accuracy Support
System (CASS) and Presort Accuracy Validation and Evaluation (PAVE) 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 using MailStream Plus and
CODE-1 Plus. 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
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Recognition Program (SERP) of CPC. Canadian clients can avoid the $0.05 per
piece surcharge by demonstrating an address accuracy level of at least 95%, and
can qualify for certain other postal rate incentives.
CODE-1 Plus International is a highly accurate and comprehensive international
address matching and verification product available. The solution validates and
corrects address elements to the street level for approximately 33 countries
worldwide, validates and corrects address elements to the city, province (or
state) level for approximately 39 countries, and formats address data to comply
with the requirements of all countries recognized by the United Nations.
Group 1's list management products, Merge/Purge Plus, Business Merge/Purge,
Generalized Selection, and List Conversion Plus allow clients to convert name
and address lists into desired formats, standardize address information,
identify and/or eliminate duplicates on business and consumer mailings, add
gender codes, and make targeted demographic selections.
DATA QUALITY
Group 1's Data Quality solutions enable businesses to improve the integrity of
customer and prospect data. Businesses can verify, as well as enhance, crucial
data to build lasting customer relationships more effectively. Group 1 provides
real-time, customer data quality and data enrichment solutions for e-commerce
and enterprise-wide applications. These industry-leading solutions provide both
substantial operational savings and increased sales and customer retention by
facilitating the most accurate target marketing. Group 1's data quality software
solutions, which include many of the company's Direct Marketing and Mailing
Efficiency Applications, are the most widely used applications for verifying
customer information.
Group 1's newest customer data quality solutions focus on the e-commerce market.
Through a partnership with USinternetworking, Group 1 is developing
DataQuality.net. A web-accessible Enterprise Information Portal (EIP),
DataQuality.net will use an XML-based interface to provide a broad variety of
real-time, customer data quality and data enrichment solutions for e-commerce
and enterprise-wide applications.
Group 1 also offers the DataVerse suite of products to provide businesses with a
highly robust infrastructure that can be trusted for mission critical customer
data quality throughout an enterprise. The DataVerse product family allows
e-businesses to integrate Group 1's industry leading data quality solutions
easily and directly into their Web environments using industry standard
technologies.
Group 1's GeoTAX provides businesses with current, accurate tax jurisdiction
assignment, to address the over 60,000 US tax jurisdictions assessing a variety
of telecommunications, utility, property, sales, income and payroll taxes.
GeoTAX reduces regulatory liability from tax penalties, and in combination with
Group 1's ZIP +4 address validation and hygiene products, and third party tax
table products is the complete solution for tax jurisdiction assignment.
Geographic and Demographic Coding help companies turn simple customer address
data into practical and powerful information. By adding highly accurate census
geography data to customer addresses, these products offer businesses a gateway
to increased customer understanding by supplying valuable geographic,
demographic and lifestyle information.
DQ Plus is a customized suite of data hygiene products, professional services,
and third-party data tailored to a customer's needs. Encompassing Group 1's
broad range of data quality products, DQ Plus helps businesses learn a wealth of
information about their customers by improving data integrity and consolidating
data.
DATABASE MARKETING
Group 1's Database Marketing solutions enable businesses to analyze customer
data and implement targeted marketing campaigns. These software solutions and
tools give businesses the power to distill valuable information from their
respective organizational databases. Companies can also utilize these solutions
to predict responses to marketing campaigns while identifying their best
customers and cross-selling opportunities. These solutions have proven most
valuable to the retail publishing gaming, hospitality and publishing industries.
DM1 is a customized, advanced database marketing system that offers a single
source solution for data analysis and data mining. With DM1, 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.
Businesses can select from Group 1's award winning suite of Database Marketing
tools to construct a flexible, user-friendly data mart system that allows the
mining of valuable
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information from customer databases. Companies can also utilize these solutions
to predict responses to marketing campaigns while identifying their best
customers and cross-selling opportunities.
A powerful and reliable marketing tool, Model 1 is a series of modeling
solutions that enables companies to maximize their marketing dollars by getting
the most out of their customer data. The Model 1 predictive modeling system
utilizes all traditional predictive techniques and selects the best fit to a
company's data. Speed, ease-of-use, breadth of predictive techniques, and
reliability enable users, from marketers to statisticians, to make more
accurate, actionable market predictions. All users benefit from Model 1's
ability to increase the productivity, response rates, customer loyalty, and
return on investment associated with marketing efforts.
PRODUCTS, SERVICES AND SUPPORT
PRODUCTS
As of March 31, 2000, Group 1 offered over 50 software products which operate on
more than 20 different operating systems and hardware platforms.
The DOC1 production engine can run under MVS, Windows NT, Windows 2000, UNIX
(Sun Solaris, HP/UX and AIX, DEC UNIX), Open VMS, OS/400 or PC DOS. DOC1 is
printer-independent and produces AFP, Metacode, HP/PCL, PostScript, HTML, XML,
PDF and line data output.
Most Direct Marketing and Mailing Efficiency products are offered in an Open
Systems format that enables the specific application to operate on all major
Windows, Unix, and mainframe platforms. This approach allows the user to migrate
from one platform to another without lost productivity or added training and
provides consistent performance across an enterprise, regardless of computer
platform.
Group 1's database marketing products are offered for a variety of operating
systems, including both Windows-based and Unix. The DM1 database marketing
system with an Oracle database operates in a client/server environment.
Model 1 runs under Windows 95, 98 or NT. Demographic and geographic coding
products operate in most open system operating environments. DQ Plus is offered
in open systems format compatible with most mainframe and mid size operating
systems.
Group 1's products can each operate on a stand-alone basis or in conjunction
with other Group 1 products to create an integrated system that can be tailored
to a client's requirements. With the introduction of Dispatcher4, a customer can
utilize the power of Group 1's core products in a single graphical environment.
SERVICES
Group 1's broad range of professional services include data migration,
integration with other systems, document analysis, consultation and design,
installation and training, file conversion and operational review. These
services are designed to assist clients in obtaining maximum utilization from
their Group 1 products and in improving other areas of their operations.
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. and in Canada and the United Kingdom.
SUPPORT
Group 1 believes that effective support of its customers and products has been a
substantial factor in its success to date and will continue to be in the
forseeable future. Customer support for software products is provided by
telephone for assistance in product installation and problem resolution.
Automated call tracking, client-specific call routing, electronic newscast,
e-mail messages and on-line discussion bulletin board services via the technical
support website are also provided for maintenance customers. On-site visits by
qualified company personnel are available, if necessary, for enterprise
solutions customers. Other offerings include e-mail support, integration
support, and premium support plans.
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Group 1 customers are afforded educational opportunities through the Annual
User's Conference and the over 20 local User Groups. In addition, two National
User Groups advise Group 1 on a variety of issues, including those related to
customer support. The thirty-member Enterprise Solutions Division National User
Group represents a cross-section of customers selected based on platforms,
products, and industries. The Electronic Document Systems Division also has an
active User's Group that meets twice a year.
For our DM1 customers, Group 1 maintains systems in our Las Vegas, Nevada
facility that duplicate the customer's environment. Group 1 Software Europe also
has modem links with many of its worldwide customers to provide high levels of
mission-critical support.
Group 1 offers with its product licenses an annual service agreement that
provides telephone support and continuing updates and enhancements, if and when
available, to its products and documentation. Educational and training seminars
specific to Group 1 products are offered by the education department.
In the fiscal years ended March 31, 2000, 1999, 1998, maintenance and
enhancement fees represented approximately 40%, 38%, and 35% respectively, of
Group 1's revenue.
CUSTOMERS
Group 1's customer base includes approximately 3,000 clients who have licensed
one or more of its software systems. Group 1 provides software solutions to
corporate leaders in a variety of industry segments, as indicated by this brief
customer sampling:
<TABLE>
<S> <C>
Insurance and Financial Services Utilities
-------------------------------- ---------
- American Express - Entergy
- Citicorp - Pacific Gas and Electric
- Lehman Brothers - Scottish Power
- Prudential Securities
- Charles Schwab Direct Marketers
- ABN Amro ----------------
- Bank of America - Publishers Clearinghouse
- CIGNA - Lands End
- MetLife
Government and Non-profit
Retailers -------------------------
--------- - Internal Revenue Service
- J.C. Penney - U.S. Senate
- L.L. Bean - National Geographic Society
- Neiman Marcus - AARP
- Sears - Veterans Administration
Telecommunications
------------------
- Ameritech
- AT&T
- GTE
- MCI
- Qwest
</TABLE>
The U.S. Postal Service is also a Group 1 Customer.
Group 1's operations are in two business segments defined as Enterprise
Solutions Software and Electronic Document Composition Software (see Note 14 to
the Consolidated Financial Statements). No customer accounts for more than 10%
of the Company's revenue.
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LICENSING
Most of Group 1's products are licensed on a perpetual "right to use" basis
pursuant to non-exclusive license agreements. Certain products which incorporate
third-party databases are licensed on an annual basis. Group 1 does not sell or
transfer title to its software products to clients. A client is generally
entitled to use a product only for internal purposes on a single computer at a
single location. Multi-site, multi-computer, and remote access corporate license
agreements are available as well. Certain postal products are required under
USPS and CPC regulations ("CASS" and "SERP", respectively) to have defined
expiration dates (quarterly or monthly) and must be under subscription or
re-licensing arrangements with Group 1 to qualify for postal discounts.
Group 1 generally warrants that its products will perform substantially in
accordance with their standard documentation for the defined warranty period or
as long as a service agreement is in effect, whichever is longer. The software
is generally licensed in conjunction with a first year maintenance agreement to
provide service and support for twelve months from the date of the license
agreement.
SALES AND MARKETING
Group 1 markets all of its software products in North America and Europe through
a direct sales and sales support organization of over 90 employees located in
the U.S., Canada, Scandinavia, Italy, Germany, the Netherlands, Austria and the
United Kingdom. To serve existing clients and to attract new customers, Group 1
has two sales and support offices in the Washington, D.C. area and eight other
regional offices in the New York City, Chicago, Los Angeles, Las Vegas, Atlanta,
Dallas, Minneapolis, Miami and Toronto metropolitan areas. European offices are
located in the London, Frankfurt, Milan, Copenhagen, Amsterdam and Vienna
metropolitan areas.
The Group 1 sales organization is supported by a comprehensive marketing program
administered from Group 1's Lanham, Maryland headquarters. Marketing is
conducted through direct mail, print advertising, an active web site, trade show
exhibitions and speaking engagements, product training seminars, telemarketing
and a broad variety of public relations activities including media relations,
analyst briefings, the Group 1 Report and the annual Group 1 Software User's
Conference.
Through its Group 1 Software Europe subsidiary, Group 1 has entered into
software distribution and support agreements for DOC 1 systems with partner
distribution companies throughout Europe. These agreements provide for a royalty
payment to Group 1, with the distributor performing sales and marketing,
customer service and support activities. Group 1 continues to pursue additional
international sales and marketing opportunities for its products.
Group 1 has entered into agreements with a number of leading software and
hardware vendors. Group 1 distributes products manufactured by Claritas, GDT,
Polk, UNICA Technologies, Business Document, Data General, COMPAQ, Window Book
and others. Domestic distributors and partners include Peoplesoft, Siebel,
Lucent, Andersen Consulting, Ernst and Young, IBM, Xerox Portal, CSC, and Bell
and Howell. International distributors of Group 1's products include Xerox, IBM,
SAP, OBIMD, Mastersoft International, Business Document, Andersen Consulting and
L&K.
PRODUCT DEVELOPMENT
The industry is characterized by rapid change in hardware and software
technology and in user needs, requiring a continual expenditure for product
development. Group 1 and other industry participants are currently responding to
the market demand for products and services that can operate in real-time. It is
likely that this operational requirement will continue in the foreseeable
future.
Group 1 must be able to provide new products and to modify and enhance existing
products on a continuing basis to meet the requirements of its customers,
including e-businesses, and of regulatory agencies, particularly the US Postal
Service and the Canada Post Corporation. Group 1 may also have to further adapt
its products to accommodate future changes in hardware and operating systems. To
date, Group 1 has been able to adapt its products to such changes and believes
that it will be able to do so in the future. Most of the Company's products are
developed internally. The Company also purchases technology, licenses
intellectual property rights and oversees third party development of certain
products.
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Quality assurance testing of Group 1's new or enhanced products is conducted by
teams of experienced individuals all segments of Group 1's organization under
the direction of testing specialists. Whether the product or technology is
developed internally or acquired from another company, Group 1 considers it
important to control the marketing, distribution, enhancement and future
direction of each of its products and technologies.
Significant investment was made during the year in new software development,
which focused on improving the integration, export, and output technologies to
take advantage of e-commerce opportunities that Group 1 believes are in its
markets. During fiscal 2000, substantial investments were made in two new
Electronic Document Composition products, DOC1 for Workgroups and Message1.
Additionally, extensive work was done to enhance and improve Group 1's core
products.
During fiscal 2000, Group 1 released product updates for all the Company's
regulatory products to assist its direct marketing and mailing efficiency
customers in the U.S. and Canada meet the requirements of the U.S. Postal
Service and Canadian Post Corporation to qualify for postal discounts.
COMPETITION
The 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 are available from a number of
different vendors offering features similar to those of Group 1's products.
Group 1's existing and potential competitors include companies having greater
financial, marketing and technical resources than Group 1. 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 Group 1's products have in-house capabilities to
develop computer software programs that can provide same or all at the
functionality of Group 1's products.
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, ease of integration of the product
line and the financial strength of the Company. Group 1 believes that it
competes favorably with regard to these factors including pricing and credit
terms. A major competitive asset is that Group 1 offers a comprehensive array of
complementary products which work together to facilitate a more effective,
efficient marketing function. 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
changes in postal regulations that affect several core products, copyright and
trade secret protection are less significant than factors such as the knowledge
and experience of Group 1's management and other personnel and their ability to
develop, enhance, market and acquire new products.
TRADEMARKS
GROUP 1 SOFTWARE, Group 1, Group 1 Software, CODE-1, CODE-1 CANADA, CODE-1
Plus, DataDesigns, DOC1, EZ-LETTER, MailStream Plus, Mail Canada, Model 1 and
MOVEForward are registered trademarks of Group 1 Software, Inc. Canadian CODE-1
Plus, Code 1 Plus International, DataQuality.net, DataVerse, DQPlus,
Dispatcher4, Generalized Selection, Geographic Coding Plus, GeoTAX, I/O-Jet,
Message 1, Merge/Purge Plus, Political Coding System, True Lead, DM 1 and DQ
Plus are trademarks of Group 1 Software, Inc. The trademark applications for
registration of DOC1, The Marketing Software Company and GeoTAX are pending.
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EMPLOYEES
As of March 31, 2000, the Company employed 398 persons on a full-time basis,
of whom 317 were based in the United States and 81 were based internationally.
Of the total, 103 were engaged in sales and marketing, 167 in product
development and support, 51 in professional services and 77 in finance,
administration and corporate operations. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and believes its employee relations to be good.
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. Group 1 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 the Chicago, Dallas, Los
Angeles, Las Vegas, Atlanta, New York City, Herndon Virginia, Minneapolis,
Miami, London, and Toronto metropolitan areas. 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, cash flows or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The trading of the common stock of the Company is reported on the NASDAQ
National Market System under the symbol GSOF. The table below sets forth the
highest and lowest closing prices between dealers for the quarters indicated and
reflects the stock split effected by the Company. These prices, as reported by
NASDAQ, do not include retail markup, markdown or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
CLOSING COMMON STOCK PRICES
---------------------------
2000 HIGH LOW 1999 HIGH LOW
---- ---------------------------- ---- --------------------
<S> <C> <C> <C> <C> <C>
First - June 30, 1999 $8.17 $4.83 First - June 30, 1998 $9.58 $4.92
Second - September 30, 1999 $7.17 $5.31 Second - September 30, 1998 $9.17 $4.17
Third - December 31, 1999 $11.25 $5.58 Third - December 31, 1998 $6.75 $4.67
Fourth - March 31, 2000 $24.56 $8.13 Fourth - March 31, 1999 $8.33 $4.83
</TABLE>
No cash dividends have been paid on the Company's common stock. The Company
pays dividends on the 6% Cumulative Convertible Preferred Stock (see Note 9 to
the Consolidated Financial Statements). 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 15, 2000, there were approximately 2,350 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
<TABLE>
<CAPTION>
(In thousands except per share amounts) Year Ended March 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Earnings Data:
Revenue $ 81,751 $ 65,291 $ 61,004 $ 54,547 $ 45,873
Income (loss) before provision for income taxes and minority
interest $ 10,931 $ 5,171 $ 2,335 $ (2,710) $ 5,472
Net income (loss) $ 6,289 $ 3,058 $ 1,150 $ (1,600) $ 2,832
Basic net earnings (loss) per share $ 1.07 $ 0.56 $ 0.20 $ (0.23) $ 0.60
Basic weighted average number of shares 5,802 5,264 4,911 4,894 4,710
Diluted net earnings (loss) per share $ 1.00 $ 0.56 $ 0.20 $ (0.33) $ 0.56
Diluted weighted average number of shares 6,245 5,317 4,948 4,894 5,010
Balance Sheet Data:
Working capital $ 17,101 $ 7,793 $ 6,692 $ 4,491 $ 6,829
Total assets $ 93,067 $ 77,799 $ 70,630 $ 75,856 $ 67,192
Capital lease obligation, excluding current portion $ 88 $ 198 $ 389 $ 304 $ 320
Stockholders' equity $ 44,928 $ 35,421 $ 27,158 $ 26,212 $ 27,433
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Any statements in this Annual Report on Form 10-K concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; together with other statements that
are not historical facts, are "forward-looking statements" as that term is
defined under the Federal Securities Laws. Forward looking statements may
include words such as "believes", "is developing", "will continue to be in the
future", "anticipates". Forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from those stated in such statements. Such risks, uncertainties and
factors include, but are not limited to, changes in currency exchange rates,
changes and delays in new product introduction, customer acceptance of new
products, changes in government regulations, changes in pricing or other actions
by competitors and general economic conditions, as well as other risks detailed
in the Company's filings with the Securities and Exchange Commission.
10
<PAGE> 11
Fiscal 2000 as Compared with Fiscal 1999
For the year ended March 31, 2000, Group 1's revenue was $81.8 million
compared with $65.3 million for the prior year. Group 1 had net income available
to common stockholders for the year of $6.2 million compared with $3.0 million
for fiscal 1999. The increase in profitability is attributed to increased
revenues and operating income in both the enterprise solutions and electronic
document composition segments as well as increased interest income.
All of Group 1's operations are in the two business segments defined as
Enterprise Solutions software and Electronic Document Composition software.
Enterprise Solutions revenue accounted for 65% and 68% of Group 1's total
revenue in fiscal 2000 and fiscal 1999, respectively. Electronic Document
Composition revenue was 35% and 32% of total revenue for fiscal 2000 and fiscal
1999. The change in mix is due to more rapid growth in sales in the Electronic
Document Composition segment. International revenues accounted for 13% of Group
1's total revenue in fiscal 2000 and 17% in fiscal 1999. The decrease in
international revenue as a percent of total revenue is due to lower European
revenues along with higher sales in the U.S.
Software license fees and related revenue of $38.9 million represented an
increase of 23% over the prior year which was attributable to increased sales
across all of Group 1's product lines. As a percent of total revenue, software
license and related revenues were 48% for fiscal years 2000 and 1999.
The Company's data quality/mailing efficiency software license fees
increased 10% for fiscal 2000 over the prior year. The increase is primarily due
to higher sales of the Company's international coding products, list products
and the DQ Plus product suite.
License fees from Database Marketing systems increased 10% for fiscal year
2000. The increase resulted from higher recognizable revenue on DM1 solutions
which are recognized on a percentage of completion basis.
Licensing of Electronic Document Composition increased by 50% in fiscal 2000
over the prior fiscal year. The increase is due to higher sales in North
America, South America and the Caribbean, offset slightly by lower sales in
Europe.
Maintenance and services revenue of $42.9 million for the year increased 27%
over the prior year. Maintenance and service revenue accounted for 52% of total
revenue in both fiscal 2000 and fiscal 1999. Recognized maintenance fees were
$32.6 million in fiscal 2000 and $24.7 million in fiscal 1999, an increase of
32%. Professional service and educational training revenues of $10.3 million in
fiscal 2000 and $9.0 million in fiscal 1999 represented an increase of 14%.
Enterprise Solutions recognized maintenance increased 27% over the prior
year to $26.7 million. Electronic Document Composition recognized maintenance
increased 59% to $5.9 million in fiscal 2000 from fiscal 1999. The Company
expects continued growth in recognized maintenance in both of its business
segments.
Professional services revenue from the Enterprise Solutions segment
increased to $2.8 million in fiscal 2000 from $2.0 million in fiscal 1999, an
increase of 40%. Electronic Document Composition services revenue increased 7%
in fiscal 2000 to $7.5 million. As the Company foresees a growing need for
integrating complex solutions, it anticipates increased revenue from these
services.
Total costs of revenue for fiscal 2000 were $27.3 million versus $23.7
million for fiscal 1999, representing 33% and 36% of total revenue,
respectively. The separate components of cost of revenue are discussed below.
Software license expense increased to $12.3 million in fiscal 2000
representing 32% of software license and related revenue compared to $10.7
million in fiscal 1999 representing 34% of software license and related revenue.
The decrease as a percent of revenue is primarily due to higher license revenue
partially offset by higher software amortization expense.
Maintenance and service expense increased to $15.0 million in fiscal 2000
from $13.0 million in fiscal 1999, 35% and 39% of maintenance and service
revenue, respectively. The decrease in expense as a percent of revenue is due to
higher revenues partially offset by higher costs of outside consultants used to
help deliver these services.
Included in maintenance and service expense above are professional service
and educational training costs of $8.0 million which were 78% of professional
services revenue during 2000 and $6.6 million and 73% of professional services
revenue for the prior year. The increase in cost as a percentage of services
revenue is due to lower margins in the Company's Enterprise Solutions services
attributable to a specific contract in which the duration extended original
11
<PAGE> 12
estimates and substantial outside resources were needed for completion. The
Company does not expect any significant costs for this contract going forward.
Costs of maintenance were $7.0 million for fiscal 2000 representing 21% of
maintenance revenue compared with costs of $6.4 million and 26% of revenue in
fiscal 1999. The decreased costs as a percentage of maintenance revenue were
primarily due to increased maintenance revenue partially offset by higher in
Information Technology costs associated with supporting internal systems. The
Company anticipates these costs to remain relatively close to their current
levels.
Total operating costs of $44.6 million amounted to 55% of revenue in fiscal
2000 compared with $36.6 million or 56% of revenue during fiscal 1999. The
various components of operating costs are discussed below.
Research and development expenses (after capitalization of certain
development costs) totaled $4.2 million in fiscal 2000 and $2.7 million in 1999,
representing 5% and 4% of total revenue. The increase in costs is due to
increased investment in new product initiatives in all of the Company's major
product groups. The Company expects these costs, as a percentage of revenue, to
remain relatively close to their current levels.
Sales and marketing expenses totaled $26.1 million or 32% of revenue in
fiscal 2000 and $21.7 million or 33% of revenue in fiscal 1999. The decrease in
costs as a percentage of revenue is primarily due to higher revenue partially
offset by higher costs for sales and marketing of Enterprise Solutions and
Electronic Document Composition products. The Company expects these costs to
remain relatively close to current levels as a percentage of revenue. Sales and
marketing costs for the Enterprise Solutions products were 32% of total
Enterprise Solutions revenue for fiscal 2000 and 36% for fiscal 1999. Electronic
Document Composition selling and marketing costs were 32% of total Electronic
Document composition revenue for fiscal 2000 and 28% for fiscal 1999.
General and administrative expenses were $14.3 million or 17% of total
revenue in fiscal 2000 compared with $12.2 million or 19% for fiscal 2000. The
increase is attributable to higher performance bonus compensation offset
partially by lower bad debt expense. The Company expects these costs to remain
relatively close to current levels as a percentage of revenue.
Net non-operating income was $1.1 million in fiscal 2000 compared with net
non-operating income of $0.2 million in fiscal 1999. This increase represents
higher interest income generated from higher cash and short-term investment
balances compared to fiscal 1999. The Company expects non-operating income to
increase as interest income on cash and investments increases and short-term
borrowing requirements remain minimal; these expectations could be affected
substantially by newly-identified investment opportunities including
acquisitions.
The Company's effective tax rate was 42% in fiscal 2000 and 39% in fiscal
1999. The current year's rate is the net effect of a 46% domestic tax rate
combined with a 32% foreign tax rate on taxable net income. The increased
effective rate is primarily due to proportionately higher domestic income in
fiscal 2000.
Fiscal 1999 as Compared with Fiscal 1998
On September 25, 1998, the shareholders of COMNET Corporation ("COMNET") and
Group 1 Software, Inc. approved the proposed merger of Group 1 Software, Inc.
into COMNET. As a result of the merger, COMNET common stock was issued to Group
1 Software, Inc.'s minority shareholders at an exchange ratio of 1.15 shares of
COMNET for each share of Group 1 Software Inc.'s stock. This transaction
increased the total number of outstanding shares for the Company to 5,568,000.
The surviving company was renamed Group 1 Software, Inc. ("Group 1" or "the
Company"). The merger was accounted for under purchase accounting and $4.1
million of identifiable intangible assets were recorded which amount is being
amortized over the estimated useful life of 15 years.
For the year ended March 31, 1999, Group 1's revenue was $65.3 million
compared with $61.0 million for the prior year. Group 1 had net income available
to common stockholders for the year of $3.0 million compared with $1.0 million
for fiscal 1998. The increase in profitability is primarily attributed to
increased revenues and to decreased expenses resulting from new distribution
agreements for WorldTrak and PC postal products which were put in place in late
fiscal 1998.
All of Group 1's operations are in the two business segments defined as
Enterprise Solutions and electronic document composition software. Group 1
recognizes maintenance and enhancement revenue over the life of the service
agreement, usually one or two years. Enterprise Solutions revenue accounted for
68% and 73% of Group 1's total revenue in fiscal 1999 and 1998, respectively.
Electronic Document Composition revenue was 32% and 27% for fiscal 1999 and
1998. International revenues accounted for 17% of Group 1's total revenue in
fiscal 1999 and 15% in fiscal 1998.
12
<PAGE> 13
Software license fees and related revenue of $31.6 million represented a
decrease of 4% over the prior year attributable primarily to decreased sales of
the NADIS and MODEL 1 products as well as the PC Postal Products which were
licensed on a long term basis to a third party for distribution during 1998. As
a percent of total revenue, software license and related revenue was 48% and 54%
for fiscal years 1999 and 1998, respectively.
The Company's data quality/mailing efficiency software license fees
increased 37% for fiscal 1999 over the prior year. The increase is primarily due
to higher sales of CODE 1 Plus, the Company's most prominent mailing efficiency
product.
License fees from Database Marketing systems decreased 62% for the fiscal
year. The decrease resulted from lower recognizable revenue on DM1 solutions
which are recognized on a percentage of completion basis and also lower sales of
the MODEL 1 product.
Licensing of Electronic Document Systems increased by 11% in 1999 over the
prior fiscal year. The increase is due to higher sales in North America offset
slightly by lower sales in Europe.
Maintenance and services revenue of $33.7 million for the year increased 19%
over the prior year. Maintenance and service revenue accounted for 52% of total
revenue in 1999 and 46% of total revenue in 1998. Recognized maintenance fees
were $24.7 million in 1999 and $21.2 million in 1998, an increase of 17%.
Professional service and educational training revenues of $9.0 million in 1999
and $7.0 million in 1998 represented an increase of 29%.
Enterprise Solutions recognized maintenance increased 14% in fiscal 1999 to
$21 million. Electronic document composition maintenance recognition increased
39% to $3.7 million in fiscal 1999. The Company expects continued growth in
recognized maintenance in both of its business segments.
Professional services revenue from the Enterprise Solutions segment
decreased to $2.0 million in fiscal 1999 from $2.4 million in fiscal 1998, a
decrease of 17%. Electronic Document Composition services revenue increased 54%
in fiscal 1999 to $7.0 million. As the Company foresees a growing need for
integrating complex solutions, it anticipates increased revenue from these
services.
Total operating costs of $60.4 million amounted to 92% of revenue in 1999
compared with $58.2 million or 95% of revenue during 1998. The various
components of operating costs are discussed below.
Software license expense increased to $10.7 million in fiscal 1999
representing 34% of software license and related revenues compared with $10.5
million in 1998 representing 32% of software license and related revenues. The
increase as a percent of revenue is due to higher software amortization expense
partially offset by lower royalties on sales of third party products spread over
a slightly lower software license revenue base.
Maintenance and service expense increased to $13.0 million in 1999 from
$12.5 million in 1998, 39% and 44% of maintenance and service revenue,
respectively. The decrease in expense as a percent of revenue is due to higher
revenues versus modest cost increases, partially offset by higher costs of
professional services and education training related to these services.
Included in maintenance and service expense above are professional service
and educational training costs of $6.6 million which were 73% of professional
services revenue during 1999 and $5.2 million and 74% of professional services
revenue for the prior year.
Costs of maintenance were $6.4 million for 1999 representing 26% of
maintenance revenue compared with costs of $7.3 million and 34% of revenue in
1998. The decreased costs as a percentage of maintenance revenue were primarily
due to increased maintenance revenue along with lower costs resulting from the
new distribution agreements for the WorldTrak and PC Postal product lines, which
shifted the support costs for these products to the respective licensees. The
Company anticipates these costs to remain relatively close to their current
levels.
Research and development expenses (after capitalization of certain
development costs) totaled $2.7 million in 1999 and $2.9 million in 1998,
representing 4% and 5% of total revenue. The Company anticipates these costs to
remain relatively close to their current levels.
Sales and marketing expenses totaled $21.7 million or 33% of revenue in 1999
and $20.9 million or 34% of revenue in 1998. The decrease in costs as a
percentage of revenue is primarily due to lower costs associated with the
13
<PAGE> 14
WorldTrak and PC operations offset slightly by higher marketing costs in fiscal
1999. The Company expects these costs, as a percentage of revenue, to remain
relatively close to current levels as a percentage of revenue.
Sales and marketing costs for the Enterprise Solutions products were 36% of
total Enterprise Solutions revenue for fiscal 1999 and 37% for fiscal 1998.
Electronic Document Composition selling and marketing costs were 28% for fiscal
1999 and 27% for fiscal 1998.
General and administrative expenses were $12.2 million or 19% of total
revenue in 1999 compared with $11.4 million or 19% for 1998. The increase in the
current year is primarily due to performance related bonuses.
Net non-operating income was $0.2 million in 1999 compared with net
non-operating expense of $0.5 million in 1998. The difference primarily reflects
increased interest income on increased cash and short-term investment balances
and decreased interest expense resulting from the elimination of short-term
borrowings. The Company expects non-operating income to increase as interest
income on cash and investments increases and short-term borrowing requirements
remain minimal; these expectations could be affected substantially by
newly-identified investment opportunities including acquisitions.
The Company's effective tax rate was 39% in both 1999 and in 1998. The 1999
rate is the net effect of a 45% domestic tax rate combined with a 34% foreign
tax rate on taxable net income.
Stock Repurchase from Merck & Co Inc.
By agreement dated September 24, 1998, the Company repurchased 770,018
shares of common stock and 100,000 shares of its 6 percent cumulative
convertible preferred stock from Merck & Co., Inc. The total cost to Group 1 of
the repurchase was $4.1 million. Merck was Group 1's largest shareholder with
14% of the Company's outstanding common stock and 68% of the preferred stock.
The repurchased common stock was subsequently reissued in connection with the
acquisition of the minority interest of Group 1 Software, Inc.
The Year 2000 Issue
In 1997, the Company formed two special task forces:
- The first task force was established to identify and evaluate our
internal systems and applications that may be affected by the Year
2000 issue; modify or replace those systems and applications so they
will work properly in the Year 2000, and communicate with our
suppliers to make sure they are prepared for the Year 2000.
- The second task force was established to evaluate the products sold
by us, to ensure they will function as designed after the Year 2000.
The Company identified and evaluated all of its systems and applications
that might have been affected by the Year 2000 issue, and developed plans to
ready these systems and applications for the century change. Modification and
replacement projects were completed pursuant to their modification and
replacement projects. All products sold by the Company, with one exception, were
modified to ensure Year 2000 functionality. The costs of the readiness program
for products and internal systems were primarily costs of existing internal
resources largely absorbed within existing spending levels. These costs were
incurred primarily in 1998 and earlier years and were not broken out from other
operating costs.
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; there can be no
assurance, however, 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 Group 1's sales representatives. Group 1's
revenue and resultant earnings have shown substantial variation on a
quarter-to-quarter basis. The Company's 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.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $17.1 million at March 31, 2000 as
compared with $7.8 million in the prior year. The current ratio was 1.4 to 1 at
March 31, 2000 and 1.2 to 1 at March 31, 1999. 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 maintains a $10 million line of
credit arrangement with a commercial bank, expiring October 31, 2001. The line
of credit bears interest at the bank's prime rate, or Libor plus 150 basis
points at Group 1's option. The line of credit is not collateralized and
requires Group 1 to maintain certain operating ratios. At March 31, 2000 and at
March 31, 1999, there were no borrowings outstanding under the line of credit.
During fiscal 2000 net income before preferred stock dividends of $6.3
million along with non-cash expenses of $14.4 million provided a total of $20.7
million cash from operating activities. A decrease in accounts receivable added
$0.2 million cash during the year from operating activities. This decrease was
due to improved collections during the year. Deferred revenues increased cash by
$4.5 million; other working capital items increased cash by $0.3 million. Cash
flows used in investing activities consist of expenditures for investments in
software development and capital equipment of $11.8 million and $9.8 million for
the purchase of marketable securities. Proceeds from the exercise of stock
options of $3.3 million were partially offset by principal payments on capital
leases and preferred dividends of $0.2 million for a total of $3.1 million cash
provided by financing activities.
Group 1 continually evaluates the credit and market risks associated with
outstanding receivables. In the course of this review, Group 1 considers many
factors specific to the individual client as well as to the concentration of
receivables within industry groups. 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 the 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
the Company. The service bureau industry is also highly competitive and subject
to general economic cycles, as they impact advertising and direct marketing
expenditures. The Company is aware of no current market risk associated with the
installment receivables. Service bureaus represent approximately $2.8 million or
73%, of the installment receivables at March 31, 2000.
As of March 31, 2000, the Company's capital resource commitments consisted
primarily of non-cancelable operating lease commitments for office space and
equipment. The Company believes that its current minimum lease obligations and
other short-term and long-term liquidity needs can be met from its existing cash
and short-term investment balances and cash flows from operations. The Company
believes that its long-term liquidity needs are minimal and no large capital
expenditures are anticipated, except for the continuing investment in
capitalized software development costs, which the Company believes can be funded
from operations during the next twelve months.
Recent Accounting Pronouncements
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No.
101,"Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. We are required to be in conformity with the provisions of
SAB 101 in fiscal year 2001. The Company has not fully assessed the effect on
our financial statements as a result of SAB 101.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
which delays the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for our fiscal year
2002. This statement establishes accounting and reporting standards requiring
that every derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. We believe the adoption of SFAS Nos. 133 and
137 will not have a material effect on our financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of Accounting Principles Board Opinion No. 25"
("FIN-44"). FIN-44 will be effective on July 1. 2000, but certain conclusions in
FIN-44 cover specific events that
15
<PAGE> 16
occurred after either December 15, 1998 or January 12, 2000. The Company
believes the adoption of FIN-44 will not have a material effect on its financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company has a subsidiary in the United Kingdom with offices in Germany
and Denmark. Additionally, the Company uses third party distributors to market
and distribute its products in other international regions. Transactions
conducted by the subsidiary are typically denominated in the local country
currency, while transactions conducted by the distributors are typically
denominated in pounds sterling. As a results, the company is primarily exposed
to foreign exchange rate fluctuations as the financial results of its subsidiary
and third party distributors are translated into U.S. dollars in consolidation.
As exchange rates vary, these results, when translated, may vary from
expectations and impact overall expected profitability. However, through and as
of March 31, 2000, the Company's exposure was not material to the overall
financial statements taken as a whole. The Company has not entered into any
foreign currency hedging transactions with respect to its foreign currency
market risk. The Company does not have any financial instruments subject to
material market risk. See Note 1 to the Consolidated Financial Statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 13 through 31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE> 17
REPORT OF INDEPENDENT ACCOUNTANTS
--------------
To the Board of Directors and Stockholders of
Group 1 Software, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of comprehensive income, of changes in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Group 1 Software, Inc. and its subsidiaries at March
31, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express and opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
McLean, Virginia
June 4, 2000
17
<PAGE> 18
GROUP 1 SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,735 $ 13,378
Short-term investments 11,259 1,471
Trade and installment accounts receivable, less
allowance of $3,317 and $3,383 21,561 22,596
Deferred income taxes 3,297 3,039
Prepaid expenses and other current assets 3,407 3,149
------------- -------------
Total current assets 60,259 43,633
Installment accounts receivable, long-term 1,945 2,221
Property and equipment, net 4,290 3,678
Computer software, net 21,823 22,559
Other assets 4,750 5,708
------------- -------------
Total assets $ 93,067 $ 77,799
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,940 $ 2,136
Current portion of capital lease obligation 109 99
Accrued expenses 6,627 5,647
Accrued compensation 7,617 7,095
Current deferred revenues 26,865 20,863
------------- -------------
Total current liabilities 43,158 35,840
Capital lease obligation, net of current portion 88 198
Deferred revenues, long-term 1,169 2,670
Deferred income taxes 3,724 3,670
------------- -------------
Total liabilities 48,139 42,378
------------- -------------
Commitments and contingencies (Note 13)
Stockholders' equity:
6% cumulative convertible preferred stock $0.25 par value;
200 shares authorized; 48 issued and outstanding (aggregate
involuntary liquidation preference $950,000 in 2000) 916 916
Common stock $0.50 par value; 14,000 shares authorized; 6,468 and
6,069 issued and outstanding 3,234 3,034
Additional paid in capital 27,431 24,060
Retained earnings 15,684 9,451
Accumulated other comprehensive income (2) 14
Less treasury stock, 497 and 483 shares, at cost (2,335) (2,054)
------------- -------------
Total stockholders' equity 44,928 35,421
------------- -------------
Total liabilities and stockholders' equity $ 93,067 $ 77,799
============= =============
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 19
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenue:
Software license and related revenues $ 38,853 $ 31,631 $ 32,786
Maintenance and services 42,898 33,660 28,218
--------------- --------------- ---------------
Total revenue 81,751 65,291 61,004
--------------- --------------- ---------------
Cost of revenue:
Software license expense 12,302 10,702 10,491
Maintenance and service expense 15,001 13,047 12,544
--------------- --------------- ---------------
Total cost of revenue 27,303 23,749 23,035
--------------- --------------- ---------------
Gross profit 54,448 41,542 37,969
Operating expenses:
Research and development 4,188 2,743 2,858
Sales and marketing 26,118 21,695 20,893
General and administrative 14,335 12,180 11,418
--------------- --------------- ---------------
Total operating expenses 44,641 36,618 35,169
--------------- --------------- ---------------
Income from operations 9,807 4,924 2,800
Non-operating income (expense)
Interest income 1,184 427 118
Interest expense (74) (104) (471)
Other non-operating income (expense) 14 (76) (112)
--------------- --------------- ---------------
Total non-operating income (expense) 1,124 247 (465)
--------------- --------------- ---------------
Income from operations before provision for income taxes
and minority interest 10,931 5,171 2,335
Provision for income taxes 4,642 2,030 921
Minority interest in net income of consolidated
subsidiary - - - 83 264
--------------- --------------- ---------------
Net income 6,289 3,058 1,150
Preferred stock dividend requirements (56) (87) (177)
--------------- --------------- ---------------
Net income available to common stockholders $ 6,233 $ 2,971 $ 973
=============== =============== ===============
Basic earnings per share $ 1.07 $ 0.56 $ 0.20
=============== =============== ===============
Diluted earnings per share $ 1.00 $ 0.56 $ 0.20
=============== =============== ===============
Basic weighted average shares outstanding 5,802 5,264 4,911
=============== =============== ===============
Diluted weighted average
shares outstanding 6,245 5,317 4,948
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 20
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
2000 1999 1998
------------ ------------ -------------
<S> <C> <C> <C>
Net income $6,289 $ 3,058 $ 1,150
Foreign currency translation adjustments (16) (273) (64)
Unrealized gain on investments - - - - - - - - -
------------ ------------ -------------
Comprehensive income $6,273 $ 2,785 $ 1,086
============ ============ =============
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- ---------------------
Additional Retained
Shares Amount Shares Par Value Paid In Capital Earnings
----------- --------- --------- ---------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997 148 $ 2,846 5,382 $ 2,691 $16,831 $ 5,507
Dividends to preferred stockholders - - - - - - - - - - - - - - - (177)
Issuance of stock upon exercise of
options - - - - - - 9 5 33 - - -
Loss on foreign currency translation - - - - - - - - - - - - - - - - - -
Net income - - - - - - - - - - - - - - - 1,150
----------- --------- --------- ---------- --------------- ---------
Balance, March 31, 1998 148 2,846 5,391 2,696 16,864 6,480
Dividends to preferred stockholders - - - - - - - - - - - - - - - (87)
Redemption of preferred stock below
carrying value (100) (1,930) - - - - - - 1,255 - - -
Issuance of stock upon exercise of
options - - - - - - 52 26 274 - - -
Repurchase of treasury stock - - - - - - - - - - - - - - - - - -
Minority interest acquisition - - - - - - 626 312 5,667 - - -
Loss on foreign currency translation - - - - - - - - - - - - - - - - - -
Net income - - - - - - - - - - - - - - - 3,058
----------- --------- --------- ---------- --------------- ---------
Balance, March 31, 1999 48 916 6,069 3,034 24,060 9,451
Dividends to preferred stockholders - - - - - - - - - - - - - - - (56)
Issuance of stock upon exercise of
options - - - - - - 399 200 2,243 - - -
Loss on foreign currency translation - - - - - - - - - - - - - - - - - -
Tax benefit related to stock options - - - - - - - - - - - - 1,128 - - -
Net income - - - - - - - - - - - - - - - 6,289
----------- --------- --------- ---------- --------------- ---------
Balance, March 31, 2000 48 $916 6,468 $3,234 $27,431 $15,684
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
--------------------------
Accumulated
Other Total
Comprehensive Stockholders'
Income Shares Amount Equity
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Balance, March 31, 1997 $ 351 474 $(2,015) $26,211
Dividends to preferred stockholders - - - - - - - - - (177)
Issuance of stock upon exercise of
options - - - - - - - - - 38
Loss on foreign currency translation (64) - - - (64)
Net income - - - - - - - - - 1,150
----------------------------- ----------------------------
Balance, March 31, 1998 287 474 (2,015) 27,158
Dividends to preferred stockholders - - - - - - (87)
Redemption of preferred stock below
carrying value - - - - - - - - - (675)
Issuance of stock upon exercise of
options - - - 9 (39) 261
Repurchase of treasury stock - - - 770 (3,465) (3,465)
Minority interest acquisition - - - (770) 3,465 9,444
Loss on foreign currency translation (273) - - - - - - (273)
Net income - - - - - - - - - 3,058
----------------------------- ----------------------------
Balance, March 31, 1999 14 483 (2,054) 35,421
Dividends to preferred stockholders - - - - - - - - - (56)
Issuance of stock upon exercise of
options - - - 14 (281) 2,162
Loss on foreign currency translation (16) - - - - - - (16)
Tax benefit related to stock options - - - - - - - - - 1,128
Net income - - - - - - - - - 6,289
----------------------------- ----------------------------
Balance, March 31, 2000 ($2) 497 ($2,335) $44,928
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------
2000 1999 1998
-------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,289 $ 3,058 $ 1,150
Adjustments to reconcile net income from
Operations to net cash provided by operating activities:
Amortization expense 10,701 8,505 7,159
Depreciation expense 1,864 1,299 1,151
Provision for doubtful accounts 1,050 2,955 3,505
Net loss on disposal of assets 15 8 51
Deferred income taxes 808 788 (802)
Minority interest in income of consolidated subsidiary - - - 83 264
Changes in assets and liabilities:
Accounts receivable 248 3,063 4,070
Prepaid expenses and other current assets (259) 227 1,291
Other assets 206 552 90
Deferred revenues 4,517 2,135 292
Accounts payable (194) 49 (1,068)
Accrued expenses 498 2,242 1,597
-------------- ------------- ------------
Net cash provided by operating activities 25,743 24,964 18,750
-------------- ------------- ------------
Cash flows from investing activities:
Purchase and development of computer software (9,055) (7,471) (8,328)
Purchase of property and equipment (2,706) (1,546) (1,151)
Purchase of marketable securities (80,955) (1,471) - - -
Sale of marketable securities 71,167 - - - - - -
Purchase of minority interest - - - (454) - - -
-------------- ------------- ------------
Net cash used in investing activities (21,549) (10,942) (9,479)
-------------- ------------- ------------
Cash flows from financing activities:
Proceeds from short-term borrowings - - - - - - 11,853
Repayment of short-term borrowings - - - - - - (18,950)
Proceeds from exercise of stock options 3,290 261 38
Proceeds from sale and leaseback of equipment - - - - - - 199
Repayment of principal on capital lease obligations (100) (249) (120)
Dividends paid on preferred stock (56) (117) (177)
Repurchase of common stock - - - (3,465) - - -
Repurchase of preferred stock - - - (675) - - -
-------------- ------------- ------------
Net cash (used in) provided by financing activities 3,134 (4,245) (7,157)
-------------- ------------- ------------
Net increase in cash and cash equivalents 7,328 9,777 2,114
Effect of exchange rate on cash and cash equivalents 29 (82) (60)
Cash and cash equivalents at beginning of period 13,378 3,683 1,629
-------------- ------------- ------------
Cash and cash equivalents at end of period $ 20,735 $ 13,378 $ 3,683
============== ============= ============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
Group 1 Software, Inc.
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying consolidated financial statements are for Group 1 Software,
Inc. ("Group 1"), formerly doing business as COMNET Corporation, which was
incorporated June 1967. Unless otherwise indicated in the Notes to the
Consolidated Financials Statements, the term "Company" will refer to the
operations of Group 1 and its subsidiaries. On September 25, 1998, the
shareholders of Group 1 Software, Inc. and COMNET Corporation ("COMNET") both
approved the proposed merger of Group 1 Software, Inc. into COMNET. The
surviving company was renamed Group 1 Software, Inc. ("Group 1") (see Note 2).
Group 1 Software, Inc. develops, acquires, markets and supports specialized
marketing, electronic document composition and mail management software. The
Company distributes all of its products in North America and its Electronic
Document Systems throughout the world.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
Group 1 Software, Inc. and its wholly owned subsidiaries. All material
intercompany transactions and balances have been eliminated in consolidation.
Estimates
The preparation of the consolidated 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's revenues are derived from the sale of perpetual licenses for
its software and from the sale of related services, which include maintenance
and support, consulting and training services. Revenues from license
arrangements are recognized upon shipment of the product when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed and
determinable and collectibility is probable. If an ongoing vendor obligation
exists under the license arrangement, revenue is deferred based on
vendor-specific objective evidence of the undelivered element. If
vendor-specific objective evidence does not exist for all undelivered elements,
all revenue is deferred until sufficient evidence exists or all elements have
been delivered. Revenues from annual maintenance and support are deferred and
recognized ratably over the term of the contract. Revenues from consulting and
training are deferred and recognized when the services are performed and
collectibility is deemed probable. The Company adopted the provisions of
Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition" as
amended by Statement of Position 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2" in fiscal year 1999 and the provisions of No. 98-9 ("SOP
98-9"), "Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions" in fiscal year 2000. Prior to fiscal 1999, the Company
recognized revenues in accordance with Statement of Position 91-1, "Software
Revenue Recognition".
The amount of deferred revenue at March 31, 2000 to be recognized
during the subsequent years is (in thousands):
<TABLE>
<CAPTION>
<S> <C>
2001 $26,865
2002 1,011
2003 131
2004 27
------------
$28,034
============
</TABLE>
Contracts for professional services are negotiated individually. The Company
generally recognizes revenues from professional service contracts on a time and
materials basis as the work is performed. Fixed price professional service
contracts are recognized using the percentage-of-completion method as work is
performed, measured primarily by the ratio of labor hours incurred to total
estimated labor hours for each specific contract. When the total estimated cost
of a contract is expected to exceed the contract price, the total estimated loss
is charged to expense in the period when the information is known.
23
<PAGE> 24
Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less at the time the investments are acquired to be cash equivalents.
Cash equivalents for the Company are solely investments in commercial paper.
Short-term Investments
The Company classifies its investments in commercial paper as
available-for-sale. As of March 31, 2000 the company had available-for-sale
investments of $11.3 million. The Company had available-for-sale investments of
$1.5 million as of March 31, 1999. The investments are adjusted to market value
at the end of each accounting period. Unrealized gains and losses, net of
applicable taxes, are charged or credited to accumulated other comprehensive
income, a separate component of stockholders equity. Realized gains and losses
on the sale of investments, as determined on a specific identification basis,
are included in the Consolidated Statements of Operations. To date, unrealized
gains and losses have not been material. Interest income is recognized when
earned.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives; two years for laptop
computers, three years for other computers, five years for office equipment and
ten years for furniture. Leasehold improvements are amortized on a straight-line
basis over the shorter of their useful lives or the term of the respective
leases.
Research and Product Development
Research and product development costs not subject to Financial Accounting
Standards Board Statement No. 86 ("SFAS 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.
Software development costs include direct labor cost and overhead. Capitalized
software development costs are amortized by the greater of (a) the ratio that
current gross revenues for the product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported on. At the balance sheet date, the Company evaluates the
net realizable value of the capitalized costs and adjusts the current period
amortization for any impairment of the capitalized asset value.
Costs for research and development, before capitalization, incurred in
fiscal 2000, 1999, and 1998 were approximately $11,023,000, $9,896,000, and
$11,493,000, respectively. Under SFAS 86, software development costs amounting
to $6,835,000, $7,153,000, and $8,635,000 were capitalized during fiscal 2000,
1999 and 1998, respectively. During fiscal 2000, 1999, and 1998, amortization of
capitalized internally developed computer software costs, was $9,027,000,
$7,649,000, and $6,068,000, respectively and is included in software license
expense.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair
market value of the tangible and intangible assets acquired in various
acquisitions and is being amortized over the estimated economic useful life
ranging from nine to fifteen years. Goodwill, net of accumulated amortization,
was $4.6 million and $5.2 million at March 31, 2000 and 1999, respectively, and
is included in other assets. Amortization charged to operations amounted to
$749,000, $353,000, and $251,000, for fiscal 2000, 1999, and 1998, respectively.
At each balance sheet date, the Company evaluates the net realizable value of
goodwill based upon expectations of non-discounted cash flows and operating
income. Based upon its most recent analysis, Group 1 believes that no impairment
of goodwill existed at March 31, 2000.
Foreign Currency Translation
The functional currency for the Company's international subsidiary is the
applicable local currency. The financial statements of the international
subsidiary are translated into U.S. dollars using exchange rates in effect at
period end for assets and liabilities and average exchange rates during each
reporting period for results of operations. Adjustments resulting from
translation of financial statements are included in stockholders' equity as
accumulated other comprehensive income. The Company does not attempt to hedge it
foreign currency exposures. Foreign currency losses of $16,000 in 2000, $273,000
in 1999 and $64,000 in 1998 are included in accumulated other comprehensive
income. Gains and losses resulting from foreign currency transactions are
immaterial for all periods represented.
24
<PAGE> 25
Stock-based Compensation Plans
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and complies with the
disclosure provisions of SFAS 123, "Accounting for Stock Based Compensation."
Under APB 25, compensation cost is recognized over the vesting period based on
the difference, if any, on the date of grant between the fair market value of
the Company's stock and the amount an employee must pay to acquire the stock.
The Company's policy is to grant options with an exercise price equal to the
quoted market price of the Company's stock on the grant date. Accordingly, no
compensation expense has been recognized for its stock option plans.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the asset and liability tax consequences of temporary differences
by applying currently enacted statutory tax rates applicable to future years to
differences between the financial statements carrying amounts and the tax bases
of existing assets and liabilities.
Earnings per Share of Common Stock
Earnings per share (EPS) is computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic EPS is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS is computed using the weighted average number of
shares of common stock and potentially dilutive common share equivalents
outstanding during the period. Potentially dilutive common share equivalents
consist of convertible preferred stock (computed using the if converted method)
and stock options (computed using the treasury stock method). Potentially
dilutive common share equivalents are excluded from the computation if the
effect is anti-dilutive. Share and per share data presented reflect the
three-for-two stock split effective February 2000.
Reconciliation of basic EPS calculations to the shares used in the diluted EPS
calculation (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------
2000 1999 1998
------------ ----------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding-basic 5,802 5,264 4,911
Effect of dilutive securities:
Stock options 443 53 37
------------ ----------- ----------
Weighted average shares outstanding - diluted 6,245 5,317 4,948
============ =========== ==========
</TABLE>
There were additional potentially dilutive convertible preferred shares of
47,500 in 2000, 96,111 in 1999 and 147,500 in 1998 which were not included in
the earnings per share calculation due to their anti-dilutive effect.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents, short term
investments and accounts receivable. The company places its cash and cash
equivalents and short term investments in, highly rated commercial paper with
maturities of less than one year. The company has established guidelines,
relative to credit ratings and maturities that seek to maintain safety and
liquidity.
The Company designs, develops, manufactures, markets and supports computer
software systems to customers in diversified industries. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
requires no collateral. The Company's installment receivables are predominately
with clients (service bureaus) who provide computer services to the direct
marketing industry. Certain of these service bureau clients may have limited
capital and insufficient assets to secure their liability to the Company. The
service bureau industry is also highly competitive and subject to general
economic cycles as they impact advertising and direct marketing expenditures.
These customers represent approximately $2.8 million or 73% of the installment
receivables balance at March 31, 2000 versus $4.3 million or 73% at March 31,
1999. The Company maintains an allowance for uncollectible accounts receivable
based upon the expected collectibility of all accounts receivable. For the years
ended March 31, 2000 and 1999, no one
25
<PAGE> 26
customer accounted for 10% or more of net accounts receivable.
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," specifies circumstances in which certain
long-lived assets must be reviewed for impairment. If such review indicates that
the carrying amount of an asset exceeds the sum of its expected future cash
flows, the asset's carrying value must be written down to fair value.
Recent Accounting Pronouncements
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No.
101,"Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. We are required to be in conformity with the provisions of
SAB 101 in fiscal year 2001. The Company has not fully assessed the effect on
our financial statements as a result of SAB 101.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
which delays the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for our fiscal year
2002. This statement establishes accounting and reporting standards requiring
that every derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. We believe the adoption of SFAS Nos. 133 and
137 will not have a material effect on our financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of Accounting Principles Board Opinion No. 25"
("FIN 44"). FIN 44 will be effective on July 1. 2000, but certain conclusions in
FIN 44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The Company believes the adoption of FIN 44 will not have a
material effect on its financial statements.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, short-term investments, accounts receivable and accounts
payable approximate their fair value due to the short maturity of these
instruments.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) ACQUISITION OF MINORITY INTEREST
On September 25, 1998, the Company formerly known as COMNET acquired the
minority interest held by Group 1 Software, Inc.'s minority shareholders for a
total purchase price of $9,899,000. The purchase price included the issuance of
1,395,713 shares of COMNET's common stock plus direct acquisition costs of
$454,000. COMNET issued 1,395,713 shares to Group 1 Software Inc.'s minority
shareholders at an exchange ratio of 1.15 shares of COMNET common stock for each
share of Group 1 Software, Inc.'s common stock. The surviving company was
renamed Group 1 Software, Inc.
The acquisition was accounted for using the purchase method of accounting.
The purchase price has been allocated to minority interest acquired based on its
estimated fair value as shown below:
<TABLE>
<CAPTION>
Allocation of purchase price (in thousands):
--------------------------------------------
<S> <C>
Total purchase price $9,899
Allocated fair value of minority interest (5,766)
------
Goodwill $4,133
======
</TABLE>
Goodwill is being amortized over its estimated useful life of 15 years.
26
<PAGE> 27
The operating results related to the acquired minority interest have been
included in the consolidated statements of operations for the year ended March
31, 1999 from September 25, 1998 (the date of acquisition.) The proforma results
below assume the acquisition occurred at the beginning of the years ended March
31, 1999 and 1998:
<TABLE>
<CAPTION>
For the Year
For the Year Ended Ended
March 31, 1999 March 31, 1998
<S> <C> <C>
Net revenue $ 65,291 $ 61,004
Operating income 4,787 2,524
Net income available to common stockholders 2,917 961
Net income per share:
Basic $ 0.49 $ 0.16
Diluted $ 0.48 $ 0.16
</TABLE>
The proforma results are not necessarily indicative of what actually would have
occurred if the acquisition had been completed as of the beginning of each of
the years presented, nor are they necessarily indicative of future consolidated
results.
(3) ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
----------------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
Trade $ 22,392 $ 22,316
Installment accounts receivable, interest
typically at 8.5% to 13% 4,431 5,884
Allowance for doubtful accounts (3,317) (3,383)
-------------- ---------------
23,506 24,817
Less non-current portion of installment accounts
receivable (1,945) (2,221)
-------------- ---------------
Current portion $ 21,561 $ 22,596
============== ===============
</TABLE>
(4) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
March 31,
------------------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Prepaid expense $1,317 $ 833
Prepaid commission 1,363 1,231
Prepaid royalty 220 350
Other assets 507 735
--------------- ----------------
$3,407 $ 3,149
=============== ================
</TABLE>
Prepaid commissions and royalties primarily relate to amounts paid, as of
the balance sheet date, on initial maintenance and enhancement contracts and
contracts being recognized under the percentage of completion method which have
been deferred into future periods.
27
<PAGE> 28
(5) PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
--------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Computer equipment $ 7,223 $ 5,347
Furniture and fixtures 2,371 2,433
Leasehold improvements 1,319 1,142
-------------- -------------
10,913 8,922
Less accumulated depreciation and amortization (6,623) (5,244)
-------------- -------------
$ 4,290 $ 3,678
============== =============
</TABLE>
(6) COMPUTER SOFTWARE
Computer software is comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Developed software $ 59,056 $ 56,603
Acquired software 1,751 5,164
Software purchased for internal use 4,128 4,266
--------------- ---------------
64,935 66,033
Less accumulated amortization (43,112) (43,474)
--------------- ---------------
$ 21,823 $ 22,559
=============== ===============
</TABLE>
The Company wrote off $10.0 million of fully amortized software balances
during fiscal 2000.
(7) ACCRUED EXPENSES
Accrued expenses are as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
------------------------------------
2000 1999
---------------- --------------
<S> <C> <C>
Accrued sales and other taxes $ 1,168 $ 705
Accrued royalties 586 1,032
Accrued sales incentives 413 385
Income taxes payable 2,224 1,149
Other accrued expenses 2,236 2,376
---------------- --------------
$ 6,627 $ 5,647
================ ==============
</TABLE>
(8) LINE OF CREDIT
The Company has a $10 million unsecured line of credit facility with a
financial institution which expires October 31, 2001. The line of credit bears
interest at the bank's prime rate (9.0% at March 31, 2000), or Libor plus 150
basis points at the Company's option. The terms of the line require the Company
to comply with certain financial covenants, the most restrictive of which
requires the Company to maintain an EBIT (earnings before interest and taxes) to
interest ratio of at least 5 to 1. At March 31, 2000 and March 31, 1999 there
were no borrowings outstanding under the line of credit.
28
<PAGE> 29
(9) STOCKHOLDERS' EQUITY
Stock Repurchase
By agreement dated September 24, 1998, the Company redeemed 100,000 shares
of 6% cumulative convertible preferred stock for $675,000 and repurchased
770,018 shares of common stock for $3,465,000 from an investor. The common
shares were repurchased for the express purpose of issuance in connection with
the minority interest acquisition. The excess of the carrying value of the
100,000 preferred shares above the redemption value was accounted for as
permanently reinvested capital. This investor was the Company's largest
shareholder with 14% of the common stock and 68% of the preferred stock.
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. On September 24, 1998 the Company
repurchased 100,000 preferred shares and currently has 47,500 shares issued and
outstanding. Dividends have been paid semi-annually in January and July since
July, 1993. The 6% Preferred Stock is convertible at any time at the sole option
of the holder into fully paid and non-assessable Common Stock, at the rate of
1.5 shares of Common Stock for each share of preferred stock, subject to a
specified adjustment rate.
The Company has the right to redeem the outstanding 6% Preferred Stock, in
whole or in part, at any time by paying to the holders thereof in cash the
redemption price per share, ($20) together with all accrued and unpaid dividends
thereon.
Stock Split
In February 2000 the Company effected a three-for-two split of the
outstanding shares of common stock. Accordingly, all data shown in the
accompanying consolidated financial statements and notes has been retroactively
adjusted to reflect the stock split.
Stock Option Plans
The Company has three stock option programs currently in effect, and three
predecessor plans for which option grants are still outstanding. Options granted
under all plans were granted at 100% of the fair market value of the common
stock at the date of grant.
The Company's Stock Option Plan of 1998 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 472,500 shares of
common stock for issuance on exercise of options under the Plan. The option and
rights vest over five years; however, all options and rights expire ten years
after the date of the grant. No stock appreciation rights have been granted
under this plan.
The Company's 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 900,000 shares of
common stock for issuance on exercise of options under the Plan. The option and
rights vest over five years; however, all options and rights expire ten years
after the date of the grant. No stock appreciation rights have been granted
under this plan.
The Company's 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 are fully vested; however, all options and rights expire ten years after
the grant date. No Stock Appreciation Rights have been granted under this plan.
A total of 219,600 shares of common stock have been reserved for issuance on
exercise of options under the plan.
The Company's Stock Option Plan for Non-Employee Directors of 1995 provides
for annual automatic grants of non-qualified stock options to non-employee
directors of the Company, at an exercise price set by the market price of the
stock under conditions defined by the plan. The options vest over five years and
expire fifteen years after the date of the grant. A total of 319,000 shares of
common stock have been reserved for issuance on exercise of options under the
plan.
29
<PAGE> 30
The Company's 1986 Stock Option Plan for Non-Employee Directors provided for
annual automatic grants of non-qualified stock options to non-employee directors
of the Company who served from 1986 to 1992, under conditions defined by the
plan. The options vest over five years and expire ten years after the grant
date. On January 22, 1993, the shareholders approved an amendment to eliminate
restrictions on vesting of stock options granted to the plan so that options
will become fully exercisable in whole or in part, upon resignation as a
director. A total of 70,300 shares of common stock are reserved for issuance on
exercise of options under the plan.
In 1991, the Company granted options to purchase an aggregate of 697,500
shares of common stock at an exercise price of $14.50 per share to the
individuals then serving on the reconstituted Board of Directors, as an
inducement to such individuals to serve on the board. The options are
exercisable for ten years from the date of grant and are fully vested. A total
of 277,500 shares of common stock are reserved for issuance on exercise of
options under the plan.
In 1992, the Company granted options to purchase an aggregate of 22,500
shares of common stock at an exercise price of $20.17 per share to the
individuals serving on the Advisory Committee. The options are exercisable for
ten years from the date of grant and are fully vested. The Company's 1992 Stock
Option Plan for Non-Employee Directors provides for annual automatic grants of
non-qualified stock options to non-employee directors of the Company, under
conditions defined by the plan, and reserves 180,000 shares of common stock for
issuance on exercise of options under the plan. The options are fully vested and
expire fifteen years after the grant date.
The following table summarizes information about the fixed stock options
outstanding at March 31, 2000:
<TABLE>
<CAPTION>
Weighted
Weighted average Weighted
Numbers of average remaining Numbers of average
Ranges of options exercise contractual options exercise
exercise prices outstanding price life in years exercisable price
------------------- -------------- ------------ ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$3.51 - $7.00 1,495,098 $5.87 7.54 651,098 $5.78
$7.01 - $10.50 239,786 $8.72 5.62 153,437 $9.39
$10.51 - $14.00 46,125 $10.98 1.16 46,125 $10.98
$14.01 - $17.50 312,000 $14.69 1.53 312,000 $14.69
$17.51 - $21.00 58,313 $20.07 1.81 58,313 $20.07
$21.01 - $24.50 7,500 $22.63 9.93 0 $0.00
-------------- ------------ ------------- -------------- --------------
Total 2,158,822 $8.01 6.18 1,220,973 $9.39
============== ============ ============= ============== ==============
</TABLE>
Activity under the Company's stock option plans discussed above is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
---------------------------- ------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding beginning of period 2,567,402 $7.63 1,739,724 $8.79 1,923,273 $8.65
Options exercised (398,967) 5.99 (52,215) 4.95 (8,550) 4.42
Options canceled (264,649) 6.14 (155,130) 9.80 (253,749) 6.80
Options granted 255,036 6.90 1,035,023 5.82 78,750 5.39
------- --------- ------
Options outstanding end of period 2,158,822 8.01 2,567,402 7.63 1,739,724 8.79
Options exercisable at end of period 1,220,973 9.39 1,413,624 8.97 1,214,030 9.67
Weighted-average fair value of options
granted during the period $6.80 $5.82 $5.39
</TABLE>
The Company accounts for the activity under the Plans in accordance with APB
25. Accordingly, no compensation expense has been recognized for the Plans. Had
compensation expense been determined based on the fair value of the stock
options for awards under the Plans in accordance with SFAS 123, the Company's
net income available to common
30
<PAGE> 31
stockholders and earnings per common share would have been decreased to the pro
forma amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------- ------------
<S> <C> <C> <C>
Net income available to common stockholders
As reported $6,233 $2,971 $973
Pro forma $4,407 $1,134 $481
Basic earnings per share
As reported $1.07 $0.56 $0.20
Pro forma $0.76 $0.22 $0.10
Diluted earnings per share
As reported $1.00 $0.56 $0.20
Pro forma $0.71 $0.21 $0.10
</TABLE>
The fair value of each option is estimated on the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended March 31, 2000, 1999 and 1998
respectively; dividend yield of 0%, expected volatility of 116%, 113% and 111%
respectively, a risk-free interest rate of 5.84%, 4.61% and 6.70% respectively,
and an expected term of 3.89, 7 and 7 years respectively.
(10) INCOME TAXES
The provision for income taxes consists of the following components (in
thousands):
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------------------------
2000 1999 1998
---------------- -------------- --------------
<S> <C> <C> <C>
Federal:
Current $ 1,613 $ 75 $ - - -
Deferred 1,244 752 (202)
---------------- -------------- --------------
2,857 827 (202)
---------------- -------------- --------------
State:
Current 1,043 225 123
Deferred (198) 45 24
---------------- -------------- --------------
845 270 147
---------------- -------------- --------------
Foreign:
Current 1,178 712 989
Deferred (238) 221 (13)
---------------- -------------- --------------
940 933 976
---------------- -------------- --------------
$ 4,642 $ 2,030 $ 921
================ ============== ==============
</TABLE>
The provision for income taxes for continuing operations varied from that
computed using the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
2000 1999 1998
----------- ------------ ----------
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit 5.1 3.4 4.2
Foreign taxes (0.5) 0.2 0.2
Other, net 3.9 1.7 1.1
----------- ------------ ----------
Effective tax rate 42.5% 39.3% 39.5%
=========== ============ ==========
</TABLE>
31
<PAGE> 32
Deferred tax assets (liabilities) which result from temporary differences in
the recognition of certain revenues and expenses for financial and income tax
reporting purposes consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
--------------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Current:
-------
Stock options $ 1,037 $ - - -
Allowance for doubtful accounts 1,281 1,312
Net operating loss carry forward - - - 717
Accrued compensation 1,010 956
Other, net (31) 54
-------------- -------------
Total current deferred tax assets $ 3,297 $ 3,039
============== =============
Long-term:
---------
Deferred maintenance revenue - long-term (414) $ (567)
Capitalized software 5,754 6,477
Depreciation (776) (431)
Net operating loss carry forward - - - (260)
Research and development tax credit (939) (1,711)
Other, net 99 162
-------------- -------------
Total long-term deferred tax liabilities $ 3,724 $ 3,670
============== =============
</TABLE>
The Company has consolidated research and development tax credit carry
forwards of approximately $939,000 which will expire in 2009 through 2020.
U.S. and international withholding taxes have not been provided on
undistributed earnings of foreign subsidiaries. The Company remits only those
earnings which are considered to be in excess of the reasonably anticipated
working capital needs of the foreign subsidiaries with the balance considered to
be permanently reinvested in the operations of such subsidiaries.
(11) BENEFIT PROGRAMS
The Company maintains a 401(k) retirement savings plan and trust for the
benefit of the Company's employees which provides for a contribution to be made
by the Company out of current operating earnings based upon the contributions
made by participating Company employees with established limits. The Company's
contributions for the years ended March 31, 2000, 1999 and 1998 were, $325,000,
$257,000, and $260,000, respectively.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information summarizes the disclosure pertaining
to the Statements of Cash Flows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
2000 1999 1998
--------- ---------- ---------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 74 $ 104 $ 535
Income taxes $ 2,613 $ 101 $ 132
Non-cash investing and financing activities:
Issuance of common and treasury stock for
minority interest acquisition - - - $ 9,444 - - -
Excess of redemption value of preferred
stock below carrying value - - - $ 1,255 - - -
Capital lease obligations incurred - - - - - - $ 238
Shares tendered in payment for stock options $ 281 $ 39 - - -
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
Legal
32
<PAGE> 33
From time to time, the Company may become involved in litigation relating to
claims arising from the ordinary course of business. The Company believes that
there are no claims or actions pending or threatened against it, either
individually or in the aggregate, the ultimate disposition of which would have a
material adverse effect on the Company.
Leasing Arrangements
The Company leases its office facilities and some of its equipment under
operating and capital lease arrangements, some of which contain renewal options
and escalation clauses for operating expenses and inflation. The Company is
obligated for the following minimum operating and capital lease rental payments
that have initial and remaining non-cancelable lease terms in excess of one year
(in thousands):
<TABLE>
<CAPTION>
Operating Capital
------------ -------------
<S> <C> <C>
2001 $ 2,573 $ 124
2002 2,223 79
2003 1,653 14
2004 1,603 - - -
2005 and thereafter 297 - - -
------------ -------------
Total minimum lease payments $ 8,349 $ 217
============
Amount representing interest (20)
-------------
Net minimum lease payments 197
Current portion of capital lease obligations (109)
-------------
Long-term portion of capital lease obligations $ 88
=============
</TABLE>
Total rent expense, under operating leases for fiscal years ended March 31,
2000, 1999, and 1998 was $3,095,000, $3,537,000, and $3,479,000, respectively.
(14) SEGMENT INFORMATION
In 1999, the Company adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131 requires
certain disclosures with respect to operating segments, products and services,
geographic areas and major customers of an entity based on the way management
disaggregates the entity for making internal operating decisions. The adoption
of SFAS No. 131 did not affect results of operations or the financial position
of the Company but did affect the disclosure of segment information. Prior year
segment information has been restated to present the Company's two reportable
segments, Enterprise Solutions Software and Electronic Document Composition
Software. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The following table
presents certain financial information relating to each reportable segment:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
Segment Information (in thousands) 2000 1999 1998
------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Revenue
Enterprise Solutions Software $ 53,252 $ 44,274 $ 43,220
Electronic Document Composition Software 28,499 21,017 16,258
Other - - - - - - 1,526
--------------- --------------- ---------------
Total revenue $ 81,751 $ 65,291 $ 61,004
=============== =============== ===============
Gross Profit
Enterprise Solutions Software $ 35,465 $ 30,368 $ 28,556
Electronic Document Composition Software 19,928 13,029 10,846
Other (945) (1,855) (1,433)
--------------- --------------- ---------------
Total gross profit $ 54,448 $ 41,542 $ 37,969
=============== =============== ===============
</TABLE>
All of the Company's assets, tax provisions and tax benefits are retained
and analyzed at the corporate level and are not allocated to the individual
segments. Amortization of capitalized software associated with the Enterprise
Solutions
33
<PAGE> 34
Software segment is $6.9 million, $4.8 million, and $4.2 million for
2000, 1999 and 1998, respectively. Amortization of capitalized software
associated with the Electronic Document Composition Software segment is $2.1
million, $1.9 million, and $1.4 million for 2000, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------
Geographic Area Information 2000 1999 1998
--------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Revenue
U.S. operations $ 74,805 $ 57,771 $ 53,779
European operations 13,493 11,294 9,678
Eliminations (6,547) (3,774) (2,453)
-------------------- -------------------- --------------------
Total revenue $ 81,751 $ 65,291 $ 61,004
==================== ==================== ====================
Operating income
U.S. operations $ 6,907 $ 2,161 $ (214)
European operations 2,900 2,763 3,014
-------------------- -------------------- --------------------
Total operating income $ 9,807 $ 4,924 $ 2,800
==================== ==================== ====================
Identifiable non-current assets
U.S. operations $ 27,418 $ 28,612 $ 27,437
European operations 6,187 6,351 6,580
Eliminations (797) (797) (797)
-------------------- -------------------- --------------------
Total identifiable non-current assets $ 32,808 $ 34,166 $ 33,220
==================== ==================== ====================
</TABLE>
It is management's belief that intercompany sales between geographic areas
are accounted for at prices consistent with market conditions as evidenced by
unaffiliated transactions. "U.S. operations" include shipments to customers in
the United States, licensing to OEMs, and exports of finished goods directly to
international customers, primarily in Canada. International revenue which
includes European operations and exports, were 12.9%, 17.4%, and 15.4% of total
revenue in 2000, 1999 and 1998.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly unaudited financial information for the years ended March 31, 2000
and 1999 was as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Fiscal Year 2000:
Revenue $16,757 $19,270 $20,243 $25,481
Gross profit 9,841 12,262 13,517 18,828
Income before taxes 618 1,835 2,931 5,547
Net income available to common stockholders 365 1,096 1,705 3,067
Basic earnings per share $0.07 $0.20 $0.30 $0.52
Diluted earnings per share $0.06 $0.19 $0.29 $0.45
Fiscal Year 1999:
Revenue $11,929 $14,561 $17,976 $20,825
Gross profit 7,036 8,856 11,526 14,124
Income before taxes 145 732 1,355 2,939
Net income available to common stockholders 37 373 820 1,741
Basic earnings per share $ 0.01 $ 0.08 $ 0.15 $ 0.31
Diluted earnings per share $ 0.01 $ 0.07 $ 0.14 $ 0.31
</TABLE>
34
<PAGE> 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James V. Manning 53 Chairman of the Board of Directors
Robert S. Bowen 62 Chief Executive Officer and Vice Chairman
Ronald F. Friedman 56 President and Director
Mark D. Funston 40 Vice President, Chief Financial Officer
Steven Bebee 46 Executive Vice President
Alan P. Slater 44 Executive Vice President
Edward Weiss 49 Secretary and General Counsel
Bernard S. Miller 58 Vice President, Chief Information Officer
Victor O. Forman 54 Vice President, Domestic and International Postal Affairs and Data
Quality
Richard H. Eisenberg 62 Director
James P. Marden 46 Director
Charles A. Mele 43 Director
Charles J. Sindelar 63 Director
Bruce J Spohler 39 Director
Thomas S Buchsbaum 49 Director
</TABLE>
The Company knows of no family relationships between any of the above.
The Board of Directors is divided into three classes. One class of the
Directors is elected annually, and Directors serve until the annual meeting of
stockholders three years following their election and until their successors are
elected and qualified. The terms of Messrs. Bowen, Friedman and Buchsbaum will
expire in 2002. The terms of Messrs. Eisenberg, Manning and Spohler will expire
at the next shareholder's meeting and the terms of Messrs. Sindelar, Marden and
Mele will expire in 2001. Each of the officers shall continue in his capacity
until his successor is appointed and qualified.
Mr. James V. Manning has been Chairman of the Board of the Company since
February, 1994 and a Director since 1992. He is Chief Executive Officer of
Synetic, Inc. and has been a director of Synetic since May, 1989.
Mr. Robert S. Bowen has been a Director and Chief Executive Officer of the
Company for more than five years. Prior to the merger of Group 1 into the
Company, Mr. Bowen was Director, Chairman of the Board and Chief Executive
Officer of Group 1 since January, 1984.
Mr. Ronald F. Friedman has been a Director of the Company for more than five
years and president of the Company since September 1998. Prior to the merger of
Group 1 into the Company, Mr. Friedman was President and Chief Operating Officer
and a Director of Group 1 Software, Inc., for more than five years.
Mr. Mark D. Funston has been Vice President, Chief Financial Officer of the
Company since September 1996 and was a Director from December 1996 through
September 1998.
Mr. Steven Bebee has been Executive Vice President since January 1997. From
January 1991 to December 1996 he was Vice President of Sales.
Mr. Alan P. Slater has been Executive Vice President since April 1992. From
October 1987 to April 1992 he was Vice President of Sales.
Mr. Edward Weiss has been Secretary and General Counsel of the Company since
1990.
Mr. Bernard S. Miller has been Chief Information Officer since April 1997
and Vice President since 1989.
35
<PAGE> 36
Mr. Victor O. Forman has been Executive Vice President of the Company for
more than five years.
Mr. Richard H. Eisenberg has been a Director of the Company since February
1994. Mr. Eisenberg is currently Vice President, Great Northern Brokerage
Corporation, and prior to that Senior Vice President of Kaye Insurance
Association, L.P. since September 1992. He has also been President of APCO
Corporation, an insurance brokerage firm, Vice President of Amalgamated Programs
Corporation and President of Great Northern Brokerage Corporation for more than
six years.
Mr. James Marden has been a Director of the Company since 1992. Mr. Marden
is currently serving as Senior Executive Vice President, Corporate Development
for Medical Logistics, Inc. From 1994 to May 1999, Mr. Marden was Chairman of
The Entertainment Connection, Inc., a privately held electronic retailer of
audio and video products. He was Vice President - Acquisitions for Medco
Containment Services, Inc. from 1991 to 1994 and held a similar position for
Synetic, Inc. from 1993 to 1994. Prior to that time, Mr. Marden was a private
investor for more than five years.
Mr. Charles A. Mele has been a Director of the Company since 1992. Mr. Mele
is Vice President/General Counsel and a director of Synetic, Inc. Prior to April
1994, he was Executive Vice President and General Counsel of Medco Containment
Services, Inc., for more than six years.
Mr. Charles J. Sindelar has been a Director of the Company since 1992. Mr.
Sindelar has been Staff Vice President - Business Development of Zenith
Electronics Corporation since September 1994. From April, 1994 to September 1994
he was also President of the Display Division, Zenith Electronics Corporation.
From November 1990 to April 1994, Mr. Sindelar was President of the Display
Division, Zenith Electronics Corporation. Mr. Sindelar was Executive Director of
Color Display Operations of Zenith from April 1990 through November 1990.
Mr. Bruce J. Spohler has been a Director since 1997. He has been Managing
Director, High Yield, of CIBC Oppenheimer for more than five years.
Mr. Thomas S. Buchsbaum has been a Director since September 1998. Since
April 1997 he has been Vice President of Education at Dell Computer Corporation.
Prior to that, for more than five years, he was Executive Vice President of
Zenith Data Systems. Mr. Buchsbaum is also a Director of Dick Blick Company.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is contained in the
registrant's definitive proxy statement, to be filed pursuant to Regulation 14A,
under the caption, "Executive Compensation" and such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is contained in the
registrant's definitive proxy statement, to be filed pursuant to Regulation 14A,
under introductory paragraphs and under the captions "Principal Stockholders"
and "Election of Directors" and such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is contained in the
registrant's definitive proxy statement, to be filed pursuant to Regulation 14A,
under the caption, "Executive Compensation - Certain Transactions," and such
information is incorporated herein by reference.
36
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) The following documents are filed as part of this report
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
1. Financial Statements:
The following documents are submitted in Item 8:
Report of Independent Accountants 12
Consolidated Balance Sheets as of March 31, 2000 and 1999 13
Consolidated Statements of Operations for the years
ended March 31, 2000, 1999 and 1998 14
Consolidated Statements of Comprehensive Income for the years ended March 31, 2000,
1999 and 1998 15
Consolidated Statements of Stockholders' Equity for the years ended March 31, 2000,
1999 and 1998 16
Consolidated Statements of Cash Flows for the years
ended March 31, 2000, 1999 and 1998 17
Notes to Consolidated Financial Statements for the years
ended March 31, 2000, 1999 and 1998 18
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this report:
Report of Independent Accountants on Financial Statement Schedule 39
Schedule II: Valuation and Qualifying Accounts for the Years
Ended March 31, 2000, 1999 and 1998 40
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required or the information is included elsewhere in the financial
statements or notes thereto.
b) Report on form 8-K
Group 1 Software, Inc. Shareholder Rights Plan
Group 1 Software, Inc. declaration of common stock split
37
<PAGE> 38
3. List of Exhibits.
2.01 Agreement and Plan of Merger, dated June 23, 1998 by and
between COMNET Corporation and Group 1 Software, Inc.
(incorporated by reference to the Company's Prospectus
filed August 18, 1998.)
3.01 Articles of Incorporation and Bylaws, as amended - 1985,
(incorporated by reference to Exhibit 3.7 to Group 1's
Annual Report on Form 10-K for the year ended March 31,
1991).
3.02 Bylaws - Amended as of January 22, 1992, (incorporated by
reference to Exhibit 3.8 to Group 1's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1991).
3.03 Amendments to Certificate of Incorporation filed January
22, 1993.
4.01 Purchase Agreement between the Company and Medco
Containment Services, Inc., dated as of January 28, 1992
(incorporated by reference to Exhibit 4.47 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1991).
4.02 Agreement Regarding Satisfaction of Debt, Release of
Pledge and Issuance of Stock between Group 1 and Robert S.
Bowen, dated as of January 28, 1992, (incorporated by
reference to Exhibit 4.48 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1991).
4.03 Agreement Regarding Satisfaction of Debt, Release of
Pledge and Issuance of Stock between Group 1 and Dr.
Milton Kaplan, dated as of January 28, 1992, (incorporated
by reference to Exhibit 4.49 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1991).
4.04 Agreement Regarding Satisfaction of Debt, Release of
Pledge and Issuance of Stock between Group 1 and John
Spohler, dated as of January 28, 1992, (incorporated by
reference to Exhibit 4.50 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1991).
4.05 Agreement Regarding Satisfaction of Debt, Release of
Pledge and Issuance of Stock between the Company and
Leonard J. Smith, dated as of January 28, 1992,
(incorporated by reference to Exhibit 4.51 to Group 1's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1991).
4.06 Stock Option Agreement between the Company and James V.
Manning, dated as of August 16, 1991, (incorporated by
reference to Exhibit 4.53 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1991).
4.07 Stock Option Agreement between the Company and James
Marden, dated as of August 16, 1991, (incorporated by
reference to Exhibit 4.55 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1991).
4.08 Stock Option Agreement between the Company and Robert S.
Bowen, dated as of August 16, 1991, (incorporated by
reference to Exhibit 4.56 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1991).
4.09 Stock Option Agreement between the Company and Ronald F.
Friedman, dated as of August 16, 1991, (incorporated by
reference to Exhibit 4.57 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1991).
4.10 Intentionally deleted
4.11 Stock Option Agreement between the Company and Charles J.
Sindelar, dated as of August 16, 1991, (incorporated by
reference to Exhibit 4.59 to the Company's Quarterly
Report on From 10-Q for the quarter ended December 31,
1991).
4.12 Agreement among the Company and Robert S. Bowen, Milton
Kaplan, Leonard J. Smith and John Spohler regarding
certain registration rights, dated as of January 28, 1992,
(incorporated by reference to Exhibit 4.60 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1991).
4.13 Certificate of Designation of 6% Convertible Preferred
Stock, filed January 22 1993.
38
<PAGE> 39
4.14 1995 Incentive Stock Option, Non-Qualified Stock Option
and Stock Appreciation Unit Plan
4.15 1995 Non-Employee Directors' Stock Option Plan
10.01 Intentionally deleted.
10.02 Intentionally deleted.
10.03 Intentionally deleted.
10.04 Intentionally deleted.
10.05 Tax Sharing Agreement among Group 1 Software, Inc.,
COM-MED Systems, Inc., ADMS, Inc. and COMNET Corporation,
dated April 1, 1991, (incorporated by reference to Exhibit
10.97 to the Company's Annual Report on Form 10-K for the
year March 31, 1991).
10.06 First Amendment to Employment Agreement by and between
Group 1 Software, Inc. and Ronald F. Friedman dated June
24, 1991, (incorporated by reference to Exhibit 10.96 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 3, 1991).
10.07 Intentionally deleted.
10.08 Amended and Restated Employment Agreement dated January
28, 1992 by and between Group 1 Software, Inc. and Robert
S. Bowen (incorporated by reference to Exhibit 10.25 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991).
10.09 Intentionally deleted.
10.10 Fee Agreement between the Company and Robert S. Bowen,
dated as of January 28, 1992, (incorporated by reference
to Exhibit 10.102 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1991).
10.11 Intentionally deleted.
10.12 Intentionally deleted.
10.13 Indemnification Agreement between the Company and James
P. Marden, (incorporated by reference to Exhibit 10.107
to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991).
10.14 Indemnification Agreement between the Company and Ronald
F. Friedman, (incorporated by reference to Exhibit
10.108 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1991).
10.15 Intentionally deleted.
10.16 Indemnification Agreement between the Company and Robert
S. Bowen, (incorporated by reference to Exhibit 10.110 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991).
10.17 Intentionally deleted.
10.18 Intentionally deleted.
10.19 Intentionally deleted.
10.20 Intentionally deleted.
10.21 Intentionally deleted.
10.22 Intentionally deleted.
39
<PAGE> 40
10.23 Amended and Restated Employment Agreement between Robert
S. Bowen and the Company, dated as of January 28, 1992,
(incorporated by reference to Exhibit 10.118 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1991).
10.24 Amended and Restated Employment Agreement between Robert
S. Bowen and Group 1 Software, Inc., dated as of January
28, 1992, (incorporated by reference to Exhibit 10.119 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991).
10.25 Intentionally deleted.
10.26 Loan Agreement, dated March 1, 1993, between COMNET
Corporation and Ronald F. Friedman.
10.27 Indemnification Agreement, dated February 24, 1992,
between COMNET Corporation and Charles A. Mele.
10.28 Indemnification Agreement between COMNET Corporation and
Charles J. Sindelar.
10.29 Lease covering Company office facilities in Lanham, MD -
1993.
10.30 Intentionally deleted.
10.31 Intentionally deleted.
10.32 Fourth Amendment to Employment Agreement, dated as of
March 1, 1994, by and between Group 1 Software, Inc., and
Ronald F. Friedman.
10.33 Intentionally deleted.
10.34 Intentionally deleted.
10.35 Intentionally deleted.
10.36 Intentionally deleted
10.37 Intentionally deleted.
10.38 Intentionally deleted.
10.39 Intentionally deleted
10.40 Fifth Amendment to Employment Agreement, dated as of
April 1, 1995, by and between Group 1 Software, Inc. and
Ronald F. Friedman.
10.41 COMNET Corporation, Deferred Compensation Plan
10.42 Definitive Agreement for purchase of assets of
DataDesigns, Inc., dated August 23, 1995 (incorporated by
reference to Exhibit 10.42 to the Company's Annual Report
on Form 10-K for the year ended March 31, 1997).
10.43 Intentionally deleted.
10.44 Intentionally deleted.
10.45 Third Amendment to Lease, dated April 15, 1994, by and
between COMNET Corporation and Quadrangle Development
Corporation (incorporated by reference to Exhibit 10.45 to
the Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.46 Intentionally deleted.
10.47 Intentionally deleted.
10.48 Line of Credit Loan Agreement with Crestar Bank, dated
October 10, 1996.
40
<PAGE> 41
10.49 Intentionally deleted.
10.50 First Amendment to Employment Agreement by and between
Robert S. Bowen and COMNET Corporation, dated August 15,
1997.
10.51 Second Amendment to Employment Agreement by and between
Robert S. Bowen and COMNET Corporation, dated January 12,
1998.
10.52 Third Amendment to Employment Agreement by and between
Robert S. Bowen and Group 1 Software, Inc. dated August
15, 1997.
10.53 Fourth Amendment to Employment Agreement by and between
Robert S. Bowen and Group 1 Software, Inc. dated January
12, 1998.
10.54 Fifth Amendment to Employment Agreement by and between
Robert S. Bowen and Group 1 Software, Inc. dated May 11,
1998.
10.55 Agreement for Purchase and Sale of Assets by and between
Intertrak Corporation and Group 1 Software, Inc. dated
September 4, 1997.
10.56 Agreement to repurchase preferred and common stock from
Merck & Co Inc. dated September 25, 1998.
10.57 Sixth Amendment to Employment Agreement by and between,
Group 1 Software, Inc. and Ronald F. Friedman dated April
1, 1996.
10.58 Seventh Amendment to Employment Agreement by and between
Group 1 Software, Inc. and Ronald F. Friedman dated April
1, 1999.
*22.0 Subsidiaries of Group 1 Software, Inc.
*23.1 Consent of PricewaterhouseCoopers LLP.
-------------------------------
* Filed herewith.
41
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
-----------------
To the Board of Directors of
Group 1 Software, Inc.
Our audits of the consolidated financial statements referred to in our
report dated June 4, 2000 appearing in the 2000 Annual Report to Shareholders of
Group 1 Software, Inc. (which report and consolidated financial statements are
included in this Annual Report on Form 10-K) also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Annual Report on
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
McLean, Virginia
June 4, 2000
42
<PAGE> 43
SCHEDULE II
GROUP 1 SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED MARCH 31, 2000,
1999, AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Additions Column D Column E
------------------------------- ------------ ----------------------------- ------------- -------------
Balance at Charged to Charged to Balance
Beginning Costs and Other Deductions at end
Description of Year Expenses Accounts Describe(1) of year
----------- ------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 2000
Allowance for doubtful
accounts $ 3,383 $ 1,050 - - - $ (1,116) $ 3,317
Year ended March 31, 1999
Allowance for doubtful
accounts $ 3,603 $ 2,955 - - - $ (3,175) $ 3,383
Year ended March 31, 1998
Allowance for doubtful
accounts $ 3,208 $ 3,505 - - - $ (3,110) $ 3,603
</TABLE>
(1) The decrease in allowance for doubtful accounts is the result of accounts
receivable written off during the year.
43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GROUP 1 SOFTWARE, INC.
(Registrant)
Date: June 29, 2000 By: /s/ ROBERT S. BOWEN
---------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ROBERT S. BOWEN
----------------------------------
Robert S. Bowen Chief Executive June 29, 2000
Officer and Director -------------
(Principal Executive Officer)
/s/ MARK D. FUNSTON
----------------------------------
Mark D. Funston Vice President June 29, 2000
Chief Financial Officer -------------
Treasurer (Principal Financial and Accounting Officer)
/s/ RONALD F. FRIEDMAN
----------------------------------
Ronald F. Friedman President and Director June 29, 2000
-------------
/s/ JAMES V. MANNING
----------------------------------
James V. Manning Chairman of the Board June 29, 2000
-------------
/s/ CHARLES J. SINDELAR
----------------------------------
Charles J. Sindelar Director June 29, 2000
-------------
/s/ JAMES MARDEN
----------------------------------
James Marden Director June 29, 2000
-------------
/s/ CHARLES A. MELE
----------------------------------
Charles A. Mele Director June 29, 2000
-------------
/s/ RICHARD H. EISENBERG
----------------------------------
Richard H. Eisenberg Director June 29, 2000
-------------
/s/ BRUCE J. SPOHLER
----------------------------------
Bruce J. Spohler Director June 29, 2000
-------------
/s/ THOMAS S. BUCHSBAUM
----------------------------------
Thomas S. Buchsbaum Director June 29, 2000
-------------
</TABLE>
44
<PAGE> 45
Index of Exhibits
PAGE NUMBER
*22.0 Subsidiaries of Group 1 Software, Inc.
*23.1 Consent of PricewaterhouseCoopers, LLP
--------------------------
* Filed herewith.
45
