<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K/A
(MARK ONE)
X AMENDMENT NO. 1 TO
----- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--- ---
COMMISSION FILE NUMBER 0-15389
GROUP 1 SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1483562
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
4200 PARLIAMENT PLACE, SUITE 600, LANHAM, MD 20706-1844
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 731-2300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK $0.01
PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on June 23, 1997, was $5,650,505.
The number of shares of the Registrant's Common Stock outstanding on June 23,
1997 was 4,293,697.
<PAGE> 2
The undersigned registrant hereby amends the following items, exhibits
or other portions of its Annual Report on Form 10-K for the fiscal year ended
March 31, 1997 as set forth in the pages attached hereto.
This Amendment No. 1 to the registrant's Annual Report on Form 10-K/A
is being filed in accordance with General Instruction G(3) to Form 10-K to
include the information required by Part III, because the registrant's
definitive proxy statement pursuant to Regulation 14A will not be filed with
the Commission within 120 days after the end of the registrant's fiscal year.
PART III
2
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF VOTING
NAME OF DIRECTOR OF DIRECTOR PRINCIPAL OCCUPATION, BUSINESS SECURITIES AND PERCENT OF
THE COMPANY (AGE) SINCE EXPERIENCE AND DIRECTORSHIPS CLASS (AT JUNE 30, 1997)
------------------- -------- ------------------------------ --------------------------
<S> <C> <C> <C>
Thomas S. Buchsbaum 1989 Since March, 1997, Vice-President, Education, 30,000(1)
(47) Dell Computer Corporation. Prior to that *
and for more than five years, Executive
(and previously Senior) Vice President,
Federal Systems for Zenith Data
Systems, Inc. for more than five years.
Also serves as a director of Dick Blick
Company.
Ronald F. Friedman 1986 President and Chief Operating Officer of 1,287
(53) the Company and its predecessor for more *
than five years. Also serves as a
director of COMNET.
Joseph R. Sullivan 1986 Vice President, Marketing and Business 32,750(2)
(52) Development of the Display Division of *
Zenith Electronics Corporation for more
than five years.
Mark D. Funston 1996 Vice-President, Chief Financial Officer 0
(37) and Treasurer of the Company since *
September, 1996. Prior to that, for more
than five years he was Chief Financial
Officer of COMSAT/RSI. He is also Vice
President and Chief Financial Officer of
COMNET and as such spends 20% of his time
on the business affairs of COMNET. He
also serves as a director of COMNET.
Charles A. Mele 1992 Executive Vice President - General 6,000(3)
(41) Counsel and a director of Synetic, Inc. *
("Synetic") for more than five years.
Also serves as a Director of COMNET.
</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF SHARES OF VOTING
NAME OF DIRECTOR OF DIRECTOR PRINCIPAL OCCUPATION, BUSINESS SECURITIES AND PERCENT OF
THE COMPANY (AGE) SINCE EXPERIENCE AND DIRECTORSHIPS CLASS (AT JUNE 30, 1997)
------------------- -------- ------------------------------ -----------------------------
<S> <C> <C> <C>
Robert S. Bowen 1986 Chairman and Chief Executive Officer of 12,000
(59) the Company and President and Chief *
Executive Officer of COMNET for more than
five years. Also serves as a director of
COMNET.
</TABLE>
- --------------
* Less than 1%
(1) Includes options to purchase 30,000 shares of the Company's common
stock exercisable within 60 days of June 30, 1997.
(2) Includes options to purchase 30,000 shares of the Company's common
stock exercisable within 60 days of June 30, 1997.
(3) Includes options to purchase 6,000 shares of the Company's common
stock exercisable within 60 days of June 30, 1997.
Mr. Charles A. Crew resigned from the Board of Directors on January 1,
1997.
Mr. Buchsbaum's business address is 1 Dell Way, Round Rock, Texas
78682. Mr. Sullivan's business address is 1000 Milwaukee Avenue, Glenview,
Illinois 60025. Mr. Mele's business address is River Drive Center 2, 669 River
Drive, Elmwood, New Jersey 07407. The business address of each of Messrs.
Bowen, Friedman and Funston is 4200 Parliament Place, Suite 600, Lanham,
Maryland 20706.
FAMILY RELATIONSHIPS
There are no family relationships among any director or executive
officer of the Company.
COMMITTEES AND MEETINGS
The Board currently has the following standing committees: the
Executive, Audit and Compensation Committees. The Executive Committee has and
may exercise all of the powers of the Board within the limits set out by
General Corporation Law of Delaware. The Executive Committee is comprised of
Messrs. Bowen and Friedman.
The Audit Committee's functions include recommending to the Board the
selection of the Company's independent public accountants and reviewing with
such accountants the plan, scope and results of their audit of the financial
statements and the adequacy of the Company's system of internal accounting
controls. The Audit Committee is comprised of Messrs. Mele and Sullivan.
The Compensation Committee's functions include reviewing management
proposals pertaining to executive compensation, profit sharing and stock
options. The Compensation Committee recommends management bonuses to the Board
for the Company's officers and employees. It may grant options and rights to
employees under and in accordance with the Company's 1995 Incentive Stock
Option, Non-Qualified Stock Option and Stock Appreciation Unit Plan (the "1995
ISO Plan"). The Compensation Committee is comprised of Messrs. Buchsbaum and
Sullivan. Mr. Buchsbaum has never been an employee of the Company. Mr.
Sullivan has not been an employee of the Company since October, 1988.
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During the fiscal year ended March 31, 1997, the Meetings Board held 4
meetings, the Executive Committee held 2 meetings, the Compensation Committee
held 3 meetings and the Audit Committee held 2 meetings. No director attended
less than 75% of all meetings of the Board and the committees on which such
director served during that fiscal year.
COMPENSATION OF DIRECTORS
No cash payments have ever been made to directors for attendance at
meetings of or otherwise serving on the Board or any committee thereof. In
September, 1995, the stockholders approved the Group 1 Software, Inc. Stock
Option Plan for Non-Employee Directors (the "1995 Directors' Plan"), which
provides for the annual, automatic grant of options to non-employee directors.
During the year ended March 31, 1997, Messrs. Buchsbaum, Sullivan and Mele were
each granted options under this plan to purchase 5,000 shares of the Company's
common stock.
ITEM 11. EXECUTIVE OFFICERS AND COMPENSATION
Executive Officers
The Executive Officers of the Company are Robert S. Bowen, Ronald F.
Friedman, Alan P. Slater, Mark D. Funston and Edward Weiss.
The business experience during at least the past five years for
Messrs. Buchsbaum and Friedman, Bowen, Funston, Sullivan and Mele are set forth
above. From March, 1982 to the present, Mr. Slater, 41, has been employed by
the Company. From April, 1992 to the present, Mr. Slater has served as
Executive Vice President, and for the five years prior to that, he served as
Vice President, Sales. Mr. Weiss, 46, has been General Counsel and Secretary
of the Company for more than five years.
Executive Compensation
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Company has established an executive compensation program based on
the following on-going principles and objectives: (i) provide compensation
opportunities that will help attract, motivate and retain highly qualified
managers and executives, (ii) link executive's total compensation to Company
performance and the individual performance of the executive and (iii) provide
an appropriate balance between incentives focused on achievement of annual
business plans and longer-term incentives linked to increases in shareholder
value. To effectuate these principles and objectives, compensation for each of
the executives of the Company consists of base salary compensation, annual
incentive compensation (based in most cases on profit performance measured
against internal profit targets) and stock option grants.
For Fiscal Year 1997, the Compensation Committee did not review the
base salary or incentive compensation program for Mr. Bowen, nor the base
salary for Mr. Friedman since in regard to both executives these matters are
fixed by employment agreements between the Company and the respective
executives. Grants of options to Messrs. Bowen and Friedman, increases to Mr.
Friedman's base salary and his incentive compensation program, and the entire
compensation program for the remaining executives, are reviewed annually by the
Compensation Committee, including the review conducted for the most recent
fiscal year.
Compensation Committee
Thomas S. Buchsbaum
Joseph R. Sullivan
COMPENSATION COMMITTEE INTERLOCK
Mr. Sullivan, a member of the Company's Compensation Committee
beginning in fiscal year 1996, served as Chief Financial Officer of the Company
from September 1986 to October 1988, and as Vice President and Chief Financial
Officer of COMNET from September 1985 to October 1988.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation Awards
Annual Compensation -----------------------------
Name and Principal ------------------------------------------- Stock All other
Position Year Salary Bonus Options(2) Compensation(3)
------------------------- ---- ------ ----- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Robert S. Bowen 1997 $248,846 18,750 $3,603
Chairman of the Board and 1996 $200,683 $564,519(1) --- $1,800
Chief Executive Officer 1995 $178,135 $484,262(1) --- $1,800
Ronald F. Friedman 1997 $177,052 --- 27,000 $4,056
President-Group 1 1996 $183,400 $123,740 10,000 $3,000
Software; Director 1995 $173,088 $307,237 --- $3,000
Alan P. Slater 1997 $144,811 --- 4,250 $3,872
Executive Vice President 1996 $140,769 $ 87,066 7,500 $2,989
1995 $133,673 $198,629 --- $2,877
Charles A. Crew(4) 1997 $113,750 --- ---
Chief Financial Officer; 1996 $ 95,788 $ 37,383 7,500 $2,400
Director 1995 $ 89,123 $104,265 --- $ 822
Mark D. Funston 1997 $ 51,693(5) $ 16,500(5) 16,500 $ 554
Chief Financial Officer; 1996 --- --- --- ---
Director 1995 --- --- --- ---
</TABLE>
(1) Mr. Bowen elected to defer bonus compensation of $197,582 and $161,421
in 1996 and 1995 respectively.
(2) Includes Group 1 options to purchase its common stock granted to Mr.
Bowen, Mr. Friedman and Mr. Slater of 18,750, 15,000 and 4,250, respectively.
Other options were granted by COMNET to purchase its common stock. All
options vest ratably over five years and expire in ten years.
(3) Includes Company contributions to the Defined Contribution Savings
(401(k)) Plan.
(4) Mr. Crew resigned his position of Chief Financial Officer on September
3, 1996.
(5) The compensation for Mr. Funston covers only part of FY 97
(September 3, 1996-March 31, 1997).
GROUP 1 AND COMNET STOCK OPTION GRANTS IN FISCAL YEAR 1997
GROUP 1
The following Group 1 stock options were granted during Fiscal Year
1997:
<TABLE>
<CAPTION>
% OF TOTAL AT 0% AT 5% AT 10%
OPTIONS GRANTED TO EXERCISE OR ANNUAL ANNUAL ANNUAL
GRANTED EMPLOYEES BASE PRICE EXPIRATION GROWTH GROWTH GROWTH
NAME # IN 1997 ($/SHARE) DATE RATE RATE RATE
---- ------- -------- --------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Robert S. Bowen 18,750 44.63% $6.50 1/13/07 $0 $117,938 $298,875
Ronald F. Friedman 15,000 35.70% $6.50 1/13/07 $0 $ 94,350 $239,100
Alan P. Slater 4,250 10.12% $6.50 1/13/07 $0 $ 26,733 $ 67,745
</TABLE>
6
<PAGE> 7
COMNET
The following COMNET stock options were granted during Fiscal Year
1997:
<TABLE>
<CAPTION>
% OF TOTAL AT 0% AT 5% AT 10%
OPTIONS GRANTED TO EXERCISE OR ANNUAL ANNUAL ANNUAL
GRANTED EMPLOYEES BASE PRICE EXPIRATION GROWTH GROWTH GROWTH
NAME # IN 1997 ($/SHARE) DATE RATE RATE RATE
---- -------- -------- --------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald F. Friedman 12,000 11.76% $ 8.25 04/29/06 $0 $75,480 $191,280
Mark D. Funston 16,500 16.18% $13.00 9/30/06 $0 $103,785 $263,010
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Shares Number of Unexercised Value of Unexercised
Acquired Options/SARs at FY-End Options/SARs at FY-End (1)
on Value ------------------------ --------------------------
Company Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------ -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Group 1
- -------
Robert S. Bowen None None --- 18,750 --- $4,688
Ronald F. Friedman None None --- 15,000 --- $3,750
Alan P. Slater None None --- 4,250 --- $1,067
Charles A. Crew None None --- --- --- ---
Mark D. Funston None None --- --- --- ---
COMNET
- ------
Robert S. Bowen (2)
Ronald F. Friedman None None 157,998 24,002 $261,720 $37,200
Alan P. Slater None None 16,900 17,600 $41,870 $22,960
Charles A. Crew None None 53,480 7,320 $87,715 $4,860
Mark D. Funston None None --- 16,500 --- ---
</TABLE>
(1) These values are based upon the difference between the grant prices of
all options awarded and the average price of $10.81 per share for COMNET common
stock and $6.75 per share for Group 1 common stock at March 31, 1997.
(2) COMNET granted to Mr. Bowen options to purchase COMNET common stock in
his capacity as an officer of COMNET, and are therefore not included herein.
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, PEER GROUP AND BROAD MARKET
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Group 1 Software 100 62.92 37.08 43.82 35.96 30.34
Peer Group 100 103.41 102.14 177.01 187.59 210.57
Broad Market 100 111.91 129.33 137.21 184.56 206.47
</TABLE>
This analysis assumes $100 was invested on April 1, 1992 and that any
dividends were reinvested. This analysis is based on fiscal years ending March
31, 1997.
The broad market index chosen was the NASDAQ Market Index. The
industry peer group consisted of BGS Systems, Inc., Hathaway Corp., Hyperion
Software, Inc., and Timberline Software, CP.
Stockholders are cautioned against drawing any conclusions from the
data contained herein, as past results are not necessarily indicative of future
performance. This data in no way reflects the Company's forecast of future
financial performance. The performance information set out directly above is
presented in accordance with the requirements of the Securities and Exchange
Commission.
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<PAGE> 8
The performance information contained in this section should not be
incorporated by reference into any prior filings by the Company under the
Securities Exchange Act of 1934 that incorporated future filings or portions
thereof.
EMPLOYMENT AGREEMENTS
ROBERT S. BOWEN.
Group 1 Agreement. The Company entered into an amended and restated
employment agreement dated as of January 28, 1992, with Mr. Bowen, as
subsequently amended (collectively, the "Group 1 Agreement"). The Group 1
Agreement expires on July 1, 2000 and provides for a salary of not less than
$211,750 per annum subject to adjustments (effective each July 1) depending
upon the amount of professional time dedicated to Group 1 vis-a-vis COMNET and
adjusted annually by the greater of changes in the area cost of living index or
the average salary percentage increase for employees approved by the Board as
part of its annual budget.
The Group 1 Agreement includes an annual incentive bonus equal to
7-1/2% of the first $1,000,000 of consolidated net income of Group 1 before
taxes with certain adjustments as defined, and 10% of such income in excess of
$1,000,000, such bonus to be no greater than that determined under a similar
bonus program related to the consolidated earnings of COMNET as long as the
program relating to COMNET is effective. Consolidated net income as defined in
the Group 1 Agreement includes all earnings of Group 1 and its subsidiaries
from any source, subject to certain specified deletions but including gain or
loss on the sale of stock or assets of Group 1 and/or a subsidiary. Specified
deletions from net income include, among other items, any provision for taxes,
any bonus payable under the Group 1 Agreement, any excess of interest income
from bank and other cash deposits over interest expense, and any charge to
income associated with the exercise of stock options. Salary and incentive
compensation paid under the Group 1 Agreement are not to be duplicated by
payments under the COMNET Agreement (described below), so long as the COMNET
Agreement is effective.
If Mr. Bowen's employment with Group 1 during the term of the Group 1
Agreement is terminated because of his disability or death, his base salary and
bonus will be prorated through the date of termination. If Mr. Bowen
terminates his employment with Group 1 for any reason other than death or
disability or he is discharged by Group 1 for cause, Mr. Bowen is entitled to
his base salary, equitably prorated, and any bonuses earned for any fiscal year
prior to the fiscal year in which his termination of employment occurred. If
Group 1 terminates Mr. Bowen's employment without cause, Mr. Bowen is entitled
to receive his salary, fringe benefits and bonuses throughout the remaining
term of the Group 1 Agreement. Upon any termination of Bowen's employment
under the Group 1 Agreement, all options held by him to purchase Group 1's
common stock will be treated as provided in the instruments or agreements
governing such options.
The Group 1 Agreement also provides that as long as COMNET owns 25% or
more of Group 1's common stock, Mr. Bowen will receive no additional
compensation under the Group 1 Agreement, but Mr. Bowen's aggregate
compensation payable under his employment agreement with COMNET will be
allocated between COMNET and Group 1 based on the proportion of his time spent
working for each of such companies. If COMNET ceases to own 25% or more of
Group 1's common stock, (i) Mr. Bowen's annual salary under the Group 1
Agreement is increased to the greater of $240,000 or 160% of the then current
base salary of Group 1's chief operating officer, adjusted upward or downward
to the extent that the proportion of Mr. Bowen's time spent working for Group 1
is greater or lesser than 50% and adjusted for changes in the cost of living,
(ii) Mr. Bowen's annual salary under his employment agreement with COMNET is
reduced to reflect only the proportion of his time spent working for COMNET
business other than Group 1 and (iii) Mr. Bowen becomes entitled to receive
incentive bonus compensation from Group 1 as follows: (A) if COMNET disposes of
its interest in Group 1 in a registered public offering, then for each fiscal
year, if Group 1's earnings equal budget targets established by the Board in
its reasonable business judgment, then Mr. Bowen's bonus shall be the greater
of $200,000 or 160% of the bonus payable to Group 1's chief operating officer,
and if Group 1's earnings are greater or lesser than such targets, then Mr.
Bowen's bonus will vary from the amount payable to him at the target earnings
level to the same proportional extent as the variation in the bonus payable to
Group 1's chief operating officer; and (B) if COMNET disposes of its interest
in Group 1 other than in a registered public offering, then Mr. Bowen's bonus
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<PAGE> 9
shall be as determined by the Board, without the participation of any directors
affiliated with COMNET.
COMNET Agreement. COMNET has also entered into an amended and
restated employment agreement with Mr. Bowen, dated as of January 28, 1992, as
its President and Chief Executive Officer (the "COMNET Agreement"). The COMNET
Agreement expires on June 30, 1998, and provides for a current total base
salary of $340,100 per annum adjusted annually (effective each July 1) by the
greater of any changes in the area cost of living index or the average salary
percentage increase for COMNET employees presented to the Board as part of the
annual budget. The COMNET Agreement provides for a bonus payable to Mr. Bowen
equal to 7-1/2% of the first $1,000,000 of consolidated net income before
taxes, with certain adjustments as defined, and 10% of all such consolidated
net income in excess of $1,000,000. Consolidated net income includes all
earnings attributable to Group 1 and any of COMNET's business operations or
subsidiaries directly related to the particular lines of business engaged in by
Group 1, or any other COMNET subsidiary, as of July 1, 1991, from any source,
subject to certain specified deletions but including gain or loss on the sale
of stock or assets of COMNET and its subsidiaries. Specified deletions from
earnings include, among other items, any provision for taxes, any bonus payable
under the COMNET Agreement, any interest income from COMNET's or its
affiliates' investments net of investment expenses, any charges to income
associated with the exercise of stock options and any interest or dividend
income from, or gain from the sale of, securities held for investment at the
time Mr. Bowen joined COMNET.
The 7-1/2% and 10% calculations in the COMNET Agreement apply to gain
realized upon a sale of Group 1 and included in consolidated net income only to
the extent that such gain does not exceed an amount (the "Cap Amount") equal to
the gain that COMNET would realize on a disposition, if any, of its interest in
Group 1 at a price per share of $21.125. The COMNET Agreement provides that
with respect to any pretax gain (net of expenses) realized upon a disposition
of Group 1 in excess of the Cap Amount, Mr. Bowen will be entitled to the
following percentages of such gain: $0 to $3.3 million - 1%; above $3.3 to $6.6
million - 2%; above $6.6 to $9.9 million - 3%; above $9.9 to $13.2 million -
4%; and above $13.2 million - 5%. Further, any bonus under the COMNET
Agreement will be offset by 40% of all fees theretofore received by Mr. Bowen
under the Bowen Fee Agreement (described below).
If Mr. Bowen terminates his employment with COMNET during the term of
the COMNET Agreement because of his disability he will be entitled to receive
his base salary and his bonuses, prorated through the date of termination, and
any options previously granted to him will, to the extent exercisable on Mr.
Bowen's date of employment, continue to be exercisable for 12 months following
such termination date. If Mr. Bowen's employment with COMNET is terminated
during the term of the COMNET Agreement because of his death, his estate will
be entitled to receive his base salary and his bonuses, prorated through the
date of termination, and any options previously granted to Mr. Bowen will, to
the extent exercisable on Mr. Bowen's date of termination of employment,
continue to be exercisable for six months following Mr. Bowen's death.
If Mr. Bowen terminates his employment with COMNET for any reason
other than death or disability or is discharged by COMNET for cause, he will be
entitled to receive his base salary, prorated through his date of termination,
and his bonus earned for any fiscal year prior to the fiscal year in which his
employment termination occurred, and all of his options will be treated as
provided in the instruments or agreements governing such options. If COMNET
terminates Mr. Bowen's employment without cause, he will be entitled to receive
his salary, as adjusted, fringe benefits and bonuses throughout the remaining
term of the COMNET Agreement, as if it had not been terminated, and all of his
options, including those that had not yet vested, will continue to vest or be
exercisable as if his employment had not been terminated but had continued for
the outstanding balance of the term of the COMNET Agreement, and he will be
afforded the maximum length of time permissible to exercise such options;
provided, however, that if such vesting of options after termination is
prohibited, COMNET shall, at such time as the options would have vested (the
"Vesting Date"), pay him in cash the difference between the average reported
price for COMNET's common stock over the 20 days immediately preceding the
Vesting Date and the exercise price of the stock options on the Vesting Date.
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<PAGE> 10
RONALD F. FRIEDMAN
The Company has entered into an employment agreement dated October 31,
1990, with Ronald F. Friedman. The agreement, as amended, expires on March 31,
1999, and provides for annual base compensation of $183,400 per annum (adjusted
on April 1, 1995), which may be further adjusted annually for merit increases
upon approval of the Compensation Committee. Under his employment agreement,
Mr. Friedman was entitled to receive an annual bonus for the fiscal year ending
March 31, 1997, based on a percentage of the Company's net income before income
taxes, interest expense, management fees and bonus amounts paid to or for the
benefit of Mr. Friedman, the Company's Chief Executive Officer and Chief
Financial Officer ("Adjusted Net Income"), which bonus plan for fiscal year
1996 varied from 7.4% of Adjusted Net Income over $5.6 million, up to a maximum
of 9% of Adjusted Net Income over $9 million. The bonus was based upon both
achievement of a certain level of Adjusted Net Income and satisfactory growth
over actual prior year results in the opinion of the Compensation Committee and
the Board. A bonus plan has not yet been put in place for the current fiscal
year. If Mr. Friedman retires or becomes totally and permanently
disabled, Mr. Friedman shall be entitled to receive all earned but unpaid
bonuses and any subsequent bonus installments. In the case of death, all
earned but unpaid bonuses and subsequent bonus installments shall be paid
promptly in one sum. If Mr. Friedman is terminated for cause or resigns under
circumstances which would justify termination for cause, all unpaid bonuses
will be forfeited and no longer be payable. If a change in control of the
Company occurs, Mr. Friedman, at his option, has the right to resign his
position with the Company, and it will continue to pay his compensation and
provide him with employee benefits for one year or until the expiration date of
his employment agreement, whichever is the shorter period, and will pay Mr.
Friedman, as a lump sum, all earned but unpaid bonuses. In addition, bonuses
will be paid on a pro-rata basis for the period through the nearest full fiscal
quarter prior to resignation.
BONUS PROGRAMS TO OTHER EXECUTIVE OFFICERS
Messrs. Funston and Slater are entitled to annual incentive bonuses
for the fiscal year ended March 31, 1998 calculated on the basis of profit
performance as compared to internal profit targets for the Company (Funston)
and for the Electronic Documentation Systems Division (Slater). Mr. Weiss is
entitled to an annual bonus for fiscal year ended March 31, 1998 calculated on
the basis of COMNET's profit performance as compared to internal profit
targets and the achievement of certain other objectives. The Company has
agreed to reimburse COMNET for the respective portion, if any, of the bonus
paid to Mr. Weiss that is attributable to the Company's earnings.
DEFERRED COMPENSATION ARRANGEMENTS
The Company has adopted a Deferred Compensation Plan by which certain
members of senior management have the option of deferring the receipt of
amounts of their annual bonus compensation, if any, and/or their base
compensation (the "Deferred Compensation Plan"). The Deferred Compensation
Plan is intended by the Company to qualify as an unfunded plan for federal
income tax purposes and the Employee Retirement Income Security Act (ERISA).
The Deferred Compensation Plan is administered by the Company. The expenses
associated with the establishment and administration of the Deferred
Compensation Plan are borne by the Company. Any expenses of implementing any
investment option selected by a participant are charged against that
participant's account. The compensation that is deferred is paid into a trust
designated solely to administer the Deferred Compensation Program. Currently
Mr. B. Scott Miller, Vice President, Information Technology, is the only
participant in the Company's Deferred Compensation Plan.
FEE AGREEMENTS
In January, 1992, COMNET and Mr. Bowen entered into a fee agreement
(the "Bowen Fee Agreement"). Under the Bowen Fee Agreement, Mr. Bowen will be
entitled to a fee paid by COMNET of 1/2% of the total consideration payable on
acquisitions and 1/2% of the pre-tax gain (net of expenses) on dispositions of
COMNET's or its subsidiaries' businesses. However, this fee will not be paid
with respect to a disposition, if any, of the Company or any of COMNET's
business operations or subsidiaries directly related to the particular lines of
business engaged in by such companies as of July 1, 1991. Mr. Bowen's right to
any fees associated with such dispositions will remain subject to the incentive
compensation arrangements in the COMNET Agreement. The term of the Bowen Fee
Agreement extends until January 27, 2002, unless Mr. Bowen is no longer a
director, officer or
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employee of COMNET, provided that if Mr. Bowen's employment is terminated
without cause (as defined in the COMNET Agreement), COMNET must either continue
this agreement until January 27, 2002, or pay Mr. Bowen the incentive bonus
upon a disposition, if any, of COMNET's interests in the Company to which Mr.
Bowen would have been entitled under his employment agreement with COMNET as in
effect prior to its amendment and restatement in January, 1992. Mr. Bowen
earned $4,466 according to this fee agreement during fiscal year 1997.
In January, 1992, COMNET entered into a fee agreement with Mr.
Friedman, pursuant to which he will be entitled to receive on disposition, if
any, of COMNET's interests in the Company, a fee in an amount equal to the
following percentages of COMNET's pre-tax gain (net of expenses) to the extent
such gain exceeds $21.125 per share of the Company: $0 to $3.3 million - 1/2%;
above $3.3 to $6.6 million - 1%; above $6.6 to $9.9 million - 1-1/2%; above
$9.9 to $13.2 million - 2%; and above $13.2 million - 2-1/2%. Such fee shall
only be payable, however, if the Company's net operating income increases at an
average annualized rate of 20% or more from 1991 until such disposition. If
the Company's net operating income increases at an average annualized rate of
15% or more, but less than 20%, Mr. Friedman will be entitled to one-half the
fee set forth above. The term of this agreement extends until January 27,
2002, unless Mr. Friedman is no longer a director, officer or employee of
COMNET.
In January, 1992, COMNET entered into a fee agreement to pay Mr. James
V. Manning, Chairman of the Board of Directors of COMNET, fees of 1/2% of the
total consideration paid on acquisitions, 1/2% of the pre-tax gain (net of
expenses) on dispositions of COMNET's or its subsidiaries' businesses.
However, Mr. Manning will be entitled to such fees with respect to a
disposition, if any, by COMNET of its holdings in the Company only if, and to
the extent that, the consideration COMNET receives exceeds $50,000,000. The
term of this agreement extends until January 27, 2002, unless earlier
terminated because he is no longer a director, officer or employee of COMNET.
Mr. Manning has earned $4,446 according to this fee agreement during fiscal
year 1997.
EXECUTIVE SUPPLEMENTARY BENEFITS
The Company provides certain of its executive officers with group
health insurance and disability insurance policies that are not available to
all salaried employees. These supplementary benefits to such executive
officers are limited to the cost of the premiums for the coverage. The
aggregate cost is less than $25,000 per year for each covered executive
officer.
INDEMNIFICATION AGREEMENTS; DIRECTORS AND OFFICERS LIABILITY INSURANCE
INDEMNIFICATION AGREEMENTS. Messrs. Bowen, Friedman, Funston and
Mele, as members of the COMNET board of directors, are signatories to
indemnification agreements with COMNET (the "Indemnification Agreements").
Each Indemnification Agreement provides that COMNET shall indemnify a director
or officer of it or of any subsidiary of it who is a party to the agreement (an
"Indemnitee") if he was or is a party to or threatened to be made a party to
any threatened, pending or completed action, suit or proceeding (except a
derivative proceeding) by reason of the fact that he is or was a director or
officer of COMNET or any subsidiary of it, or is or was serving at its request
in certain capacities for another entity, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement (if such
settlement is approved in advance by COMNET) in connection with the defense or
settlement of such actions, suits or proceedings. The indemnification is
limited to instances where the Indemnitee acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of
COMNET, and with respect to any criminal action, had no reasonable cause to
believe his conduct was unlawful. With respect to derivative proceedings, the
Indemnification Agreement provides indemnification similar to that provided in
the Indemnification Agreement for non-derivative proceedings, except that
indemnification is allowed only to the extent determined to be fair and
reasonable by the court.
The Indemnification Agreement provides that if a director or officer
is entitled to indemnification for some or a portion of the expenses,
judgments, fines or penalties actually or reasonably incurred by him in the
investigation, defense, appeal or settlement of any civil or criminal action,
suit or proceeding, COMNET shall nevertheless indemnify him to the extent to
which he is entitled. By the terms of the Indemnification Agreements, the
benefits are not available for expenses or liabilities paid directly to
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the Indemnitee under an applicable policy of directors and officers insurance
or in several other instances such as if a court determines that each material
assertion made by the Indemnitee in that proceeding was not made in good faith
or was frivolous, or if the claim arises from the purchase and sale by the
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, or similar successor statutes.
Messrs. Buchsbaum and Sullivan, who are directors of the Company but
not directors of COMNET, are not signatories to an Indemnification Agreement.
They receive indemnification protections, however, under the directors and
officers liability insurance policy described below, as well as the
indemnification provisions contained in the Company's Certificate of
Incorporation and Bylaws.
DIRECTORS AND OFFICERS LIABILITY INSURANCE. The Company currently
maintains coverage of directors and officers liability under a policy obtained
by COMNET covering COMNET and its subsidiaries. This coverage is subject to an
aggregate limit of liability of $5,000,000. Deductibles under this policy
range from $5,000 per officer or director for each claim to $50,000 in the
aggregate for certain covered claims. This policy does not cover, among other
matters, dishonest, fraudulent, or criminal behavior.
401(k) PLAN
In January, 1994, COMNET adopted the COMNET Corporation and
Subsidiaries 401(k) Retirement Savings Plan and Trust (the "401(k) Plan"). The
Company, as a subsidiary of COMNET, participates in the 401(k) Plan. The
401(k) Plan provides for a contribution to be made by the Company and its
subsidiaries out of current operating earnings based upon the contributions
made by participating employees.
All employees of the Company or its subsidiaries who have been
employed for at least three months are eligible to participate in the 401(k)
Plan. Participants in the 401(k) Plan may contribute from 1% to 15% of their
compensation from the Company or its subsidiary (up to a limit of $9,500) in
a calendar year. The Company or a subsidiary will make contributions to an
employee's 401(k) Plan account equal to the sum of the following: (i) $.75 for
each $1.00 a participant contributes up to 2% of the participant's compensation
and (ii) $.50 for each $1.00 the participant contributes for the next 1% of the
participant's compensation. Participants are 100% vested in the contributions,
and earnings thereon, they make to the 401(k) Plan out of their compensation.
Participants vest in employer contributions, and earnings thereon, at a rate of
20% per year of employment with the Company or a subsidiary, up to 100%.
However, if a participant's employment with the Company or a subsidiary
terminates because of retirement, death or disability (as defined in the 401(k)
Plan), 100% of the employer contributions, and earnings thereon, become 100%
vested.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 30, 1997
as to all persons who, to the knowledge of the Company, were beneficial owners
of five percent or more of the common stock of the Company and all directors
and officers of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF TITLE OF NUMBER OF SHARES PERCENT OF
BENEFICIAL OWNER CLASS OF CLASS CLASS
------------------- -------- ---------------- ----------
<S> <C> <C> <C>
COMNET Corporation (1)
4200 Parliament Place
Suite 600 Lanham, MD 20706-1844 Common Stock 3,484,588 81.2%
All directors and officers
as a group (9 persons) (2)(3) Common Stock 100,037 2.3%
</TABLE>
- ------------
(1) As of July 11, 1995, Medco Containment Services, Inc. ("Medco"), owned
17.0% of the issued and outstanding shares of the voting securities of
COMNET Corporation ("COMNET"). Pursuant to an Agreement and Plan of
Merger, dated as of July 27, 1993, as amended, by and among Merck &
Co., Inc., a New Jersey corporation ("Merck"), M Acquisition Corp.
("Merger Sub") and Medco, Medco was merged with and into Merger Sub
and Medco became a wholly owned subsidiary of Merck. Merck is a
worldwide organization engaged primarily in the business of
discovering, developing, producing and marketing products, and
services for the treatment of disease and the maintenance or
restoration of health. The principal executive offices of Merck are
located at One Merck Drive, Whitehouse Station, New Jersey. As of
June 30, 1997, Merck may be deemed to be the indirect beneficial
owner, through its ownership of Medco, of 543,345 shares of COMNET's
common stock, representing approximately 17.0% of the outstanding
shares of COMNET's common stock and Merck may also be deemed to be the
indirect beneficial owner, through its ownership of Medco, of 100,000
shares of COMNET's 6% Preferred Stock. Merck effectively has the sole
power to vote and direct the vote of such shares of common stock and
6% Preferred Stock, and to dispose and direct the disposal of such
shares.
(2) Includes common stock purchase options for 70,000 shares of the
Company's common stock which are currently exercisable or will become
exercisable within 60 days of June 30, 1997.
(3) All directors and officers of the Company, as a group (9 persons),
were beneficial holders of 113,585 shares of COMNET common stock, and
common stock purchase options for 443,178 shares of COMNET common
stock which are currently exercisable or will become exercisable
within 60 days of June 30, 1997.
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company, all directors, officers and beneficial owners of more
than ten percent of any class of stock have filed on a timely basis Forms 3,
Forms 4 and Forms 5 as required in the fiscal year ended March 31, 1996, except
for Mark D. Funston who inadvertently filed a late Form 3.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMNET-GROUP 1 MANAGEMENT AND SERVICES AGREEMENT
Effective April 1, 1997, the Company renewed its Management and
Services Agreement with COMNET (the "Management Services Agreement") under
which COMNET provides to the Company certain management and other services
through March 31, 2000. The Company believes that these arrangements are fair
and reasonable. By having entered into the Management Services Agreement, the
Company believes the possibility of conflicts of interest with COMNET regarding
providing these services will be minimized because the terms under which
benefits and services are to be exchanged will be generally governed by the
Management Services Agreement and need not be separately negotiated in each
instance. However, no assurance can be given that conflicts of interest will
not occur.
Under the Management Services Agreement, COMNET provides on an actual
or estimated cost or usage basis, not intended to provide a profit to COMNET,
all accounting and finance support, legal and administrative support, human
resources support, office space and certain liability and property insurance
relating to this office space and its usage. The Company has retained the
right, upon 120 days notice, except for the providing of office space, to
acquire the services and benefits from a third party or to provide such
services or benefits itself.
The Company agreed to reimburse COMNET for 80% of its salary and
fringe benefit expenses for Robert S. Bowen or his successor(s) as Chief
Executive Officer of the Company
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<PAGE> 13
in return for Mr. Bowen's or his successor's services in such capacity. The
percentage represents the estimated portion of Mr. Bowen's professional time
presently spent on Company affairs. The Company has also agreed to reimburse
COMNET for that portion of Mr. Bowen's or his successor's incentive bonus
award, if any, that is attributable to the Company's earnings.
The Company has agreed to reimburse COMNET for a portion of its salary
and fringe benefit expenses for Mr. Funston or his successor(s) as Chief
Financial Officer of the Company ("CFO") in return for Mr. Funston's or his
successor's services in such capacity. The portion of the CFO's salary and
fringe benefit expenses to be reimbursed will be determined as a percent of the
estimated portion of Mr. Funston's professional time spent on Company affairs.
For the year ended March 31, 1997, 80% of the CFO's salary and fringe benefit
expense was reimbursed under this formula. The Company has agreed to reimburse
COMNET for that portion of Mr. Funston's or his successor's incentive bonus
award, if any, that is attributable to the Company's earnings.
The Company has agreed to reimburse COMNET for all costs that COMNET
incurred for the benefit of the Company to deliver the services to the Company
of COMNET's Finance Department, Legal Department, Corporate Administrative
Department and Human Resources Department.
The Company has agreed to pay COMNET a management fee in recognition
of the provision by COMNET of services and benefits, including certain senior
management services, at cost. This management fee shall be based on the
Company's annual pre-tax earnings (before the cost of any management fee) as a
percentage of the Company's total annual revenues (the "Pre-Tax Margin"),
ranging from 1% of the total Company revenues if the Pre-Tax Margin is 20.99%
or under, and increasing by equal increments to 2.0% of the Company's total
revenues if the Pre-Tax Margin is 30% or more. Total amount charged by COMNET
to the Company for management and other services under the Management Services
Agreement totaled $3,131,582 for the year ended March 31, 1997, including the
management fee paid for the fiscal year ended March 31, 1997, of $506,691.
TAX SHARING AGREEMENT
On April 1, 1991, the Company and COMNET renewed their tax sharing
agreement ("Tax Sharing Agreement"). Under current law and so long as COMNET
owns at least 80% of the total value of the stock of the Company and owns stock
possessing at least 80% of the voting power of the Company, the Company will,
at the election of COMNET, continue to be included in COMNET's consolidated
Federal income tax returns. The Company will pay to COMNET the amount of the
separate income tax liability that the Company would have been obligated to pay
had it filed a separate return. The Company's separate income tax liability
will be computed by reference to the Company's items of income, deduction and
credit in the current and prior years. For the purposes of the Tax Sharing
Agreement, carry forwards and carrybacks of losses and deductions will be
computed as if the Company had not filed consolidated income tax returns with
COMNET. In the event that, upon audit of any consolidated income tax returns
or upon the filing of any amended return or claims for refund, there are
adjustments that would have affected the Company's separate income tax
liability, the Company will make to or receive from COMNET additional payments
at the time and in the amount, including interest thereon, as would have been
paid to or received from the Internal Revenue Service had the Company filed a
separate return.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by
the undersigned, thereunto duly authorized.
Group 1 Software, Inc.
(Registrant)
/s/ MARK D. FUNSTON
--------------------------
Mark D. Funston
Vice President
Chief Financial Officer
Dated July 28, 1997
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