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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-6355
COMNET Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 52-0852578
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
4200 Parliament Place, Suite 600, Lanham, MD 20706-1860
(Address of principal executive offices)
(ZIP Code)
Registrant's telephone number, including area code: (301) 918-0400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.50 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d)of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on June 21, 1996 was $26,216,888.
The number of shares of the Registrant's Common Stock outstanding on June 21,
1996 was 3,161,282.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive proxy statement to be filed with the Securities and Exchange
Commission relating to Company's 1996 Annual Meeting of Shareholders (Part III
of Form 10-K).
Part I
Item 1. Business
The Company
COMNET Corporation ("COMNET" or "Company") through its subsidiary, Group 1
Software, Inc. ("Group 1") develops, acquires, markets and supports specialized
marketing and mail management software. On December 31, 1994, Group 1 acquired
all of the outstanding shares of capital stock of Archetype Systems, Ltd. of
the United Kingdom. Archetype Systems, Ltd. has changed its name to Group 1
Software Europe, Ltd.("Group 1 Europe") and will continue its operations based
in London, England.
COMNET owns 81.2% of Group 1's issued and outstanding shares of common
stock, with the remaining 18.8% or 809,109 shares held by others. The trading
of the common stock of Group 1 is reported on the Nasdaq National Market System
under the symbol GSOF. During the fiscal year ended March 31, 1996, Group 1's
common stock price ranged from a high of $26.00 to a low of $7.50. Based on
the closing price of Group 1's common stock on June 21, 1996, of $8.50,
COMNET's holdings in Group 1 represented a market value of approximately $29.6
million.
As of March 31, 1995, the Company disposed of its other subsidiary, COM-
MED Systems, Inc. ("COM-MED Systems") that provided turnkey management and
operations support systems and consulting services for the long-term care
industry.
COMNET Corporation is incorporated under the laws of the state of
Delaware. Unless otherwise indicated, the term "Company" shall refer to COMNET
and its subsidiaries, exclusive of discontinued operations. The executive
offices of COMNET are located at 4200 Parliament Place, Suite 600, Lanham, MD
20706-1860, and the telephone number at that location is (301) 918-0400.
Group 1 Software, Inc. ("Group 1") develops, acquires, markets and
supports specialized marketing and mail management software. Group 1 markets a
broad range of software solutions in each of four major categories: Customer
Information Management, Database Marketing, Electronic Document Composition and
Mailing Efficiency. The operating systems utilized for Group 1's products vary
as to category. Products in the first two categories - Customer Information
Management and Database Marketing - operate in client/server mode for UNIX or
NT server or workstations with client support in Windows 3.x, 95 and NT.
Electronic Document Systems currently run under MVS on IBM and IBM-compatible
mainframe computers as well as under UNIX and IBM OS/2 on the PC. Mailing
Efficiency products run on IBM and IBM compatible mainframe computers, IBM
AS/400, Digital, UNIX, Microsoft NT and IBM OS/2 platforms as well as on IBM
and IBM-compatible microcomputers (PCs). Group 1's Electronic Document Systems
support Kodak, IBM and Xerox print architectures (AFP and Metacode) for high-
speed, high-volume production laser printing.
Group 1 distributes all of its products in North America and its
Electronic Document Systems throughout the world as well; plans are underway to
distribute additional Group 1 products in Europe. Group 1 has recently
undertaken initiative to distribute its products in Latin American and the
Pacific rim. Group 1 believes it is a leading vendor of mailing efficiency
software products in North America.
Group 1's software products serve the needs of a wide variety of clients,
including those in the financial, insurance, utility, manufacturing, retailing,
hospitality, publishing and mail order industries, plus service bureaus,
associations and various activities of educational institutions and
governmental agencies. In general, Group 1's software systems are designed to
minimize the costs and maximize the opportunity to sell products and services
to existing and potential customers. Group 1's software systems also provide
solutions where a need exists for highly accurate name and address data or
where address information must be correlated with demographic or geographic
data. Other Group 1 systems provide highly effective document preparation for
customized forms or personalized correspondence. This is achieved through the
use of advanced document design workstation software coupled with sophisticated
host-based document composition software, resulting in highly targeted and
individualized documents (e.g., statements, invoices, policies, direct mail,
etc.). Group 1 believes that the continuing growth of database marketing, data
warehousing and targeted, direct communication, together with increased postal
rates and postage discounts for coded and/or sorted mail, can expand the market
potential for Group 1's existing and future products.
Group 1 also offers a broad variety of professional services to its
clients, including systems and business analysis, installation assistance,
operations support, programming services, technical education and training and
operational reviews. These services are designed to assist clients in
obtaining maximum utilization from their Group 1 products and/or in improving
efficiency and effectiveness of their business operations.
Group 1 markets its Customer Information Management, Database Marketing,
and Electronic Document System directly to its clients in North America and in
the United Kingdom and through distributors in Europe. Mailing Efficiency
products are marketed directly for large system configurations and through a
dealer and distributor network for PC applications.
Markets Served
Group 1 markets its products within a broad span of industries to fulfill
customer information manage-ment, database marketing, database
publishing/electronic printing and mailing efficiency requirements. Included
among the industry groups served by Group 1 are banking, insurance, credit card
companies and financial institutions, retailers, hotels, catalog mailers,
publishers, manufacturers, telecommunication companies, associations,
educational institutions, fund raisers and governmental activities. All of
these industry groups use Group 1's mailing efficiency systems, although use by
retailers, catalog mailers and publishers is particularly significant due to
the large volume of heavy and expensive mail pieces typically involved.
Associations, educational institutions and fund raisers are also extensive
users of Group 1's list management and personalization products. The Smart
Marketing Suite (recently introduced for the PC) integrates mailing efficiency,
file merge and deduplication, and mail preparation functions in an integrated
desktop marketing tool for small businesses.
The banking and insurance segments, while requiring address correction
products, additionally use Group 1's products to build and maintain Customer
Information Systems (CIS) and to clean transaction based, operational data
prior to loading into a data warehouse. Both CIS and data warehouses are
being built by these organizations primarily to provide a complete picture of
their customers and their business. Geographic and demographic overlays may be
used to gauge market penetration, demographic targets and competitive position.
Cross-selling opportunities among groups can also be identified. While banking
and insurance organizations have led in the CIS applications of Group 1
products, such applications have potential within many other market segments as
well. Banking and insurance organizations also have increasing need for
software tools to assist in certain record keeping and analysis used to
demonstrate compliance with government regulations. These industry segments
use Group 1's geocoding and demographic coding products for Credit Reporting
Act and Home Mortgage Disclosure Act compliance.
Enterprises with large sales organizations are increasingly in need of a
closed-loop sales and marketing automation systems that can track every
communication with a prospect or existing customer. Group 1's multi-module
sales and marketing automation system supports complex global territories, plus
direct and indirect sales channels, allowing businesses to manage sales
opportunities more effectively. Businesses may now fully integrate account,
contact, activity and resource management functions with Oracle Office,
Microsoft Office, Lotus Smart Suite and knowledge based support products to
maximize sales results.
Many industries who have adopted database marketing utilize Group1
products that append demographic and geographic data to provide enhancements to
existing customer databases. Use of other Group 1 systems provides automated
predictive modeling to identify more precise buying patterns, or by clustering,
identify differences in behavioral characteristics across product lines or over
time. Hospitality and gaming organizations are becoming aggressive marketers.
Group 1's database marketing system extracts raw customer data from existing
client systems for conversion it into a useful marketing database. Meticulous
filtering, correcting and consolidating of large amounts of operational data
from multiple sources create a highly accurate database. The system provides
the capability to query for relevant customer information and to prepare target
market profiles and market segmentation analysis, to help plan more effective
media and direct mail programs. Organizations are able to discover the
lifetime value of each customer, as a guide to the development of stronger
relationships with the more profitable customers.
Information-intensive organizations are seeking automated solutions that
combine their customer data with today's advanced printing technology to
produce individualized, well-designed business documents. These organizations,
which include banks, credit card processors, insurance companies, public
utilities, health care providers and others, use Group 1's electronic document
composition software (plus, in many instances, Group 1's consulting services)
to generate and manage customized statements using conditional statement logic.
The format, content and language of each statement may be individually
structured relative to specific information contained in each customer record;
individualized marketing messages can also be incorporated. Increasing numbers
of organizations are integrating complete marketing strategies with automated
document design and composition systems to improve sales and customer
satisfaction.
Products and Services
As of March 31, 1996, Group 1 offered a total of 89 software products.
The sales and marketing automation products operate in a true two-tiered
client/server mode. Client support includes Windows 3.x, 95, and NT. Server
operating systems may be UNIX, NT or Novell. WorldTrak supports Oracle,
SYBASE, SQLServer, SQLBASE databases. The data repository structure features
dynamic configuration. Data sources may be accessed and drilled on RDBMS
through a single interface to all customer-related data.
The database marketing products are offered for a variety of operating
systems. The DataDesigns database marketing system with a proprietary database
operates in a client/server environment. The server software is the SQLBase
RDMS which runs under Windows 3.x ,95 or NT, OS/2 and Novell Netware; the
client utilizes Windows 3.x or 95. Support for SQLRouters are available to
access Oracle, SYBASE and SQLBASE databases.
The multi-platform electronic document composition system is offered with
enhanced PC-based WYSIWYG technology. The system directly converts and imports
IBM and Xerox laser printing resources such as fonts, images and overlays.
DOC1 can operate in centralized, or distributed, departmental or desktop
environments under MVS, OS/2, OS/400, and UNIX operating systems. The system
is printer independent and supports AFP, Metacode and PCL output.
The newest releases of the PC products are developed in a 32-bit Windows
environment. All Group 1 PC products support ".dbf" files, the industry
standard PC database software format.
Most of the mailing efficiency products are offered in an Open System
format which ensures that the specific application operates on all major
computer systems from NT to mainframe. This approach allows the user to
migrate from one platform to another without lost productivity or added
training.
Group 1's software products can each operate on a stand-alone basis or in
conjunction with other Group 1 products to create an integrated system tailored
to a client's requirements.
In October, 1993, Group 1 purchased the Canadian mail management and
postal qualification PC software, plus certain related technology and assets of
Promark Software, Inc. In June, 1994, Group 1 purchased the postal discount
and POSTNET Barcoding PC software from PostSaver Systems, Inc. In December,
1994, Group 1 purchased Archetype Systems, Ltd. Archetype Systems, Ltd. has
been renamed Group 1 Software Europe, Ltd. (Group 1 Europe). In August, 1995
Group 1 purchased the database marketing software and other assets of
DataDesign, Inc. In November, 1995 , Group 1 purchased the sales and marketing
automation software and certain other assets of Premier One, Inc.
Customer Information Management
Group 1's WorldTrak sales and marketing automation system provides closed-
loop tracking of all prospect and customer inquiries. WorldTrak's user-
definable workflow allows clients to tailor the system to match their sales and
marketing processes. Enhanced reporting, campaign management, sales pipeline
management and sales forecasting are streamlined to provide improved market
analysis. A client-server based system, it maintains closed-loop sales,
marketing and service information to allow for improved management of the
prospect, customer and supplier relationship. WorldTrak records the
characteristics of all types of marketing, sales and support efforts, including
media advertising and telemarketing. This relationship-driven system
consolidates all activity to enable measurement of the quality of leads, return
on marketing investment and total cost of marketing and selling. WorldTrak
supports international business disciplines, helping to ensure that language,
cultural and geographic issues affecting global business operations are
properly addressed.
To process name and address data for Customer Information Files (CIF's)
reliably, Group 1 offers the NADIS System (Name and Address Data Integrity
Software). An expert system technology, NADIS offers the most advanced
capabilities to ensure data integrity and to identify all relationships within
and across files.
Database Marketing
Group 1's DataDesigns database marketing system allows the user to develop
a composite profile of its best customers and prospects. Raw customer data is
extracted from existing client systems for conversion into a useful marketing
database. Meticulous filtering, correcting and consolidating of the large
amounts of operational data from multiple sources creates a highly accurate
database. The system provides the capability to query for relevant customer
information, and to prepare target market profiles and market segmentation
analysis, to help plan more effective media and direct mail programs.
Organizations are able to discover the lifetime value of each customer as a
guide to the development of stronger relationships with the most profitable
customers.
Group 1's demographic and geographic systems allow census-based
information and longitude and latitude information compiled by R.L. Polk &
Company and the U.S. Bureau of the Census to be appended to the customer or
prospect database. The Generalized Selection System provides a flexible method
of target marketing and mailing list manipulation.
Group 1 offers an automated predictive modeling tool permitting the
analysis of volumes of data quickly, to identify buying patterns of individuals
for more precise, profitable targeted marketing. This sophisticated system is
easy to use, without the need for complex formulas. Other Group 1 products
provide data analysis and decision support tools to identify motivational
behavioral characteristic and changes across products or over time.
Electronic Document Systems
Group 1's Electronic Document Composition system (DOC1) makes possible
advanced applications of electronic preparation of individualized documents for
worldwide markets. The software supports all major printing architectures and
can operate in centralized, distributed or desktop environments under OS/2,
OS/400, MVS, and UNIX operating systems. DOC1 produces individualized
statements, insurance policies, invoices, medical bills, letters, etc. that
allow one-on-one communication with the recipient. The system is a truly
visual application that allows the user to place text, images and graphics on
the page in a dynamic WYSIWYG process. DOC1 can be integrated with Group1's
MailStream Plus system to produce output documents in a sequence that provides
USPS presorting discounts.
Group 1's Automated System for Advanced Printing (ASAP) is a complete
system comprising batch and on-line components to create, print and manage
individualized business documents. The system uses conditional statement logic
and variable processing to generate customized documents such as statements,
invoices, and policies, all based on customer-unique information. The system
is a tailored solution for IBM and IBM-compatible mainframes, implemented to
client specifications. ASAP features a menu-driven interface that lets users
define documents interactively, as well as manage printer resources and
documents within a secure environment. The system supports all major printing
architectures.
ASAP is used to create, compose, edit and produce direct mail, mass
correspondence and other forms of written material on a highly individualized
basis. Specific information for each individual can be extracted from computer
databases for incorporation into a mail piece. Words, sentences and/or entire
paragraphs can be automatically added, changed or deleted based upon the target
recipient's information file and the creative wishes of the user. The
resulting personalized letters, forms, coupons, reports, labels and other
correspondence can be produced economically on high-speed laser, impact or ink-
jet printers.
Postal Discount and Mailing Efficiency
Group 1's postal discount and mailing efficiency software products provide
a fully automated means for clients to take advantage of significant postal
discounts offered in both the United States and Canada for presorted and coded
mail. Within this group of software products are also the tools to improve
lettershop efficiency, palletize mail, speed mail delivery, allow in-plant
truck loading and produce the necessary United States Postal Service (USPS)
reports and Canada Post Corporation (CPC) statements of mailing.
All appropriate Group 1 products are Coding Accuracy Support System (CASS)
and Presort Accuracy Validation and Evaluation (PAVE) certified by the USPS.
These products allow mailers to qualify for enhanced carrier route, presort and
automation postal discounts and to optimize discounts among various postal rate
categories. Clients can currently save nearly 28% of the cost of First-Class
mail and up to 48% of the cost of Standard mail by presorting and coding.
Significant savings can also be achieved with other classes of mail. Similar
benefits are provided to Canadian mailers using Group 1's products accepted
under the Software Evaluation and Recognition Program (SERP) of CPC. Canadian
clients can avoid the $0.05 per piece surcharge by demonstrating an address
accuracy level of at least 90%, and can qualify for certain other postal rate
incentives.
Group 1's list management systems allow clients to convert name and
address lists into desired formats, to standardize address information, to
identify and/or eliminate duplicates on business and consumer mailing files and
to make targeted demographic and test-cell selections. This software also adds
or verifies ZIP Codes and postal codes for the United States and Canada.
Group 1's PC-based products include a specialized database management
system designed specifically to handle mailing lists, and postal discount
systems which allow mailers to qualify for various discounts depending on
various postal rate category. A stand-alone product is also available that is
designed to remove duplicates from address lists on the most popular database
management systems. The system can print virtually any type of label.
Professional Services and Customer Support Services
Professional services are available including operations support, systems
analysis, programming services, technical education and training, and
operational reviews. These services are designed to assist clients in obtaining
maximum utilization from their Group 1 products and in improving other areas of
their operations.
Group 1 offers with its product licenses an annual service agreement which
provides telephone support and continuing updates and enhancements, as
available, to its products and documentation. Educational and training
seminars specific to Group 1 products are offered as part of the initial
product licensing agreement at no additional charge; thereafter, such seminars,
together with a variety of more general educational seminars, are available for
a fee.
Pricing
The Customer Information Management and Database Marketing software
products offered by Group 1 carry one-time perpetual license fees of $5,000 to
$175,000 except for the Demographic Coding System for which a full national
package is priced on an annual license basis at $50,500 (regional editions are
available). A complete Group 1 mail and list management system would have a
list price of more than $136,000. For PCs, products are offered for suggested
retail prices from $295 to $5,995.
The DOC1 software product carries a one-time perpetual license fee ranging
from $50,000 to over $400,000 depending on platform chosen, number of
workstations and number of composition systems licensed. Enterprise-wide
corporate licenses of DOC1 are available at additional costs generally
exceeding $250,000.
License agreements and products sold to distributors generally call for
payment in full, 30 days after execution, although extended payment terms may
be granted. Alternatively, a customer may elect an installment payment program
(typically from one to five years) with a minimum down payment of 10% of the
license and first year maintenance fees, and an interest charge of 10% to 12%
per annum depending on credit-worthiness. Actual prices and terms charged by
Group 1 for its products and services may reflect volume and other discounts.
To receive maintenance, enhancements and telephone support for of Group
1's software products, a customer must pay an annual fee in advance which is
presently 16.5% (currently 15% in the U.K. and the European marketplace) of the
then-current license fee for the product. U.S. and Canadian postal master
files are available for an additional fee. A service and enhancement agreement
is available for an annual fee of $295 each for certain of Group 1's PC
products.
Licensing
With the exception of the Demographic Coding System, Group 1's products
are licensed on a perpetual "right to use" basis pursuant to non-exclusive
license agreements. The Demographic Coding System is licensed on an annual
basis. Group 1 does not sell or transfer title to its software products to
clients. A client is generally entitled to use a product only for internal
purposes on a single computer at a single location. Client/server
implementations are available for DataDesign and WorldTrak; LAN network
versions for PC products are also available. Multi-site, multi-computer
corporate license agreements are available as well. Certain postal products
are required by the USPS and CPC regulations ("CASS" and "SERP", respectively)
to have an expiration date (quarterly or monthly) and must be under
subscription or re-licensing arrangements with Group 1 in order to be used for
postal discounts or price qualification.
Group 1 warrants that the majority of its products will perform
substantially in accordance with their standard documentation for the defined
warranty period or as long as a service agreement is in effect, whichever is
longer. The software is generally licensed in conjunction with a first year
maintenance agreement to provide an initial warranty for twelve months from the
date of the license agreement. Microcomputer software is warranted for ninety
days from date of purchase against defects in material and workmanship and
against operational failures.
Customers
Group 1's customer base includes approximately 2,100 clients who have
licensed one or more of its large software systems. In addition, over 26,600
of Group 1's PC software systems have been licensed. Group 1 believes that it
is a leading vendor of list and mail management software in North America.
Group 1's clients range from small businesses to a large number and broad
variety of the foremost businesses and other organizations in North America and
internationally. Included are utilities such as Pacific Gas and Electric and
PEPCO, telecommunication companies such as AT&T and MCI; major banks such as
Citibank, National Westminster Bank, Bank One, Chase Manhattan Bank and Banque
Nationale du Canada; insurance companies such as The Hartford Insurance Group,
Metropolitan Life, and Standard Life of Scotland; publishers such as Time,
Inc., McGraw-Hill and Encyclopedia Britannica; computer services companies such
as EDS and Neodata; financial services companies such as Prudential Securities,
Charles Schwab and General Electric Credit; retailers such as Nordstrom and Wal-
Mart; manufacturers such as GTE, Caterpillar, Eastman Kodak, General Mills and
Xerox; governmental bodies such as the U.S. Senate, U.S. Customs and U.S.
Government Printing Office; credit companies such as GE Data Services and TRW
Information Services; direct marketers such as Publishers Clearing House, Lands
End and L.L. Bean; service companies such as American Express, Trans World
Airlines, Avis and Tru Green Chem Lawn; educational institutions such as The
Johns Hopkins University and MIT; health and leisure companies such as Nordic
Track; non-profit service groups such as The Girl Scouts of America, National
Geographic Society and AARP; cultural organizations such as the Metropolitan
Museum of Art and Metropolitan Opera Association; and hospitality and
entertainment companies such as Marriott, Mirage Resorts and Westin Hotels.
The United States Postal Service is also a client of Group 1.
All of Group 1's operations are in the one business segment broadly
defined as marketing support software; during the fiscal year ended March 31,
1996, four customers individually accounted for more than 1% of Group 1's
revenue. No customer accounted for 3% of revenue. Traditionally, Group 1 does
not have a material order backlog for its software products at any given time.
Group 1 recognizes maintenance and enhancement revenue over the life of the
service agreement, usually from one to five years. International revenues
account for less than 10% of Group 1's total revenue, although that percentage
is expected to increase with the continued growth of European revenue and
penetration into the South American market
Sales and Marketing
Group 1 markets its software products in North America and Europe through
a direct sales and sales support force of 94 representatives located in the
U.S., Canada and the United Kingdom. To serve existing clients and to solicit
new additions to the client base, Group 1 has two sales and support offices in
the Washington, D.C. area and nine regional offices in the New York City,
Chicago, Los Angeles, Las Vegas, Atlanta, Dallas, Minneapolis, Toronto and San
Juan metropolitan areas. A European office is located in the London, England
metropolitan area.
The Group 1 sales organization is supported by a comprehensive marketing
program administered from Group 1's Lanham, Maryland headquarters. Marketing
is conducted through direct mail, print advertising, trade show exhibitions and
speaking engagements, product training seminars, telemarketing and a broad
variety of public relations activities including the Group 1 Report and the
annual Group 1 Software Users Conference, which was attended by over 400
customers in fiscal 1996.
Group 1 has entered into a software distribution agreement with a Swedish
company to serve Scandinavia and an Australian company to serve the Australian
and New Zealand markets. Through its Group 1 Europe subsidiary, Group 1 has
entered into software distribution and support agreements for the DOC1 product
with companies throughout Europe. These agreements provide for a royalty
payment to Group 1, with the distributor performing sales and marketing,
customer service and support activities. Group 1 continues to pursue
additional international sales and marketing opportunities for its products.
Group 1's PC software products are marketed to end-users through Group 1's
developing U.S. and Canadian dealer and distributor network.
Group 1 has entered into joint marketing agreements with a number of
business partners including IBM, Xerox, Data General Corp., R.L. Polk, Campaign
Mail & Data, the Harris Group, MapInfo, Advanced Software Application Corp.,
Software Pursuits, Mastersoft International Pty., Geographic Data Technology,
Claritas/NPDC and OBIMD International. Generally, the agreements provide for
distribution of Group 1 products in conjunction with the business partner's
products. A sale may arise from either sales organization, and territories are
non-exclusive. The agreements provide for a commission payment to Group 1 when
it has contributed to a sale of the other company's products. Conversely,
Group 1 may pay a commission when a partner contributes to a sale of Group 1
products or services.
Support
Group 1 believes that effective support of its customers and products has
been a substantial factor in Group 1's success to date and will continue to be
so in the future. As of March 31, 1996, over 85% of Group 1's large systems
customers were enrolled in the product maintenance and enhancement program.
Customer support for these software products is provided by telephone for
assistance in product installation and problem resolution during normal
business hours. A telephone support help line is also provided for PC
products. Automated call tracking, client-specific call routing and on-line
bulletin board services are also provided for maintenance customers. Customer
support is provided by telephone and, if necessary for large systems, on-site
by qualified Company personnel. Group 1 Europe also has modem links with many
of its worldwide customers to provide even higher levels of mission-critical
support. In the fiscal years ended March 31, 1996, 1995 and 1994, maintenance
and enhancement fees represented approximately 37%, 42% and 43%, respectively,
of Group 1's revenue.
Professional services, including operations support, business analysis,
programming services, technical education and training, and operational
reviews, are provided at the client's location and at Group 1 training
facilities throughout the U.S., Canada and the U.K.
Product Development
The computer industry is characterized by rapid change in hardware and
software technology and in user needs, requiring a continuing expenditure for
product development. It is likely that such circumstances will continue in the
future. Accordingly, Group 1 must be able to provide new products and to
modify and to enhance existing products on a continuing basis to meet the
requirements of its customers and of regulatory agencies, particularly the USPS
and CPC. Group 1 may also have to adapt its products to accommodate future
changes in hardware. To date, Group 1 has been able to adapt its products to
such changes and believes that it will be able to do so in the future. Group 1
also evaluates externally developed products that can be acquired or licensed
and subsequently marketed through the Group 1 sales force and distribution
network. Whether the product is developed internally or acquired from another
company, Group 1 considers it important to control the quality, marketing,
distribution, enhancement and evolution of each of its products. Quality
assurance testing of Group 1's new or enhanced products is conducted by teams
of experienced individuals drawn from all segments of Group 1's organization
under the direction of testing specialists.
New product development during fiscal year 1996
Significant investment was made during the year in new software
development for migration of a variety of products to the Open Systems
platform. Additionally, extensive work was performed on enhancing existing
mainframe, midrange and open system products.
New Open Systems Products
During the year, Group 1 released Open Systems versions of Canadian Code-
1 Plus, Mail Canada Plus, Generalizes Selection Plus and I/O Jet Plus for use
on a variety of platforms.
Existing Open Systems, IBM mainframe and midrange Products
Enhancements were made during fiscal 1996 to on-line and batch products to
improve functionality and ease of use, to accommodate changes in the
marketplace and in postal regulations. The personalization products were
enhanced to increased functionality and to take advantage of a broader range of
electronic printing technologies. Additionally, improvements were made to
Group 1's existing CODE-1 Plus and the Canadian mail products to meet new USPS
and CPC certification and regulatory requirements. Significant investment was
made in the MailStream products for all platforms to implement a major revision
in the classifications of mail and the discount structures related to mail
preparation. These products were released to market in May, 1996.
Enhancements were also made to the previously released Open Systems
versions of CODE-1 Plus, Geographical Coding System, MailStream Plus,
Palletization Plus, POSTNET Barcoding, Labels Printing Plus, EZ Case Plus and
Merge/Purge Plus.
Group 1 also committed substantial resources to the development and
enhancement of new products:
DOC1 version 2.2 was integrated with Group 1's MailStream Plus presorting
product, and also provides additional operational efficiencies such as direct
importation of IBM and Xerox printer resources, the provision of multiple
libraries of document objects, and enhanced post-processing capabilities. The
new release also has more desktop publishing-like document design capabilities,
eliminating costly design and testing of conditional documents. Version 2.2
provides dynamic page layout and direct text importation from PC word
processors. Multi-lingual versions of documents may now be processed within a
single print run.
A Graphical User Interface (GUI) to the Open Systems product line was
introduced to provide enhanced ease of use and reduced training needs for a
large segment of the customer base. Utilizing Microsoft Windows based
technology, these productivity workstations seamlessly interface with most of
the supported Open Systems hardware platforms.
The DataDesigns database marketing system was integrated with Group 1's
Canadian PC address standardization product. Automation of the data import and
installation and system configuration was undertaken, with completed elements
delivered with current installations. Enhanced reporting and additional
interfaces to third party systems were also completed during the year. User
interfaces were improved to current SQL Windows standards.
WorldTrak version 3.0, to be released in mid-FY97, will provide support
for Windows 95 and a completely new user interface. Also included will be
enhanced channel management, opportunity management, reporting and scheduling
modules.
PC Products
In March, 1996 Group1 released the Smart Marketing Suite which seamlessly
integrates the individual applications of AccuMail and ProSort, with
anticipated future functionality of database management and intelligent data
merging. The suite is Windows 95 compliant, using the latest 32-bit technology
with a common interface that allows ease-of-use task processing.
AccuMail 5.0 in 32-bit Windows was released with a smaller database
configuration and improved coding accuracy. Changes were also made to comply
with CASS and other regulatory requirements.
ProSort 2.0 was released in September, 1995 with increased speed, second
class mail sortation and ASCII file support. ProSort was also PAVE certified
by the USPS. In March 1996 a 32-bit Windows version was released.
The Canadian PC products for Windows and DOS were enhanced for additinoal
functionality and compliance with CPC regulatory changes. SmartSort 5.0, to be
released in early fiscal 1997, is the first Windows-based mail sortation
software for Canadian address lists.
Products acquired during fiscal year 1996
The DataDesigns system is a desktop database marketing system designed
specifically for the hotel and gaming industries but adaptable to other
industry applications. Developed utilizing GUPTA's SQL Windows and C++ , data
is captured from virtually all computing platforms - from standalone PCs to
networks to midrange and mainframe computers. Data can come from any
relational or non-relational database system including Informix, Oracle,
SYBASE, SQLBASE and DB2. The DataDesigns system is a client/server
configuration; the server can be any NT server or workstation with a Windows PC
as the client.
The WorldTrak sales and marketing automation system supports all
client/server architectures including Intel and RISC-based systems, and
operating systems supported by RDBMS vendors. Developed utilizing GUPTA's SQL
Windows, the system supports the most popular databases, including SYBASE,
Oracle, Microsoft SQL Server and SQLBASE. The client system operates under
Windows 3.x, 95 and NT.
Products licensed for distribution
In May, 1996 Group 1 and OBIMD International of Paris, France entered into
a joint venture under which Group 1 will market PC-based Universal Mailing
software for address correction, postal coding, postal sortation and an
extensive postal database developed by OBIMD. The software and database will
allow businesses to manage mailing lists and prepare mail for more than 190
countries.
Group 1's portfolio of USA and foreign registered and common law
trademarks exceeds seventy marks. Included among those marks are AccuMail,
ArcList, CODE -1 Plus, DOC1 and Group 1 Software (name and logo). All other
trademarks and respective marks referenced in this report are the property of
their respective owners.
Competition
The computer software and service industry is highly competitive, and no
published data are available regarding Group 1's relative position in the
markets in which it operates. Although no major competitor currently competes
against Group 1 across its entire product line, competitive products offer many
similar features. Group 1's existing and potential competitors include
companies having greater financial, marketing and technical resources than
Group 1. Group 1 believes that there are at least thirty-four companies which
offer products competitive with one or more of Group 1's products. Group 1
believes that six companies offer customer information management systems and
at least twelve companies offer database marketing systems. At lease four
competitors are in the document composition and production marketplace. For
mailing efficiency products, at least two competitors offer products that
compete with Group 1 on open system and mainframe platforms. During the year,
Group 1 continued to experience strong competition in the market for postal
coding and presorting software from these competitors. Group 1 believes that
at least ten companies offer PC products competitive with one or more of Group
1's products. There can be no assurance that one or more of these competitors
will not develop products that are equal or superior to the products Group 1
expects to market. In addition, many potential clients for which Group 1's
products are targeted have in-house capability to develop computer software
programs.
Group 1 believes that the principal, distinguishing competitive factors in
the selection of its software products are price/performance characteristics,
marketing and sales expertise, ease of use, product features and functions,
reliability and quality of technical support, integration of the product line
and the financial strength of the publisher. Group 1 believes that it competes
favorably with regard to these factors including pricing and credit terms.
Group 1's primary strengths are the technical capabilities of its personnel and
products, marketing and sales expertise, service and support, and industry
product leadership.
Product Protection
Group 1 regards its software, in source and object code, as proprietary
and relies upon a combination of contract, trade secret and copyright laws to
protect its products and related manuals and documentation. The license
agreements under which clients use Group 1's products generally restrict the
client's use to its own operations and always prohibit unauthorized disclosure
to third persons. Notwithstanding these restrictions, it may be possible for
other persons to obtain copies of Group 1's products. Group 1 believes that
because of the rapid pace of technological change in the computer industry and,
in addition, changes in postal regulations that affect several core products,
copyright and trade secret protection are less significant than factors such as
the knowledge and experience of Group 1's management and other personnel and
their ability to develop, enhance, market and acquire new products.
Employees
As of March 31, 1996, the Company employed 311 persons on a full-time
basis. Of those employees, 164 were in management, professional and technical
positions, 102 in marketing, sales and support and 45 in administrative
positions. None of the Company's employees is represented by a labor union and
the Company
has experienced no work stoppages. The Company believes its employee relations
are satisfactory.
COM-MED Systems
COM-MED Systems, a wholly-owned subsidiary of the Company, provided the
long-term health care industry with computer software systems for management
and operations support. As of March 31, 1995, the Company sold the assets of
COM-MED Systems for up to $4,500,000, to be paid as a percentage of the
acquiring company's future revenues. Additionally, the Company was issued
warrants to acquire up to 25% of the acquiring company's common stock. In
September, 1995 the acquiring company ceased operations, whereupon the Company
repossessed those assets and sold them, in turn, to another entity for up to
$4,500,000, to be paid as a percentage of that company's future earnings.
Reserves in the amount of $108,000 have been established to cover
disposition cost and contingencies associated with the sale of the assets. Any
gain on the sale will be recognized as payments are received. During fiscal
year 1994, the Company wrote off approximately $1,100,000 in capitalized
software and other assets relating to COM-MED Systems. The Company's
Consolidated Statements of Earnings have been restated to reflect COM-MED
Systems as a discontinued operation.
Item 2. Properties
The Company's executive and administrative offices are located in Lanham,
Maryland, a Washington, DC suburb, where the Company leases 51,900 square feet
under a lease that expires in 2004. These facilities also include Group 1's
headquarters and principal operations base. COMNET has options to lease
additional space at specified periods during the term and to extend its lease.
Group 1 leases additional sales and support offices in Chicago, Dallas, Los
Angeles, Las Vegas, Atlanta, New York City, Sterling, Minneapolis, San Juan,
Puerto Rico, London, England and Toronto, Canada metropolitan area. See Note
13 of notes to consolidated financial statements.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings which, in its belief,
after review by legal counsel, could have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to, and approved by, the required
vote of security holders of the Company at the Company's most recent annual
Shareholder's meeting held on September 12, 1995.
(1) To elect three (3) directors to hold office until the third
annual meeting of stockholders of Group 1 following their
election and until the election and qualification of their
successors.
Nominees For Withheld
Richard H. Eisenberg 2,878,251 95,570
Carl I. Kanter* 2,878,251 97,168
James V. Manning 2,878,251 95,570
*Resigned December 8, 1995
(2) To approve the adoption of Company's 1995 Incentive Stock
Option, Non-Qualified Stock Option and Stock Appreciation
Unit Plan.
For Against Abstain
2,764,542 194,559 14,720
(3) To approve the adoption of Company's 1995 Non-Employee
Directors' Stock Option Plan.
For Against Abstain
2,756,383 194,253 23,185
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The trading of the common stock of the Company is reported on the Nasdaq
National Market System under the symbol CNET. The table below sets forth the
highest and lowest closing prices between dealers for the quarter indicated.
These prices, as reported by Nasdaq, do not include retail markup, markdown or
commissions and may not necessarily represent actual transactions.
Closing Common Stock Prices
1996 High Low 1995 High Low
First-June 30, 1995 $10.50 $9.00 First-June 30, 1994 $11.50 $8.00
Second-September 30, Second-September 30,
1995 $20.50 $9.13 1994 $10.75 $9.75
Third-December 31, Third-December 31,
1995 $17.00 $10.00 1994 $11.00 $9.00
Fourth-March 31, 1996 Fourth-March 31, 1995
$14.00 $10.00 $10.75 $9.75
No cash dividends have been paid on the Company's common stock. The
Company pays dividends on the 6% Convertible Preferred Stock discussed in Note
8. The Board of Directors intends to retain, for the foreseeable future, the
Company's remaining earnings for use in the development of the business.
At June 21, 1996, there were approximately 1,050 holders of record of the
Company's common stock, including persons who wish to be identified as having
an interest in shares held or recorded in "street name" with broker-dealers.
Item 6. Selected Financial Data
(In thousands except per share amounts) Year ending March 31,
1996 1995 1994 1993 1992
Statement of Earnings Data:
Revenue $45,873 $37,883 $31,370 $32,099 $30,430
Earnings from continuing
operations $ 5,472 $ 5,241 $ 3,303 $ 5,548 $ 5,068
Net earnings from continuing
operations $ 2,832 $ 2,658 $ 1,776 $ 3,075 $ 2,795
Net loss from discontinued
operations - - - $ (282) $(1,571) $ (921) $(1,818)
Net earnings $ 2,832 $ 2,376 $ 204 $ 2,154 $ 976
Earnings per share (primary):
Earnings from continuing $ 0.82 $ 0.76 $ 0.54 $ 0.83 $ 0.78
operations per share of common
stock
Loss from discontinued
operations per share of common
stock - - - $ (0.08) $ (0.53) $ (0.24) $ (0.51)
Net earnings per share $ 0.82 $ 0.68 $ 0.01 $ 0.59 $ 0.27
Weighted average number of
common shares: 3,717 3,617 2,941 3,884 3,566
Balance Sheet Data:
Working capital $ 6,829 $ 6,787 $ 8,958 $ 9,499 $ 6,711
Total assets $67,192 $57,148 $49,047 $45,541 $38,954
Long-term debt $ 320 $ 561 $ 719 $ 1,206 $ 1,273
Stockholders' equity $27,433 $22,866 $20,337 $17,251 $13,926
The year ended March 31, 1992, includes a provision of $1.2 million
(pretax) for expenses arising from the disposition of AIM operations
which occurred in October 1992 (Fiscal Year 1993).
Restated to report separately, as a discontinued operation, the
results of operations of COM-MED Systems.
See Notes 1 and 9 of notes to consolidated financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
1996 as Compared with 1995
The Company sold its COM-MED Systems subsidiary as of March 31, 1995. The
Company's consolidated financial statements have been restated to report
separately, as a discontinued operation, the results of operations of COM-MED
Systems. The Company's remaining business unit is Group 1 Software, Inc., an
81% owned subsidiary, which develops, acquires, markets and supports
specialized marketing and mail management software. For the year ended March
31, 1996, the Company's revenue was $45,873,000 compared with $37,883,000 the
prior year. The Company's net earnings from continuing operations were
$2,832,000 or $0.82 per share compared with $2,658,000 or $0.76 per share the
prior year.
For the year ended March 31, 1996, Group 1's revenue was $45,875,000
compared with $37,921,000 for the prior year. Net earnings for the year were
$3,701,000 compared with $3,272,000 for fiscal 1995. On December 31, 1994,
Group 1 acquired Archetype Systems, Ltd. (renamed Group 1 Software Europe,
Ltd.). The results of operations from that subsidiary subsequent to the
acquisition did not have a material effect on the consolidated financial
statements for fiscal 1995.
All of Group 1's operations are in the one business segment broadly
defined as marketing support software; during the fiscal year ended March 31,
1996, four customers individually accounted for more than 1% of Group 1's
revenue. No customer accounted for 3% of revenue. Traditionally, Group 1 does
not have a material order backlog for its software products at any given time.
Group 1 recognizes maintenance and enhancement revenue over the life of the
service agreement, usually from one to five years. International revenues
account for less than 10% of Group 1's total revenue, although that percentage
is expected to increase with the continued growth of European revenue and
penetration into the South American market
Software license fees and related revenue of $25,786,000 represented an
increase of 24% over the prior year attributable primarily to new product
sales. As a percent of total revenue, software license and related revenue was
56% and 55% for fiscal years 1996 and 1995, respectively.
License fees from Customer Information Management Systems software
increased by $808,000 over the prior year due mostly to NADIS revenues;
Database Marketing Systems license fees decreased by $127,000 due to lower
geographic and demographic licenses fees offset in part by revenue from the
newly acquired DataDesigns system. Licensing of the Electronic Document
Systems contributed increased revenue of $1,780,000, due primarily to a full
year of European operations versus only four months the prior year. Mailing
Efficiency software revenues increased $2,609,000 over the prior year due to
the continued growth of the Open Systems product suite; the increase also
reflects a growth of $850,000 in PC software revenue.
Maintenance and other revenue in fiscal 1996 of $20,087,000 increased by
17% over the prior year. Maintenance and other services accounted for 44% of
total revenue in 1996 versus 45% of total revenue in 1995. Recognized
maintenance contract revenue increased over the prior year by $1,826,000, due
primarily to the continuing growth in the number of customers under maintenance
contracts. The maintenance renewal rate was 85% for the fiscal year 1996
compared with 83% in fiscal 1995.
Total operating costs and expenses for fiscal year 1996 were $40,640,000
or 89% of total revenue compared with $32,825,000 or 87% of total revenue
during the prior year. The increase in operating costs and expenses as a
percent of revenue is primarily due to increased selling and marketing
expenses.
Software license expense increased to $7,582,000 in fiscal 1996 from
$6,453,000 the prior year, representing 30% and 31% of software license and
related revenue, respectively. The increase in software license expense was
related to increased amortization of product development and acquisition cost
as well as the direct sales support activity related the DOC1 and NADIS
products. PC cost of sales also increased for the year due to the cost of
production and shipping.
Maintenance and other service expense increased to $7,569,000 in the
current year from $6,171,000 in 1995, representing 37% and 36% of maintenance
and other revenue, respectively. The incremental cost was due primarily to an
increase of $1,309,000 in amortization expenses for the current year reflecting
the new and enhanced products released during fiscal 1996 and fiscal 1995 for
all computer platforms. Amortization was 11% of total revenue in both years.
Group 1 expects the amortization of software costs to continue to increase due
to development expenditures capitalized and to recent software acquisitions.
Other direct costs to fulfill new customer orders and provide updates for
existing customers increased to 6% of total revenue from 5% the prior year due
to an increase in internal product distribution support personnel. Group 1
expects the cost of maintenance and other service to increase as Group 1's
customer base expands.
Research, development and indirect support expenses totaled $2,628,000 in
fiscal 1996 and $1,895,000 in the prior year, representing 6% and 5% of
revenue, respectively. Expenses during fiscal 1996 increased due to additional
internal management and technical support requirements for the growing number
of computer platforms and specialized product applications. Group 1 expects
these expenses to continue to increase as Group 1's product applications
increase.
Selling and marketing expenses totaled $15,897,000 or 35% of revenue in
fiscal year 1996, compared with $12,208,000 or 32% of revenue the prior year.
The increase in expenses reflects higher sales compensation travel and direct
marketing expenses to support increased sales activity for new products and
markets.
General and administrative expenses increased $682,000 to $5,291,000 or
12% of revenue, primarily as a result of increased costs associated with a full
year of Group 1's operations in Europe and establishing operations in Puerto
Rico to address the South American market. Additionally, compensation and
professional services increased over the prior year.
The provision for doubtful accounts of $1,618,000 represented an increase
of $130,000 from the prior year. This increase over the prior year reflects a
reduction in that year of reversal of reserves associated with a note
receivable for which payment was received.
Net non-operating income for the Company totaled $239,000 in fiscal year
1996, which represents an increase of $55,000 as compared with fiscal 1995.
Interest income and gains on investments increased $199,000, as compared with
fiscal 1995 as a result of the improved invested cash position of the Company
throughout the year. Interest expense increased $12,000 due to increased
capital lease obligations. Other expense increased by $27,000 for foreign
exchange losses and $105,000 for other items.
The Company's effective tax rate for the 1996 fiscal year was 36% as
compared with 38% for fiscal 1995 reflecting the lower state tax rates in
addition to lower foreign tax rates on a larger proportion of foreign income
versus the prior year.
1995 as Compared with 1994
As stated previously, the Company sold its COM-MED Systems subsidiary as
of March 31, 1995. The Company's consolidated financial statements have been
restated to report separately, as a discontinued operation, the results of
operations of COM-MED Systems. The Company's remaining business unit is Group
1 Software, an 81% owned subsidiary. For the year ended March 31, 1995, the
Company's revenue was $37,883,000 compared with $31,370,000 the prior year.
The Company's net earnings from continuing operations were $2,658,000 or $0.76
per share compared with $1,776,000 or $0.54 per share the prior year.
For the year ended March 31, 1995, Group 1's revenue was $37,921,000
compared with $31,312,000 for the prior year. Net earnings for the year were
$3,272,000 compared with $2,474,000 for fiscal 1994. On December 31, 1994,
Group 1 acquired Archetype Systems, Ltd. (renamed Group 1 Software Europe,
Ltd.). The results of operations from that subsidiary subsequent to the
acquisition did not have a material effect on consolidated financial statements
for the fiscal year 1995.
Software license fees and related revenue for the Company of $20,754,000
represented an increase of 27% over the prior year attributable primarily to
new product sales. As a percent of total revenue, software license and related
revenue was 55% and 52% for fiscal years 1995 and 1994, respectively.
License fees from Customer Information Management systems software
increased by $115,000 over the prior year due mostly to NADIS revenues;
Database Marketing systems license fees increased by $896,000 due to geographic
and demographic licenses fees. Licensing of Electronic Document Systems
contributed increased revenue of $2,449,000, due primarily to one fiscal
quarter of the new European operations plus six months of DOC1 revenues in the
U.S. versus none in the prior year. Mailing Efficiency software revenues
decreased $413,000 versus the prior year due to the decline in mainframe
license which was partially offset by the growth of the Open Systems product
suite plus an increase of $1,317,000 in PC software revenue as a result of new
products added during this and the prior year.
Maintenance and other revenue of $17,128,000 increased by 14% over the
prior year. Maintenance and other services accounted for 45% of total revenue
in 1995 versus 48% of total revenue in 1994. Recognized maintenance contract
revenue increased over the prior year by $2,133,000, due primarily to the
continuing growth in the number of customers under maintenance contracts. The
maintenance renewal rate was 83% for the fiscal year as compared with 82% in
fiscal 1994.
Total operating costs and expenses for the Company for fiscal year 1995
were $32,825,000 or 87% of total revenue compared with $27,991,000 or 89% of
total revenue during the prior year. The decrease in operating costs and
expenses as a percent of revenue is due to many operating costs not increasing
in proportion to the revenue increase.
Software license expense increased to $6,453,000 in fiscal 1995 from
$4,921,000 the prior year, representing 31% and 30% of software license and
related revenue, respectively. Software license expense increased primarily
due to a greater mix of royalty related products distribured by the Company.
PC cost of sales also increased for the year due to the increases in sales
volume. The Company expects that royalty expense will continue to insrease as
the sales of these products increases.
Maintenance and other service expense increased to $6,171,000 in the
current year from $5,076,000 in 1994, representing 36% and 34% of maintenance
and other revenue, respectively. The incremental cost was due primarily to an
increase of $882,000 in amortization expenses for the current year reflecting
the new and enhanced products released during fiscal 1995 and fiscal 1994 for
all computer platforms. Amortization was 9% of total revenue in both years.
Group 1 expects the amortization of software costs to continue to increase due
to the development expenditures capitalized and from recent software
acquisitions. Other direct costs to fulfill new customer orders and provide
updates for existing customers decreased to 5% of total revenue due to the
Company's cost containment efforts in the current year from 6% the prior year.
The Company expects the cost of maintenance and other service to increase as
the Company's customer base expands.
Research, development and indirect support expenses totaled $1,895,000 and
$1,830,000 in the prior year, representing 5% and 6% of revenue, respectively.
Although the percent of revenue has declined, actual expenses during fiscal
1995 increased due to a reduced rate of total research and development
expenditures capitalized as software development costs. This increased expense
reflects additional internal management and technical support requirements for
the growing number of computer platforms and specialized product applications.
Selling and marketing expenses totaled $12,208,000 or 32% of revenue in
fiscal year 1995, compared with $11,113,000 or 35% of revenue the prior year.
The increase in expenses reflects higher sales compensation and direct
marketing expenses to support the increased sales activity for new products and
markets.
General and administrative expenses increased $1,489,000 to $4,609,000,
primarily as a result of increased profitability-based compensation and
professional services costs.
The provision for doubtful accounts of $1,488,000 represented a decrease
of $442,000 from the prior year. The decrease in this expense reflects a lower
incidence of Group 1 client payment defaults in the current year versus the
prior year and the receipt of payments for notes receivable for sale of
business assets that was previously fully reserved.
Net non-operating income for the Company totaled $184,000 in fiscal year
1995, as compared with an expense of $77,000 for fiscal 1994. Interest expense
decreased $40,000 due to capital lease obligations; additionally, a $50,000
reduction of accrued penalty associated with a state tax claim, and other
income items of $17,000 were offset by an investment loss of $140,000.
Interest income increased by $141,000 as a result of the improved invested cash
position of the Company throughout the year. The Company did not incur the
$95,000 interest and penalty associated with state sales tax audit claims
experienced in fiscal 1994. The net change in foreign currency between the
years was a gain of $59,000.
The Company effective tax rate for the 1995 fiscal year was 38% compared
with 32% for fiscal 1994. The increase in the current year was due to lower
research and development credits versus those in the prior year. The prior
year included retroactive research and development credits available as a
result of changes in the then current tax regulations.
Seasonality and Inflation
Group 1 in the past has experienced greater sales and earnings in the
January-March quarter, the fourth quarter of its fiscal year, although there
can be no certainty that this will occur in the future. This seasonal factor
is believed to be attributable to buying patterns of major accounts and also to
a fiscal year incentive program for Company sales representatives. Group 1's
revenue and resultant earnings have shown substantial variation on a quarter-to-
quarter basis. A substantial portion of revenue in any given quarter is
comprised of a relatively limited number of high-value software license
agreements. These license agreements represent the culmination of a sales
cycle averaging three to six months. Any significant lengthening in the sales
cycle can have the effect of moving revenue from one quarter into the next,
contributing to quarter-to-quarter variations.
Prices remain stable for Group 1's products. Inflation directly affects
Group 1's cost structure principally in the areas of employee compensation and
benefits, occupancy and support services and supplies.
Liquidity and Capital Resources
The Company's working capital was $6,829,000 at March 31, 1996 as compared
with $6,786,000 the prior year. The current ratio was 1.3 to 1 at March 31,
1996 and 1995. Note that the current portion
of deferred revenue related to maintenance and enhancement contracts is
included in current liabilities. Accordingly, working capital and current
ratios may not be directly comparable to such data for companies in other
industries where similar revenue deferrals are not typical.
The Company provides for its cash requirements through cash funds
generated from operations. Additionally, the Company's Group 1 subsidiary
maintains an uncollateralized $5,000,000 line of credit arrangement with Signet
Bank (Maryland), a major Mid-Atlantic regional bank, with interest at the
bank's prime rate. The terms of this line of credit allow Group 1 to lend
money from this arrangement to the Company. At March 31, 1996 and 1995 there
were no short-term borrowings under this line of credit.
During fiscal 1996 net earnings of $2,832,000 plus non-cash expenses of
$9,783,000 provided a total of $12,615,000 cash from operating activities.
This amount was offset by increased accounts receivable that required
$9,978,000 which is the combined result of higher year-end sales over the prior
year-end, increases in the amount of installment receivables, and the increased
mix of large dollar contracts with extended collection cycles versus the prior
year. Deferred revenues increased cash by $2,396,000, and other working
capital items increased cash provided by operating activities by $1,724,000.
Cash flows from investing activities are primarily expenditures for investments
in software development and capital equipment of $10,058,000. Cash of
$1,843,000 was generated from the sale of marketable securities. Proceeds
from the exercise of the Company's stock options generated cash of $1,823,000.
Long-term debt was reduced by $328,000, and dividends of $177,000 were paid.
Group 1's practice of accepting license agreements under installment
payment arrangements substantially increases its working capital requirements.
Generally, these arrangements are for a period of one to five years after a
minimum down payment of 10% of the principal amount of the contract. Interest
currently ranges from 10% to 12%. In the years ended March 31, 1996, 1995 and
1994, the principal amount of installment agreements entered into during the
year represented 15%, 17% and 20% of Group 1's revenue, respectively.
Installment receivables included in accounts receivable are $11,769,000 and
$8,995,000 at March 31, 1996 and 1995, respectively. Group 1 continues to
experience a significant interest in financing of software purchases by a broad
range of customers, in every industry segment served. The installment
receivable balance, in addition to Group 1's policy of offering competitive
trade terms of payment, make it difficult to accurately portray a relationship
between the outstanding accounts receivable balance and the current year
revenues.
Group 1 continually evaluates the credit and market risks associated with
outstanding receivables. In the course of this review, Group 1 considers many
factors specific to the individual client as well as to the concentration of
receivables within industry groups. Group 1's installment receivables are
predominately with clients (service bureaus) who provide computer services to
the direct marketing industry. Many of these clients have limited capital and
insufficient assets to secure their liability with Group 1. The service
bureaus are highly dependent on Group 1's software and services to offer their
customers the economic benefit of postal discounts and mailing efficiency. To
qualify for the U.S. Postal Service and Canada Post Corporation postal
discounts, service bureaus require continuous regulatory product updates from
Group 1. The service bureau industry is also highly competitive and subject to
general economic cycles, as they impact advertising and direct marketing
expenditures. Group 1 is aware of no current market risk associated with the
installment receivables. Service bureaus represent approximately $8,978,000,
or 76%, of the installment receivables at March 31, 1996.
As of March 31, 1996, the Company's capital resource commitments consisted
primarily of non-cancelable operating lease commitments for office space and
equipment. The Company believes that its current debt services, minimum lease
obligations and other short-term and long-term liquidity needs can be met from
cash flows from operations. The Company believes that its long-term liquidity
needs are minimal and no large capital expenditures are anticipated, except for
the continuing investment in capitalized software development costs which the
Company believes can be funded from operations. Historically, the Company has
been able to negotiate capital leases for its acquisition of equipment.
Item 8. Financial Statements and Supplementary Data
See pages 19 through 34.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
REPORT OF INDEPENDENT ACCOUNTANTS
___________________
To the Stockholders and
Board of Directors
COMNET Corporation
We have audited the accompanying consolidated balance sheets of COMNET
Corporation and Subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of COMNET
Corporation and Subsidiaries as of March 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
June 26, 1996
COMNET CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 1,844,521 $ 1,938,796
Marketable securities 1,979,166 3,779,624
Trade and installment accounts receivable,
less allowance of $2,409,000 and $1,703,000
24,488,730 18,457,360
Income tax benefit - - - 1,314,774
Deferred income taxes 1,923,000 1,489,000
Prepaid expenses and other current assets 2,793,129 2,824,848
---------- ----------
Total current assets 33,028,546 29,804,402
Installment accounts receivable, long-term 5,985,291 3,656,520
Property and equipment, net 3,269,206 2,867,193
Computer software, net 22,425,814 18,726,275
Other assets 2,482,964 2,093,922
---------- ----------
Total assets $ 67,191,821 $ 57,148,312
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,483,356 $ 2,801,166
Current portion of long-term debt 564,934 652,157
Accrued expenses 6,760,472 4,861,327
Accrued compensation 3,743,954 3,803,307
Current deferred revenues 12,646,877 10,899,993
---------- ----------
Total current liabilities 26,199,593 23,017,950
Long-term debt, net of current portion 320,115 560,940
Deferred revenues, long-term 4,363,429 3,713,854
Deferred income taxes 3,147,000 1,922,000
Minority interest in net earnings of
consolidated subsidiary 5,728,613 5,068,068
---------- ----------
Total liabilities $ 39,758,750 $ 34,282,812
---------- ----------
Commitments and contingent liabilities
Stockholders' equity:
6% cumulative convertible preferred stock
(Note 8) 2,845,857 2,845,857
Common stock $0.50 par value; 10,000,000
shares authorized; 3,562,690 and 3,383,748
issued and outstanding 1,781,345 1,691,874
Capital contributed in excess of par value 17,471,861 15,738,644
Retained earnings 7,285,246 4,630,709
Unrealized loss on investments, net (2,175) (44,720)
Cumulative foreign currency translation 66,287 18,486
---------- ----------
29,448,421 24,880,850
Less treasury stock at cost, 316,267 shares (2,015,350) (2,015,350)
---------- ----------
Total stockholders' equity 27,433,071 22,865,500
Total liabilities and stockholders' equity $ 67,191,821 $ 57,148,312
========== ==========
See notes to consolidated financial statements.
COMNET CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31,
1996 1995 1994
Revenue:
Software license and related revenues $ 25,785,598 $ 20,754,197 $ 16,397,575
Maintenance and other revenue 20,087,224 17,128,462 14,971,991
---------- ---------- ----------
Total revenue 45,872,822 37,882,659 31,369,566
---------- ---------- ----------
Costs and expenses:
Software license expense 7,582,297 6,453,283 4,920,535
Maintenance and service expense 7,569,039 6,170,855 5,076,139
Research, development and indirect 2,627,627 1,895,315 1,830,401
support
Selling and marketing 15,897,343 12,208,007 11,113,418
General and administrative 5,345,635 4,609,469 3,120,795
Provision for doubtful accounts 1,617,637 1,487,878 1,929,424
---------- ---------- ----------
Total costs and expenses 40,639,578 32,824,807 27,990,712
---------- ---------- ----------
Operating earnings 5,233,244 5,057,852 3,378,854
Non-operating income (expense), net 238,871 183,552 (76,251)
---------- ---------- ----------
Earnings from continuing operations
before provision for income taxes 5,472,115 5,241,404 3,302,603
Provision for income taxes 1,985,000 1,968,539 1,061,832
Minority interest in net earnings of
consolidated subsidiary 655,578 615,158 465,103
---------- ---------- ----------
Net earnings from continuing
operations $ 2,831,537 $ 2,657,707 $ 1,775,668
========== ========== ==========
Discontinued operations:
Loss from discontinued operations
(net of tax benefits of $83,000 and
$873,000 for 1995 and 1994,
respectively) - - - (161,504) (1,571,226)
Loss on disposal of discontinued
operations (net of tax benefit of
$61,000) - - - (120,282) - - -
Net earnings 2,831,537 2,375,921 204,442
Preferred stock dividend
requirements (177,000) (177,000) (177,683)
---------- ---------- ----------
Net earnings available to common
stockholders $ 2,654,537 $ 2,198,921 $ 26,759
========== ========== ==========
Earnings per share of common stock
Continuing operations 0.82 0.76 0.54
Discontinued operations - - - (0.08) (0.53)
---------- ---------- ----------
Net earnings per common share $ 0.82 $ 0.68 $ 0.01
========== ========== ==========
See notes to consolidated financial statements.
COMNET CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1996, 1995 and 1994
Common Stock
6% Capital Unrealized Equity
Cumulative $0.05 Contributed Treasury Gain/(Loss) Adjustment Total
Convertible Par In Excess of Retained Stock from for Currency Stockholders'
Preferred Stock Value Par Value Earnings at Cost Investments Translation Equity
Balance, March 31, 1993 2,845,857 1,554,909 13,975,436 2,405,029 (684,470) -.-.- -.-.- 20,096,761
Dividends to preferred
stockholders - - - - - - - - - (177,683) - - - - - - - - - (177,683)
Repurchase of common
stock - - - - - - - - - - - - (467,520) - - - - - - (467,520)
Issuance of stock upon
exercise of options - - - 54,328 627,100 - - - - - - - - - - - - 681,428
Gain on foreign
currency translation - - - - - - - - - - - - - - - - - - 18,486 18,486
Net earnings for the
year - - - - - - - - - 204,442 - - - - - - - - - 204,442
--------- ------- ---------- --------- ------- -------- -------- -----------
Balance, March 31, 1994 2,845,857 1,609,237 14,602,536 2,431,788 (1,151,990) - - - - - - 20,337,428
Dividends to preferred
stockholders - - - - - - - - - (177,000) - - - - - - - - - (177,000)
Repurchase of common
stock - - - - - - - - - - - - (863,360) - - - - - - (863,360)
Issuance of stock upon
exercise of options - - - 82,637 1,136,108 - - - - - - - - - - - - 1,218,745
Gain on foreign
currency translation - - - - - - - - - - - - - - - - - - 18,486 18,486
Unrealized loss on
investments - - - - - - - - - - - - - - - (44,720) - - - (44,720)
Net earnings for the
year - - - - - - - - - 2,375,921 - - - - - - - - - 2,375,921
--------- ------- ---------- --------- ------- -------- ----------- -----------
Balance, March 31, 1995 2,845,857 1,691,874 15,738,644 4,630,709 (2,015,350) (44,720) 18,486 22,865,500
Dividends to preferred
stockholders - - - - - - - - - (177,000) - - - - - - - - - (177,000)
Issuance of stock upon
exercise of options - - - 89,471 1,733,217 - - - - - - - - - - - - 1,822,688
Gain on foreign currency
translation - - - - - - - - - - - - - - - - - - 47,801 47,801
Unrealized gain on
investments - - - - - - - - - - - - - - - 42,545 - - - 42,545
Net earnings - - - - - - - - - 2,831,537 - - - - - - - - - 2,831,537
--------- ------- ---------- --------- ------- -------- ----------- -----------
Balance, March 31, 1996 $2,845,857 $1,781,345 $17,471,861 $7,285,246 $ (2,015,350) $ (2,175) $66,287 $27,433,071
========= ======= ========== ========== ======== ======== =========== ===========
See notes to consolidated financial statements.
COMNET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
1996 1995 1994
Cash flows from operating activities:
Net earnings $ 2,831,537 $ 2,375,921 $ 204,442
Adjustments to reconcile earnings
from operations to net cash
provided by operating activities:
Amortization expense 5,095,487 3,796,982 4,284,934
Depreciation expense 861,499 749,036 827,404
Provision for doubtful accounts
receivable 1,617,637 1,906,184 2,367,506
Provision for doubtful notes
receivable - - - - - - 60,259
Net gain (loss) on disposal of - - - 7,999 (350)
asset
Deferred income taxes 1,548,022 1,112,000 (424,000)
Minority interest in earnings of
consolidated subsidiary 655,578 615,158 470,445
Changes in assets and liabilities:
Increase in accounts receivable (9,977,778) (6,068,215) (1,969,171)
Decrease in notes receivable 276,072 183,614 538,321
(Increase) decrease in other
current assets (201,546) (166,758) 1,030,158
(Increase) decrease in other
assets 125,903 (111,590) (152,243)
Increase in deferred revenues 2,396,459 2,097,704 2,886,632
Increase (decrease) in accounts
payable (317,810) 665,744 362,677
Increase in accrued expenses 2,866,923 3,444,937 152,286
Increase (decrease) in taxes
payable - - - (381,556) - - -
Increase (decrease)in accrued
expenses 1,839,794 2,515,293 (147,218)
---------- ---------- ----------
Net cash provided by operating
activities 6,750,854 9,297,516 10,339,796
---------- ---------- ----------
Cash flows from investing activities:
Purchase and development of computer
software (8,758,547) (5,902,737) (5,081,358)
Purchase of equipment and
improvements (1,299,991) (726,166) (1,351,570)
Purchase of marketable securities (18,066,997) (3,824,344) - - -
Sale of Marketable securities 19,910,000 - - - - - -
Advances to and payment for
acquisition of subsidiary, net of
cash acquired - - - (2,514,945) - - -
Sale of assets - - - 354,689 - - -
---------- ---------- ----------
Net cash used in investing activities (8,215,535) (12,613,503) (6,432,928)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from short-term borrowings 8,384,995 3,307,458 3,268,812
Reduction of short-term borrowings (8,384,995) (3,307,458) (3,268,812)
Proceeds from exercise of stock
options 1,822,688 355,395 213,908
Proceeds from exercise of subsidiary
stock options 4,967 - - - 2,250
Principal payments of long-term debt (328,050) (788,339) (645,892)
Dividends paid on preferred stock (177,000) (177,000) (166,408)
---------- ---------- ----------
Net cash provided by (used in)
financing activities 1,322,605 (609,944) (596,142)
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents (142,076) (3,925,931) 3,310,726
Loss on currency translation 47,801 30,659 - - -
Cash and cash equivalents at beginning
of period 1,938,796 5,834,068 2,523,342
---------- ---------- ----------
Cash and cash equivalents at end of
period $ 1,844,521 $ 1,938,796 $ 5,834,068
========== ========== ==========
See notes to consolidated financial statements.
COMNET Corporation
Notes to Consolidated Financial Statements
Years Ended March 31, 1996, 1995 and 1994
(1) Organization and Summary of Significant Accounting Policies
Organization
COMNET Corporation ("COMNET" through its subsidiary, Group 1
Software, Inc. ("Group 1") develops, acquires, markets and
supports specialized marketing and mail management software. The
Company distributes all of its products in North America
and its Electronic Document Systems throughout the World. The
Company has recently undertaken an initiative to distribute its
products in Latin American and the Pacific rim.
Principles of Consolidation
The consolidated financial statements of the Company include
the accounts of COMNET Corporation and its wholly and majority
owned subsidiaries ("the Company"). All material intercompany
transactions and balances have been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with the
American Institute of Certified Public Accountants' Statement of
Position 91-1 on Software Revenue Recognition. Revenue from
perpetual licenses and the portion of royalty revenues not
subject to future obligations is generally recognized after
execution of a licensing agreement and shipment of the product
provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management.
Maintenance and enhancement (post contract support) revenues
are deferred and recognized ratably over the life of each
contract. Costs related to performance under post-contract
support agreements are expensed as incurred.
The amount of deferred revenue at March 31, 1996, to be
recognized during the subsequent years is:
1996 $12,646,877
1997 2,550,088
1998 1,218,991
1999 411,381
2000 & beyond 182,969
-----------
$17,010,306
===========
Contracts for professional services are negotiated
individually and are non-cancelable. The Company recognizes
revenues from professional service contracts using the percentage-
of-completion method as work is performed, measured primarily by
the ratio of labor hours incurred to total estimates labor hours
for each specific contract. When the total estimated cost of a
contract is expected to exceed the contract price, the total
estimated loss is charged to expense in the period when the
information is known.
Contract professional services revenue in the year ended
March 31, 1996 was recognized primarily using the percentage-of-
completion method as the work was performed. For the period
ended March 31, 1995 the completed contract was used; any
difference in revenue resulting from this change in accounting
method was immaterial to the consolidated financial statements
for 1995 and 1994.
Cash Equivalents
Cash equivalents consist of investments with original
maturities of 90 days or less, which are readily convertible into
cash.
Installment Accounts Receivable
License agreements may be executed under installment
contracts, which provide for interest charges and monthly
payments, with terms up to five years. Interest income from such
contracts, which is included in software licenses and related
revenue, was $440,000, $406,000 and $391,000 in 1996, 1995 and
1994, respectively.
Property and Equipment
Property and equipment are stated at cost and are
depreciated using the straight-line method over their estimated
useful lives, ranging from three to ten years. Leasehold
improvements are amortized on a straight-line basis over the
shorter of their useful lives or the lives of the respective
leases.
Research and Product Development
Research and product development costs not subject to
Financial Accounting Standards Board ("FASB") Statement No. 86,
"Accounting for the Cost of Computer Software to be Sold, Leased,
or Otherwise Marketed," are expensed as incurred and relate
mainly to the development of new products and on-going
maintenance of existing products.
Software development costs incurred subsequent to
establishment of the software's technological feasibility are
capitalized. Capitalization ceases when the software is
available for general release to customers. All costs not
meeting the requirements for capitalization are expensed in the
period incurred. Capitalized software development costs are
amortized by the greater of (a) the ratio that current gross
revenues for the product bear to the total of current and
anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life
of the product including the period being reported on.
Costs for research and development incurred in 1996, 1995
and 1994 were approximately $9,068,000, $6,948,000, and
$6,563,000, respectively. Under FASB Statement No. 86, software
development costs amounting to $7,675,000, $5,089,000 and
$4,476,000, respectively, were capitalized. During the years
ended March 31, 1996, 1995 and 1994, amortization of capitalized
internally developed computer software costs, based on an
estimated economic life of no more than five years, was
$4,010,000, $3,430,000 and $2,665,000, respectively.
Marketable Securities
Concurrent with its purchase of investments during fiscal
1995, Group 1 adopted Statement of Financial Accounting Standards
("SFAS") Statement No. 115, "Accounting for Certain Investments
and Debt and Equity Securities." Group 1 has classified its
investments as "available for sale" securities which require that
all unrealized gains and losses be reported, net of tax, as a
separate component of stockholders' equity. The cost basis of
Group 1's investment portfolio as of March 31, 1996, which
consisted of money market funds and mutual funds exceeded its
market value by approximately $2,100.
In management's opinion, the decline in the value of the
investments was a temporary decline.
Goodwill
The Company has classified as goodwill the cost in excess of
fair value of the net assets of companies acquired in purchase
transactions. Goodwill is being amortized on a straight-line
basis over periods not exceeding 9 years. Amortization charged
to operations amounted to $70,000, $44,000 and $23,000, for 1996,
1995 and 1994, respectively. At each balance sheet date, the
Company evaluates the net realizable value of goodwill based upon
expectations of non-discounted cash flows and operating income.
Based upon its most recent analysis, The Company believes that no
impairment of goodwill existed at March 31, 1996.
Foreign Currency Translation
Assets and liabilities of the Company's foreign operation
are translated into U.S. dollars using rates of exchange in
effect at the balance sheet date. Revenues and expenses are
translated at the monthly average exchange rate. Gains and
losses from foreign currency transactions are included in the
results of operations currently, while those resulting from
translation of financial statement amounts are included as a
separate component of stockholders' equity.
Sale of Stock of and by a Subsidiary
Gains arising from both the public sale by the Company of
stock in a subsidiary and the issuance to the public by a
subsidiary of the Company of its own stock have been recognized
as non-operating income.
Income Taxes
The Company uses the liability method of accounting for
income taxes. Under the liability method, deferred income taxes
are recognized for the tax consequences of temporary differences
by applying currently enacted statutory tax rates applicable to
future years to differences between the financial statements
carrying amounts and the tax bases of existing assets and
liabilities.
Minority Interest
Minority interest of approximately 18.8% for each of the
years ending March 31, 1996, 1995 and 1994,
is reflected in consolidation and is the portion of Group 1
Software, Inc. ("Group 1") that is not owned by the Company.
Earnings per Share of Common Stock
Earnings per share of common stock have been computed for
the years ended March 31, 1996, 1995, and 1994 on net earnings,
after deducting dividends using the weighted average number of
common and dilutive common equivalent shares outstanding during
the respective years. Common equivalent shares result from the
dilutive effect of stock options, calculated under the treasury
stock method. The weighted average number of common shares and
equivalents used for primary earnings per share was 3,716,794 in
1996, 3,616,578 in 1995 and 2,941,325 in 1994.
Concentration of Credit Risk
The Company designs, develops, manufactures, markets and
supports computer software systems to customers in diversified
industries. The Company performs ongoing credit evaluations of
its customers' financial condition and generally requires no
collateral. The Company's installment receivables are
predominately to clients (service bureaus) who provide computer
services to the direct marketing industry. Many of these clients
have limited capital and insufficient assets to secure their
liability to the Company. The service bureau industry is also
highly competitive and subject to general economic cycles as they
impact advertising and direct marketing expenditures. These
clients represent approximately $8,970,000 or 76% of the
installment receivables at March 31, 1996.
New Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 121
regarding accounting for asset impairments. This statement,
which must be adopted by the Company for fiscal years beginning
April 1, 1996, requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Adoption of SFAS No. 121 is not expected to have a material
impact on the Company's financial statements.
The Financial Accounting Standards issued SFAS No. 123
regarding accounting for stock compensation. The Company plans
to adopt the proforma note disclosure requirements as prescribed
in SFAS No. 123 in fiscal year 1997.
Reclassification
Certain prior year amounts have been reclassified to conform
with the current year presentation.
(2) Accounts Receivable
Accounts receivable are comprised of the following:
March 31,
1996 1995
Trade $21,114,071 $14,872,261
Installment accounts receivable,
interest typically at 8.5% to 13%
11,768,950 8,944,619
Allowance for doubtful accounts (2,409,000) (1,703,000)
------------ ------------
30,474,021 22,113,880
Less non-current portion of
installment accounts receivable 5,985,291 3,656,520
------------ ------------
Current portion $24,488,730 $18,457,360
============ ============
(3) Prepaid Expense and Other Assets
Prepaid expenses and other current assets are comprised of
the following:
March 31,
1996 1995
Prepaid expense $ 563,418 $ 712,651
Prepaid commission 801,911 646,934
Prepaid royalty 695,003 989,115
Net assets of discontinued
operations - - - 123,648
Other assets 732,797 352,500
------------ ------------
$2,793,129 $2,824,848
============ ============
Prepaid commissions and royalties primarily relate to
amounts paid, as of the balance sheet date, on maintenance and
enhancement revenues deferred into future periods.
(4) Property and Equipment
Property and equipment is comprised of the following:
March 31,
1996 1995
Data processing equipment $ 4,663,216 $ 4,140,768
Furniture and fixtures 2,513,106 1,839,471
Leasehold improvements 667,033 326,350
------------ ------------
7,843,355 6,306,589
Less accumulated depreciation and
amortization (4,574,149) (3,439,396)
------------ ------------
$ 3,269,206 $ 2,867,193
============ ============
(5) Computer Software
Computer software is comprised of the following:
March 31,
1996 1995
Developed software $30,247,944 $22,529,822
Acquired software 6,317,931 5,753,165
Software purchased for internal
use 3,382,908 2,933,728
------------ ------------
39,948,783 31,216,715
Less accumulated amortization (17,522,969) (12,490,440)
------------ ------------
$22,425,814 $18,726,275
============ ============
(6) Accrued Expenses
Accrued expenses are as follows:
March 31,
1996 1995
Accrued sales and other taxes $ 734,798 $ 818,470
Accrued royalties 953,636 1,160,294
Accrued sales incentives 301,556 255,494
Accrued rent abatements 39,402 214,888
Accrued dividends 44,250 44,250
Income taxes payable 176,537 72,073
Other accrued expenses 4,338,101 1,649,499
Accrued expense for disposition
of AIM operations 63,750 354,359
Accrued expense for disposition
of COM-MED operations 108,441 292,000
------------ ------------
$6,760,472 $4,861,327
============ ============
(6) Short-term Borrowings
At March 31, 1996, the Company's Group 1 Software, Inc.
subsidiary, maintained an uncollateralized $5,000,000 bank line
of credit arrangement with interest at the bank's prime rate
(8.25% at March 31, 1996). As of March 31, 1996 and 1995, there
were no borrowings under this line. The line of credit
arrangement requires Group 1, among other things, to maintain
certain financial ratios. Group 1 was in compliance with all
terms of the credit arrangement during the reporting period.
(7) Long-term Debt
Long-term debt consists of the following:
March 31,
1996 1995
Installment notes payable $ 702,035 $1,007,671
Capitalized lease obligations 183,014 205,426
------------ ------------
Sub-total 885,049 1,213,097
Less current portion 564,934 652,157
------------ ------------
Long-term portion $ 320,115 $ 560,940
============ ============
Installment notes and capital lease obligations are payable
monthly and bear interest at rates ranging from 6.0% to 10.0%
and mature in the years ending March 31, 1997 through 1998. The
notes are collateralized by certain equipment with a net book
value that approximates the outstanding loan balance. These lease
obligations were entered into at then current market rates.
Installment notes include two notes with no interest. These
notes have been discounted to reflect the present value of the
debt. The note for the acquisition of certain assets of Arc
Tangent, Inc. has been discounted at 6% to $291,220 at March 31,
1996. The note payable for the acquisition of certain assets of
PostSaver, Inc. has been discounted at 7.25% to $167,360 at March
31, 1996. (See Note 13).
The aggregate maturities of the long-term debt during the
years subsequent to March 31, 1996 are:
1997 $ 564,934
1998 320,115
-----------
$ 885,049
===========
The Company believes that there are no material differences
between carrying amounts and market value of its long-term
obligations.
(8) Stockholders' Equity
Preferred Stock
On January 22, 1993, the Company issued a series of
Preferred Stock par value $0.25 per share, to be designated "6%
Cumulative Convertible Preferred Stock" consisting of 147,500
shares. Dividends have been paid semi-annually in January and
July since July, 1993. The 6% Preferred Stock shall be
convertible at any time at the sole option of the Company into
fully paid and non-assessable Common Stock, at the rate of one
share of Common Stock for each share of preferred stock, subject
to a specified adjustment rate.
The Company shall have the right to redeem the outstanding
6% Preferred Stock, in whole or in part, at any time and from
time to time after March 31, 1993, by paying to the holders
thereof in cash the redemption price per share, 110% through
March 31, 1994, and decreasing 2% per year through April 1, 1998,
together with all accrued and unpaid dividends thereon through
the Redemption Date.
Stock Option Plans
The Company has five stock option programs currently in
effect, and two predecessor plans for which option grants are
still outstanding:
The COMNET Corporation Stock Option Plan of 1995 authorizes
the grant of incentive stock options, non-qualified stock options
and stock appreciation rights, at the sole discretion of the
Compensation Committee of the Board of Directors, to officers and
other employees of the Company, and reserved 600,000 shares of
common stock for issuance on exercise of options under the Plan.
The option and rights vest over five years; however, all options
and rights expire ten years after the date of the grant. The
plan activity was as follows:
Option
Shares
Shares under option, beginning of year - - -
Options granted - exercise price $10.00 315,100
-------
Shares under option end of year - exercise
price of $10.00 315,100
=======
At March 31, 1996 none of these options were exercisable.
Options for 63,020 shares become exercisable in the year ending
March 31, 1997. At March 31, 1996, 284,900 shares were available
for future grants of options.
The COMNET Corporation Stock Option and Stock Appreciation
Unit Plan of 1986 for employees permitted the grant of options to
purchase common stock of the Company, or stock appreciation
rights redeemable in cash or common stock at the sole discretion
of the Compensation Committee of the Board of Directors, at
prices not less than fair market value on the date of grant. The
options and rights vest over five years; however, all options and
rights expire ten years after the grant date. The plan's
activity was as follows:
Option
Shares
Shares under option, March 31, 1993 - exercise
prices of $5.1875 - $32.25 880,034
Options granted - 1994 - exercise prices of
$14.00 - $15.75 250,200
Options exercised - 1994 - exercise prices $5.185
- $10.00 (108,656)
Options canceled - 1994 (47,250)
-------
Shares under option, March 31, 1994 - exercise
prices of $6.625 - $30.25 974,328
Options granted - 1995 - exercise price of $7.50 17,500
Options exercised - 1995 - exercise prices $6.625
- $8.25 (165,274)
Options canceled - 1995 (178,450)
-------
Shares under option, March 31, 1995 - exercise
prices of $6.625 - $30.25 648,104
Options granted - 1996 - exercise prices of
$10.00 67,383
Options exercised - 1996 - exercise prices $5.375
- $14.00 (78,983)
Options canceled - 1996 (29,100)
-------
Shares under option, March 31, 1996 - exercise
prices of $6.625 - $30.25 607,404
=======
As of March 31, 1996, options for 427,269 shares were
exercisable at prices ranging from $6.625 to $30.25. Options
outstanding at March 31, 1996 expire in years ending March 31,
1997 through 2006. Options for 51,825 shares become exercisable
in the year ending March 31, 1997. No stock appreciation units
have been granted under the plan. As of March 31, 1996 the 1986
Stock Option and Stock Appreciation Unit Plan had terminated and
no future grants of options will be made under the plan.
The COMNET Corporation 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, and reserves 150,000 shares of
common stock for issuance on exercise of options under the Plan.
The options vest over five years and expire fifteen years after the
date of the grant. No options were granted under this plan during
the year ended March 31, 1996.
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.
The plan's activity was as follows:
Option
Shares
Shares under option, March 31, 1993 and 1994
- exercise prices of $5.375 - $30.00 184,334
Options exercised - 1995 - exercise prices of (37,500)
$5.375 - $7.125
-------
Shares under option, March 31, 1995 146,834
Options exercised - 1996 - exercise prices of
$5.375 - $11.00 (99,959)
-------
Shares under option, March 31, 1996 -
exercise price of $16.50 - $30.00 46,875
=======
As of March 31, 1996, 46,875 shares under option were vested
and exercisable. Options outstanding at March 31, 1996, expire
in years ending March 31, 2001 through 2002. The plan has issued
options to the full extent of the number of shares of common
stock reserved for issuance; no further grants will be made
thereunder.
In 1991, the Company granted options to purchase an
aggregate of 465,000 shares of common stock at an exercise price
of $21.75 per share to the individuals then serving on the
reconstituted Board of Directors, as an inducement to such
individuals to serve on the board. Currently options to purchase
210,000 shares remain granted. The options are exercisable for
10 years from the date of grant and vest 20% per year, subject to
potential acceleration as defined in the stock option agreements.
As of March 31, 1996, options for 167,997 shares were
exercisable. Options for an additional 42,003 shares become
exercisable in the year ending March 31, 1997.
In 1992, the Company granted options to purchase an
aggregate of 15,000 shares of common stock at an exercise price
of $30.25 per share to the individuals serving on the Advisory
Committee. The options are exercisable for ten years from the
date of grant and vest 20% per year. As of March 31, 1996,
options for 12,000 shares were exercisable. Options for an
additional 3,000 shares become exercisable in the year ending
March 31, 1997.
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 120,000 shares of
common stock for issuance on exercise of options under the plan.
The options vest progressively over five years and expire fifteen
years after the grant date. The plan's activity was as follows:
Option
Shares
Shares under options, March 31, 1993 - exercise
price of $30.50 5,000
Options granted - 1994 - exercise price of $24.25 35,000
Options canceled - 1994 - exercise price of
$24.25 (5,000)
-------
Shares under option, March 31, 1994 35,000
Options granted - 1995 - exercise price of $8.75 25,000
-------
Shares under option, March 31, 1995 60,000
Options granted - 1996 - exercise price of 30,000
$10.125
Options canceled - exercise price $8.75 - $30.50 (20,000)
-------
Shares under option, March 31, 1996 - exercise
price of $8.75 - $24.25 70,000
-------
As of March 31, 1996, 14,000 options were exercisable.
Options outstanding at March 31, 1996 expire in the years ending
March 31, 2003 through 2004. Options for 8,000 shares become
exercisable in the year ending March 31, 1997. At March 31, 1996
the 1992 stock option plan for non-employee directors had
terminated and no future grants of options will be made under the
plan.
At March 31, 1996, approximately 1,954,279 shares of common
stock were specifically reserved for issuance under the employee
stock option plan and the director stock option plans.
(9) Income Taxes
The provision for income taxes for continuing operations
consists of the following components:
Year Ended March 31,
1996 1995 1994
Federal:
Current $ 244,000 $ 46,000 $ 852,000
Deferred 945,000 1,396,000 (41,000)
--------- --------- ---------
1,189,000 1,442,000 811,000
--------- --------- ---------
State:
Current 76,000 80,000 99,000
Deferred 73,000 157,000 72,000
--------- --------- ---------
149,000 237,000 171,000
--------- --------- ---------
Foreign: 647,000 289,000 80,000
--------- --------- ---------
$1,985,000 $1,968,000 $1,062,000
========= ========= =========
The benefit for income taxes for discontinued
operations consists of the following components:
Year Ended March 31,
1996 1995 1994
Federal:
Current - - - $ 275,000 $(340,000)
Deferred - - - (414,000) (489,000)
--------- --------- ---------
- - - (139,000) (829,000)
--------- --------- ---------
State:
Current - - - 3,000 2,000
Deferred - - - (8,000) (46,000)
--------- --------- ---------
- - - (5,000) (44,000)
--------- --------- ---------
- - - $(144,000) $(873,000)
========= ========= =========
The provision for income taxes for continuing operations
varied from that computed using the statutory federal income tax
rate as follows:
Year Ended March 31,
1996 1995 1994
Statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal
income tax benefit 1.9 3.1 4.0
Research and development tax
credits (0.9) (4.0) (10.1)
Foreign taxes 1.5 2.1 2.4
Other, net (0.2) 2.4 1.9
----- ----- -----
Effective tax rate 36.3% 37.6% 32.2%
===== ===== =====
The significant components of the current deferred tax
asset and the long-term deferred tax liabilities are:
March 31,
1996 1995
Current:
Deferred maintenance revenue $531,000 $532,000
Allowance for doubtful accounts 928,000 626,000
Reserve for the disposition of
AIM 22,000 120,000
Other, net 442,000 211,000
------------ ------------
Total current deferred tax asset $1,923,000 $1,489,000
============ ============
Long-term:
Deferred maintenance revenue -
long-term $1,439,000 $1,799,000
Allowance for doubtful accouts 501,000 501,000
Capitalized software (5,930,000) (4,713,000)
Depreciation (81,000) (165,000)
Other, net 924,000 656,000
------------ ------------
Total long-term deferred tax
liabilities $(3,147,000) $(1,922,000)
============ ============
The Company has consolidated investment and research and
development tax credit carry forwards of $1,223,000, which will
expire in 2005 through 2011.
(10) 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 within established limits. Company
contributions for the year ended March 31, 1996, 1995 and 1994
were $226,000, $184,000, and $173,000, respectively.
(11) Quarterly Income Data (Unaudited)
Quarterly financial information for the years ended March
31, 1996, and 1995 was as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
(Dollars in thousands except earnings per share)
Fiscal Year 1996:
Revenue $ 9,384 $10,081 $10,853 $15,555 $45,873
Earnings from
continuing operations
before taxes 874 1,901 972 1,725 5,472
Net Earnings 420 614 459 1,339 2,832
Earnings per
share (1) $ 0.12 $ 0.18 $ 0.13 $ 0.36 $ 0.82
Fiscal Year 1995:
Revenue $ 7,643 $ 8,966 $ 9,333 $11,941 $37,883
Earnings from
continuing operations
before taxes 597 1,022 1,266 2,356 5,241
Net earnings from
continuing operations 288 473 641 1,256 2,658
Net Earnings (loss)
from discontinued
operations 6 (8) (100) (180) (282)
Net earnings 294 465 541 1,076 2,376
Earnings per share
from continuing
operations 0.08 0.14 0.19 0.37 0.76
Loss per share from
discontinued
operations 0.00 0.00 (0.03) (0.05) (0.08)
Net earnings per
share $ 0.08 $ 0.14 $ 0.16 $ 0.32 $ 0.68
See Note 1 of notes to consolidated financial statements
(12) Non-operating Income (Expense) and Supplemental Information
Non-operating income and expense is comprised of the
following:
Year Ended March 31,
1996 1995 1994
Interest income $209,422 $321,100 $179,692
Interest expense (125,809) (113,881) (154,364)
Gain (loss) on sales
of investment 109,595 (133,788) 7,132
Gain (loss) on sale of
assets - - - 5,883 350
Other income (expense),
net 45,663 104,238 (109,749)
--------- --------- ---------
Total non-operating
income (expense), net $238,871 $183,552 $(76,939)
========= ========= =========
The following supplemental information summarizes the
disclosure pertaining to the Statement of Cash Flows:
Year Ended March 31,
1996 1995 1994
Cash paid during the year for:
Interest $145,176 $105,793 $165,251
Income taxes 165,251 610,482 223,039
Non-cash investing and financing
activities:
Note payable incurred in
connection with
the purchase of the assets of - - - $563,795 - - -
PostSaver Systems, Inc.
Notes payable incurred in
connection with the purchase
of the assets of Data Designs,
Inc. $180,000 - - - - - -
Notes payable incurred in
connection with the purchase
of the assets of World Trak,
Inc. $100,000 - - - - - -
Capital lease obligations
incurred $47,102 $138,341 - - -
Accrued preferred stock
dividends - - - - - - 11,275
Options exercised through stock
surrender - - - 863,360 467,520
(13) Commitments
Purchased Services Effective April 6, 1994, Group 1 entered
a three-year contract with a supplier of computer time-sharing
services, which requires Group 1 to purchase all of its internal
IBM mainframe computer requirements, from this supplier. The
Agreement provides for a fixed monthly fee. Group 1's actual
costs of services with this vendor for the years ended March 31,
1996, 1995, and 1994 were $1,056,000, $1,017,000, and $1,245,000,
respectively.
Leasing Arrangements
The Company leases its office facilities and some of its
equipment under operating and capital lease arrangements, some of
which contain renewal options and escalation clauses for
operating expenses and inflation. The Company is obligated for
the following minimum operating and capital lease rental payments
that have initial and remaining non-cancelable lease terms in
excess of one year:
Operating Capital
1997 $ 2,294,950 $ 173,452
1998 2,076,540 74,786
1999 1,674,216 - - -
2000 and beyon d 7,041,188 - - -
----------- -----------
Total minimum lease payments $13,086,894 $ 248,238
Amount representing interest =========== (65,224)
-----------
Net minimum lease payments 183,014
Current portion of capital lease
obligations 121,557
----------- -----------
Long-term portion of capital lease
obligations $ 61,457
===========
The Company entered into capital lease transactions
aggregating $47,102 and $138,341, for the years ended 1996 and
1995, respectively. No transactions occurred in 1994. As of
March 31, 1996, the book value of assets recorded under capital
leases was $132,801.
Total rent expense, under operating leases for fiscal years
ended March 31, 1996, 1995 and 1994 was $2,462,000, $1,216,000,
and $1,158,000, respectively.
Acquisition Agreements
In October, 1993, Group 1 entered into an agreement with
Promark Software, Inc., a British Columbia corporation, to
acquire certain assets including title to all of Promark's
Canadian mail management PC software and certain related
technology. The agreement provides for a full payment of the
purchase price based only on a percentage of revenues over a
period of twenty-seven months. As of March 31, 1996, these fees
totaled $344,047 for the twenty-seven month period.
In June, 1994, Group 1 entered into an agreement with Post
Saver Systems, Inc., of Michigan, to acquire certain of its
assets including title to all of its postal discount and POSTNET
Barcoding products. Group 1 agreed to pay $710,000 over three
years, plus a percentage of Group 1's sales of these products if
sales exceed $1.5 million in the three years after closing. As
of March 31, 1996 no payment had been made under the latter
provision.
In December, 1994, Group 1 acquired all of the outstanding
shares of capital stock of Archetype Systems, for $400,000 cash
(net of cash acquired) plus a percentage of Archetype Systems'
sales of the Archetype products, if sales exceed 2,000,000 pounds
in a 12 month period after closing. On April 25, 1996, Group 1
paid an additional $372,019 cash under the latter provision. This
amount was included as an accrued liability at March 31, 1996 and
included in the goodwill valuation. The acquisition was
accounted for as a purchase and, accordingly, the purchase price
was allocated to the post closing assets and liabilities based on
their estimated fair values, resulting in $1,072,000 in goodwill,
which is included in other assets. The goodwill will be
amortized over a period not to exceed nine years. The assets
acquired and the liabilities assumed have been included in the
accompanying consolidated balance sheet. Archetype Systems has
changed its name to Group 1 Software Europe, Ltd. ("Group 1
Europe") and will continue its operations based in London,
England.
In August, 1995, Group 1 entered into a definitive agreement
with DataDesigns, Inc. of Las Vegas, Nevada to acquire cetairn
assets including title to all of its software products. Group 1
paid $484,000 in cash at closing and will pay a percentage of the
Group 1's sales of these products during the subsequent five
years.
In November, 1995, Group 1 entered into a definitive
agreement with Premier One Consultants, Inc. of Minneapolis,
Minnesota to acquire certain assets including title to all of its
software products. Group 1 paid $319,000 in cash at closing and
will pay a percentage of the Group 1's sales of these products
during the subsequent three years.
(14) Discontinued Operations
COM-MED Systems, a wholly-owned subsidiary of the Company,
provided the long-term health care industry with computer
software systems for management and operations support. As of
March 31, 1995, the Company sold the assets of COM-MED Systems
for up to $4,500,000, to be paid as a percentage of the acquiring
company's future revenues. Additionally, the Compay was issued
warrants to acquire up to 25% of the acquiring company's common
stock. In September, 1995 the acquiring company ceased
operations, whereupon the Company respossessed those assets and
sold them, in turn, to another entity for up to $4,500,000, to be
paid as a percentage of that company's future earnings.
Reserves in the amount of $108,000 have been established to
cover disposition cost and contingencies associated with the sale
of the assets. Any gain on the sale will be recognized as
payments are received. During fiscal year 1994, the Company
wrote off approximately $1,100,000 in capitalized software and
other assets relating to COM-MED Systems. The Company's
Consolidated Statements of Earnings have been restated to reflect
COM-MED Systems as a discontinued operation.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Directors and executive officers of the Company are as
follows:
Name Age Position
James V. Manning 49 Chairman of the Board of Directors
Robert S. Bowen 58 President, Chief Executive
Officer and Director
Ronald F. Friedman 52 President, Group 1 Software, Inc.
and Director
Charles A. Crew 53 Executive Vice President, Chief
Financial Officer, Treasurer and
Director
Edward Weiss 45 Secretary and General Counsel
Richard H. Eisenberg 58 Director
James Marden 42 Director
Charles A. Mele 39 Director
Charles J. Sindelar 59 Director
The Company knows of no family relationships between any of
the above.
The Board of Directors is divided into three classes. One-
third of the Directors will be elected annually, and Directors
serve until the annual meeting of stockholders three years
following their election and until their successors are elected
and qualified. The terms of Messrs. Bowen, Friedman and Crew
will expire at the next shareholder's meeting. The terms of
Messrs. Sindelar, Marden and Mele will expire in 1997. The terms
of Messrs. Eisenberg and Manning will expire in 1998. 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, President and Chief
Executive Officer of the Company for more than five years and a
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
and President and Chief Operating Officer and a Director of Group
1 and its predecessor, Group 1 Software Division of Group 1, for
more than five years.
Mr. Charles A. Crew has been a Director and Executive Vice
President, Chief Financial Officer of the Company for more than
five years and a Director and Chief Financial Officer of Group 1
for more than five years.
Mr. Edward Weiss has been Secretary and General Counsel of
the Company for more than five years. he has been Secretary and
General Counsel of Group 1 for more than five years.
Mr. Richard Eisenberg has been a Director of the Company
since February, 1994. Mr. Eisenberg has been 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 five years.
Mr. James Marden has been a Director of the Company since
1992. Mr. Marden is currently serving as 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 five years. He is also a Director of Group 1
Software, Inc.
Mr. Charles J. Sindelar has been a Director of the Company
since 1992. Mr. Sindelar has been Vice President
(and previously Staff Vice President), Business Development of
the Network Systems Division (and previously Corporate 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.
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.
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
Page Number
(a) 1. Financial Statements:
The following financial statements are
submitted in Item 8:
Report of Independent Accountants on
Financial Statements 18
Consolidated Balance Sheets as of March
31, 1996 and 1995 19
Consolidated Statements of Earnings for
the years ended March 31, 1996, 1995 and 20
1994
Consolidated Statements of Stockholders'
Equity for the years ended March 31, 1996, 21
1995 and 1994
Consolidated Statements of Cash Flows for
the years ended March 31, 1996, 1995 and 22
1994
Notes to Consolidated Financial Statements
for the years ended March 31, 1996, 1995 23 - 24
and 1994
2. Financial Statement Schedules
The following financial statement schedule is
filed as part of this report:
Report of Independent Accountants on
Financial Statement Schedule 43
Schedule II: Valuation and Qualifying
Accounts for the Years Ended March 31, 1996, 44
1995 and 1994
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.
3. Listing of Exhibits
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 Bylaws - Amended as of January 22, 1993.
3.04 Amendments to Certificate of Incorporation filed
January 22, 1993.
*3.05 Amendment to By-Laws.
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, 991).
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 Stock Option Agreement between the Company and Charles
A. Crew, dated as of August 16, 1991, (incorporated by
reference to Exhibit 4.58 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1991).
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.
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 Technology Purchase Agreement between COMNET
Corporation and Andy Bellinghieri - 1985, as amended
and restated in May, 1994, (incorporated by reference
to Exhibit 10.52 to The Company's Annual Report on
Form 10-K for the year ended March 31, 1991).
10.02 Revolving Line of Credit between The Company Software,
Inc. as Borrowers, and Signet Bank/Maryland as Lender,
dated November 9, 1989, (incorporated by reference to
Exhibit 10.88 to The Company's Annual Report on Form
10-K for the year ended March 31, 1991).
10.03 Employment Agreement between Ronald F. Friedman and
The Company Software, Inc. dated October 31, 1990,
(incorporated by reference to Exhibit 10.94 to The
Company's Annual Report on Form 10-K for the year
ended March 31, 1991).
10.04 Management and Services Agreement between The Company
Software, Inc. and COMNET Corporation dated April 1,
1994.
10.05 Tax Sharing Agreement among The Company 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
The Company 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 Amendment to the Management Services Agreement as of
August 1, 1991 by and between Computer Network
Systems, Inc. and COMNET Corporation, (incorporated
by reference to Exhibit 10.98 to The Company's
Quarterly Report on Form 10-Q for the quarter ended
September 31, 1991).
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).
10.08 Fee Agreement between The Company and James B.
Manning, dated as of January 28, 1992, (incorporated
by reference to Exhibit 10.100 to The Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1991).
10.09 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).
10.10 Fee Agreement between The Company and Ronald F.
Friedman, dated as of January 28, 1992, (incorporated
by reference to Exhibit 10.103 to The Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1991).
10.11 Indemnification Agreement between The Company and
James V. Manning, (incorporated by reference to
Exhibit 10.105 to The Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1991).
10.12 Indemnification Agreement between The Company and
James 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.)
10.13 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).
10.14 Indemnification Agreement between The Company and
Charles A. Crew, (incorporated by reference to Exhibit
10.109 to The Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1991).
10.15 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).
10.16 Stockholder Voting Agreement among Medco Containment
Services, Inc. andRobert S. Bowen, Charles A. Crew,
Ronald F. Friedman, Milton Kaplan,Perry E. Morrison,
Leonard J. Smith and John Spohler, dated as of January
28, 1992, (incorporated by reference to Exhibit 10.111
to The Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991).
10.17 Advisory Committee Agreement between The Company and
Leonard J. Smith, dated as of January 28, 1992,
(incorporated by reference to Exhibit 10.112 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991).
10.18 Advisory Committee Agreement between The Company and
Milton Kaplan, dated as of January 28, 1992,
(incorporated by reference to Exhibit 10.113 to The
Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991).
10.19 Advisory Committee Agreement between The Company and
Perry E. Morrison, dated as of January 28, 1992,
(incorporated by reference to Exhibit 10.114 to The
Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991).
10.20 Agreement between The Company and Robert S. Bowen,
dated as of January 23, 1992, (incorporated by
reference to Exhibit 10.115 to The Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1991).
10.21 Loan Agreement and three notes in the amount of
$78,334 each between The Company as Holder and Robert
S. Bowen as Maker, dated as of January 23, 1992,
(incorporated by reference to Exhibit 10.117 to The
Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991).
10.22 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).
10.23 Amended and Restated Employment Agreement between
Robert S. Bowen and The Company 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).
10.24 Indemnification Agreement, dated January 22, 1993,
between COMNET Corporation and Carl I. Kanter.
10.25 Loan Agreement, dated March 1, 1993, between COMNET
Corporation and Ronald F. Friedman.
10.26 Indemnification Agreement, dated February 24, 1992,
between COMNET Corporation and Charles A. Mele.
10.27 Indemnification Agreement between COMNET Corporation
and Charles Sindelar.
10.28 Lease covering Company office facilities in Lanham, MD
- 1993.
10.29 Letter of Intent between Group 1 Software, Inc. and
Archetype Systems, Ltd., dated as of April 15, 1994.
10.30 Agreement between Group 1 Software, Inc. and Archetype
Systems, Ltd. for acquisition of the entire share
capital of Archetype Systems, Ltd., dated as of
December 30, 1994.
10.31 Fourth Amendment to Employment Agreement, dated as of
March 1, 1994, by and between Group 1 Software, Inc.,
and Ronald F. Friedman.
10.32 Sublease, dated March 1, 1994, by and between COMNET
Corporation and Group 1 Software, Inc.
10.33 Agreement to Extend Management and Services Agreement,
dated April 1, 1994, by and between COMNET Corporation
and Group 1 Software, Inc.
10.34 Sales agreement for COM-MED Systems, Inc.
10.35 Letter of Agreement between Group 1 and MEDCOM
Acquisition Corporation, dated May 8, 1995.
10.36 Amended Letter of Agreement between Group 1 and MEDCOM
Acquisition Corporation, dated June 9, 1995.
10.37 Bill of Sale between Group 1 and MEDCOM Acquisition
Corporation, dated March 31, 1995, for the sale of
substantially all of the assets of COM-MED Systems,
Inc. and CMEDS, Inc.
10.38 Line of Credit between Group 1 and MEDCOM Acquisition
Corporation, dated March 31, 1995.
10.39 Fifth Amendment to Employment Agreement, dated as of
April 1, 1995, by and between Group 1 Software, Inc.
and Ronald F. Friedman
10.40 COMNET Corporation, Deferred Compensation Plan
10.41 COMNET Corporation, Deferred Compensation Plan
10.42 Definitive Agreement for purchase of assets of
DataDesigns, Inc., dated August 23, 1995
10.43 Definitive Agreement for purchase of assets of Premier
One Consultants, Inc., dated November 22, 1995
10.44 Agreement between Sidco, Inc., and CMEDS, Inc., dated
November 14, 1995
*10.45 Third Amendment to Lease, dated April 15, 1994, by and
between COMNET Corporation and Quadrangle Development
Corporation
*10.46 First Amendment to Sublease, dated April 15, 1994, by
and between COMNET Corporation and Group 1 Software,
Inc.
*11.0 Computation of earnings per share.
16.1 Change in Registrant's Independent Accountant on Form
8-K dated January 26, 1990, (incorporated by reference
to Exhibit 16.1 of Group 1's Quarterly Report on From
10-Q for the quarter ended June 30, 1991).
*22.0 Subsidiaries of COMNET Corporation.
*23.0 Consent of Independent Accountants.
_______________________________
* Filed herewith.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
_________________
To the Stockholders and
Board of Directors
COMNET Corporation
Our report on the consolidated financial statements of
COMNET Corporation and Subsidiaries is included elsewhere in this
Form 10-K. In connection with our audits of such financial
statements, we have also audited the related financial statement
schedule, as listed in the index to the financial statement
schedule of this Form 10-K.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
June 26, 1996
SCHEDULE II
COMNET Corporation
Valuation and Qualifying Accounts
For the Years Ended March 31, 1996, 1995, and 1994
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other Deductions at end
Description of Year Expenses Accounts of year
Describe
Year ended March 31,
1996
Allowance for
doubtful accounts $1,703,000 $1,617,637 $281,400 $(1,193,000) $2,409,000
Year ended March 31,
1995
Allowance for
doubtful accounts $2,634,000 $1,906,184 $ - - - $(2,837,184) $1,703,000
Year ended March 31,
1994
Allowance for
doubtful accounts $2,245,400 $2,427,765 $ - - - $(2,039,165) $2,634,000
The decrease in allowance for doubtful accounts is the
result of accounts receivable written-off during the year.
Fiscal year 1995 reflects receipt of payment for notes
receivable for sale of business assets that were previously
fully reserved.
Amounts charged to costs and expenses also includes
amounts from COM-MED Systems which is included in discontinued
operations in fiscal 1996, 1995 and 1994.
EXHIBIT 11
COMNET Corporation
Computation of Earnings Per Share
For the Years Ended March 31, 1996, 1995 and 1994
1996 1995 1994
Net earnings $2,831,537 $2,657,707 $1,775,668
Plus: Excess funding,
net 377,128 243,989 - - -
of income taxes
Less: Preferred stock
dividend (177,000) (177,000) (177,683)
---------- ---------- ----------
Primary earnings from (A)
continuing operations $3,031,665 $2,724,696 $1,597,985
========== ========== ==========
Preferred stock Dividend (177,000) (177,000) (177,683)
---------- ---------- ----------
Fully diluted earnings
from continuing (B) $3,208,665 $2,901,696 $1,775,668
operations
========== ========== ==========
Primary loss on
discontinued (C)
operations $ - - - $ (281,786) $(1,571,226)
========== ========== ==========
Fully diluted loss on
discontinued operations (D) $ - - - $ (281,786) $(1,571,226)
========== ========== ==========
Weighted average shares
outstanding 3,269,495 3,616,578 2,941,325
Weighted average shares
and
common equivalent
shares (E) 3,716,794 3,616,578 2,941,325
outstanding for primary
earnings per share
Additional equivalent
shares assuming full
dilution 147,500 147,500 147,500
---------- ---------- ----------
Weighted average shares
and common equivalent
shares outstanding for
fully diluted earnings
per share (F) 3,864,294 3,764,078 3,088,825
========== ========== ==========
Earnings per share
Primary
Continuing (A)/(E) $ 0.82 $ 0.76 $ 0.54
operations
Discountinued (C)/(E) $ - - - $ (0.08) $ (0.53)
operations
---------- ---------- ----------
Net earnings per common
share $ 0.82 $ 0.68 $ 0.01
========== ========== ==========
Fully Diluted
Continuing (B)/(F) $ 0.83 $ 0.76 $ 0.57
operations
Discountinued (D)/(F) $ - - - $ (0.08) $ (0.56)
operations
---------- ---------- ----------
Net earnings per common
share $ 0.83 $ 0.68 $ 0.01
========== ========== ==========
Common stock equivalents are antidilutive in the period.
Exhibit 22. Subsidiaries of COMNET Corporation
Group 1 Software, Inc., a Delaware corporation
Seanet, Inc., a Delaware corporation
PROM-CO, Inc., a Delaware corporation
ADMS, Inc., a Delaware Corporation
CONSENT OF INDEPENDENT ACCOUNTANTS
_______________
We consent to the incorporation by reference in the
registration statement of COMNET Corporation on Form S-8 (File
No. 2-62254) of our reports, dated June 26, 1996, on our audits
of the consolidated financial statements and financial statement
schedule of COMNET Corporation and Subsidiaries as of March 31,
1996 and 1995 and for each of the three years in the period ended
March 31, 1996, which reports are included in this Annual Report
on Form 10-K.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
June 28, 1996
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.
COMNET CORPORATION
(Registrant)
Date: June 28, 1996 By: /s/ Robert S. Bowen
_______________________________
Robert S. Bowen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ Robert S. Bowen President, Chief Executive June 28, 1996
Officer and Director
(Principal Executive Officer)
/s/ Charles A. Crew Executive Vice President June 28, 1996
Chief Financial Officer
Treasurer and Director
/s/ Ronald F. Friedman President, Chief Operating June 28, 1996
Officer Group 1 Software,
Inc., and Director
/s/ James V. Manning Chairman of the Board June 28, 1996
/s/ Charles J. Sindelar Director June 28, 1996
/s/ James Marden Director June 28, 1996
/s/ Charles A. Mele Director
/s/ Richard H. Eisenberg Director June 28, 1996
Index of Exhibits
PAGE
NUMBER
*4.14 1995 Incentive Stock Option, Non-Qualified
Stock Option and Stock Appreciation Unit Plan
4.15 1995 Non-Employee Directors' Stock Option
Plan
10.45 Third Amendment to Lease, dated April 15,
1996, by and between COMNET Corporation and
Quadrangle Development Corporation
10.46 First Amendment to Sublease, dated April 15,
1996, by and between COMNET Corporation and
Group 1 Software, Inc.
11.0 Computation of earnings per share. 45
22. Subsidiaries of COMNET Corporation. 46
23. Consent of Independent Accountants. 47
EXHIBIT 4.14
COMNET CORPORATION
INCENTIVE STOCK OPTION,
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION UNIT PLAN
COMNET CORPORATION, a Delaware corporation (hereinafter
referred to as the "Company"), adopted and established a non-
qualified stock option and stock appreciation incentive unit plan
(the "Plan") for its officers and other key employees (whether
full-time or otherwise) effective as of September 12, 1995, the
date it was approved by the Company's shareholders at their
annual meeting.
The provisions of the Plan are set forth below:
SECTION ONE
DESIGNATION AND PURPOSE OF THE PLAN
A. Designation. This document is designated the "COMNET
CORPORATION INCENTIVE STOCK OPTION, NON-QUALIFIED STOCK OPTION
AND STOCK APPRECIATION UNIT PLAN" (hereinafter referred to as the
"Plan").
B. Purpose. The purpose of the Plan is to advance the
growth and development of the Company by affording an opportunity
to the officers and other employees (whether full-time or
othvest in shares of
the Company's Stock and/or to receive a cash or Stock
distribution representing increases in the value of the Company's
Stock. The acquisition of such Stock by such employees and/or
the payment of cash distributions to such employees, who
contribute to responsible for the Company's success, provides a
continuing incentive for them to promote the best interests of
the Company and induces them to continue their employment with
the Company or a Subsidiary. Finally, the Plan will enable the
Company or a Subsidiary to attract competent personnel to enter
its employ.
SECTION TWO
DEFINITIONS
The following definitions shall be applicable to the terms
used in the Plan:
A. "Code" means the Internal Revenue Code of 1986, as
presently in effect or as hereafter amended.
B. "Committee" means the Compensation Committee appointed
to administer the Plan pursuant to Section Four.
C. "Company" means COMNET Corporation, a Delaware
corporation.
D. "Eligible Individual" means any officer or other key
employee (whether full-time or otherwise) of the Company or a
Subsidiary. Options and Stock Units may be granted under the
Plan only to such officers and other key employees (whether full-
time or otherwise) of the Company or a Subsidiary.
E. "Incentive Stock Option" shall mean an option granted
under this Plan that meets the requirements of Code Section 422.
F. "Incentive Stock Option Plan" shall mean that part of
the Plan the provisions of which are specifically designated as
relating solely to Incentive Stock Options as well as those
provisions of the Plan which relate to Options generally or to
both Options and Stock Units.
G. "Non-Qualified Stock Option" means any options granted
under the Plan that are not Incentive Stock Options.
H. "Non-Qualified Stock Option Plan" shall mean that part
of the Plan the provisions of which are specifically designated
as relating solely to Non-Qualified Stock Options as well as
those provisions of the Plan which relate to Options generally or
to both Options and Stock Units.
I. "Option" shall mean an Incentive Stock Option and a Non-
Qualified Stock Option granted under this Plan to purchase
authorized but unissued or treasury shares of the Company's
Stock.
J. "Participant" means any Eligible Individual who is
granted an Option or Stock Unit as provided in this Plan, and
shall also mean the successor in interest, if any, of a deceased
Eligible Individual.
K. "Plan" shall mean the COMNET Corporation Incentive Stock
Option, Non-Qualified Stock Option and Stock Appreciation Unit
Plan as set forth in this document, and as hereafter amended, the
provisions of which, unless otherwise designated, form a part of
each of the incentive Stock Options Plan, the Non-Qualified Stock
Option Plan, and the Stock Appreciation Unit Plan.
L. "Redemption Date" for a Stock Unit shall be the earlier
of (i) the date so designated in the written instrument granting
the Stock Unit, which shall in no event be earlier than the first
anniversary of the date of grant of the Stock Unit (except as
otherwise expressly provided herein) nor later than the tenth
anniversary of the date of grant of the Stock Unit; (ii) the date
of the death of the Participant to whom the Stock Unit was
granted; or (iii) the date which is the first day of the sixth
month following the termination of employment of the Participant
to whom the Stock Unit was granted if such termination of
employment is due to "total disability" of the Participant. If
the termination of employment is due to any other cause which the
Committee, in its sole discretion, determines should permit a
redemption rather than a forfeiture of outstanding vested Stock
Units, the redemption rules of Section Twelve A shall apply.
M. "Stock" means the Common Stock of the Company.
N. "Stock Appreciation Unit Plan" shall mean that part of
the Plan the provisions of which are specifically designated as
relating solely to Stock Units as well as those provisions of the
Plan which relate to both Stock Units and Options.
O. "Stock Unit" means a stock appreciation incentive unit
granted to a Participant by the Committee under this Plan.
P. "Subsidiary" shall mean an affiliate controlled by the
Company, directly or indirectly, through one or more
intermediaries, subject to Section Twelve(A)(vi), below.
Q. "Vesting Date" for a Stock Unit shall mean the date or
dates upon which all or any portion of the Stock Units shall
become nonforfeitable in the event of the subsequent
total disability or death of the participant or in the event of
the termination of employment of the Participant for other causes
approved by the Committee.
R. Wherever appropriate, words used in this Plan in the
singular may mean the plural, the plural may mean the singular,
and the masculine may mean the feminine or neuter.
SECTION THREE
STOCK SUBJECT TO STOCK OPTIONS AND STOCK UNITS
Subject to the adjustment provided in Section Ten, the total
number of shares of Stock which may be delivered to all
participants upon the exercise of all Options granted under this
Plan, shall not exceed 600,000 and the total number of shares of
Stock which may be so issued may be increased only by a
resolution adopted by the Board of Directors of the Company and
approved by the stockholders of the Company. Shares delivered
under this Plan upon the exercise of an Option shall be fully
paid and non-assessable. Subject to the adjustment provided in
Section Ten, the total number of Stock Units which may be issued
by the Committee to all Participants under this Plan shall not
exceed 100,000 and the total of such Stock Units may be increased
only by a resolution adopted by the Board of Directors of the
Company and approved by the stockholders of the Company. Such
Stock may either be authorized and unissued or treasury stock.
Subject to the adjustment provided in Section Ten, the total
number of Shares of Stock which may be issued by the Committee in
redemption of Stock Units to all Participants under the Plan
shall not exceed 75,000 shares and the total number of shares of
Stock which may be so issued may be increased only by a
resolution adopted by the Board of Directors of the Company and
approved by the stockholders of the Company.
SECTION FOUR
ADMINISTRATION OF THE PLAN
A. Appointment of Committee. The Board of Directors shall
appoint a Compensation Committee (the "Committee") which shall
consist of not less than three (3) members of such Board of
Directors, none of whom is, or has been during the one (1) year
period prior to his appointment, an Eligible Individual, who
shall not be eligible during the period of service on the
Committee. In addition, the Board of Directors may designate a
member of the Committee to act as Chairman of the Committee. The
Board of Directors, in its sole discretion, may at any time,
remove any member of the Committee and appoint a director to fill
any vacancy on the Committee. No individual may participate as a
member of the Committee in the administration of this Plan if he
shall have been eligible to receive a grant of an award of any
options or stock appreciation rights of the Company or any of its
affiliates (as that term is used in SEC Rule 16b-3) under this
Plan or any other discre- tionary plan of the Company or its
affiliates (as that term is used in SEC Rule 16b-3) at any time
within one year prior to serving on the Committee.
B. Committee Meetings. The Committee shall hold its
meetings at such times and places as are specified by the
Committee. A majority of the Committee shall constitute a
quorum. All actions of the Committee shall be taken by a
majority of a quorum present at the meeting duly called by any
member of the Committee; provided, however, that any action taken
by a written document signed by a majority of the Committee
members shall be as effective as actions taken by the Committee
at a meeting duly called and held.
C. Committee Powers. Subject to the terms and provisions
of this Plan, the Committee shall have full power and authority
to (i) designate the Eligible Individuals to whom Options or
Stock Units shall be granted, (ii) determine the number of
Options and/or Stock Units to be granted to each Participant,
(iii) determine the Redemption Date of any Stock Units and the
Vesting Date for any Stock Units, (iv) determine whether a vested
Stock Unit shall be redeemed for cash or for Stock or for a
combination of cash and Stock, (v) determine the purchase price
to be paid for each share of Stock deliverable upon the exercise
of any Options, which shall be at least equal to the fair market
value of a share of Stock at the time the Option is granted, (vi)
determine the period during which an Option may be exercised,
which period may not (except as otherwise expressly provided
herein commence prior to the first anniversary of the date of
grant of the Options nor extend beyond the tenth anniversary of
the date of grant of the Options, (vii) establish the provisions
of Non-Qualified Options to avoid such Options being deemed to
constitute incentive stock options under Section 422 of the Code
and regulations thereunder, including but not limited to
extending the terms of Non-Qualified Options to a term not to
exceed ten years and seven days and (viii) determine any other
conditions to which the exercise of an Option shall be subject,
including, subject to the provisions of Section Twelve, the
effect upon an Option of the termination of employment or death
of a Participant. The Committee shall have all rights, powers
and authority necessary or appropriate to administer this Plan in
accordance with its terms, including, without limitation, the
power to make binding interpretations of this Plan and to resolve
all questions (whether express or implied) arising thereunder.
The Committee may prescribe such rules and regulations for
administering this Plan as the Access EDGAR E-Mail and Bulletin Board
neccessary or appropriate.
SECTION FIVE
SELECTION OF PARTICIPANTS
In determining which Eligible Individuals shall be granted
Options and/or Stock Units, the Committee shall evaluate, inter
alia, (i) the duties and responsibilities of the Eligible
Individuals, (ii) their past and prospective contributions to the
success of the Company, (iii) the extent to which they are
performing and will continue to perform valuable services for the
benefit of the Company, and (iv) such other factors as the
Committee deems relevant.
SECTION SIX
ISSUANCE OF OPTIONS AND STOCK UNITS
A. Form of Options and Stock Units. Subject to the
provisions of this Plan, each group of Options and/or Stock Units
granted to a Participant shall be set forth in a written
instrument upon such terms and conditions as the Committee
determines. The Redemption Date of any Stock Unit and the
Vesting Date of any Stock Unit shall be set forth in such written
instrument. Each such instrument shall incorporate the
provisions of this Plan by reference.
B. Date of Grant of Stock Units and Options. The date of
grant for a Stock Unit shall be the date on which the Stock Unit
instrument was issued to the Participant and for an Option shall
be the date such options were granted by the Committee.
C. Delivery of Shares on Exercise of Option. Except as
otherwise expressly provided herein, no Option may be exercised
prior to the first anniversary of the date of grant of the
Option. Upon exercise of any Option, or any portion thereof, the
Committee shall deliver to the Participant such number of shares
of Stock as the Participant elects to purchase, as soon as
practicable after the Committee receives (i) written notice of
such exercise under and pursuant to the terms and conditions of
the applicable Option document and (ii) the full purchase price
for such shares which shall be paid in cash or shares of stock,
or a combination thereof. The Participant shall be entitled to
pyramid the shares received upon exercise of Options by
simultaneously delivering such shares of stock in payment of the
purchase price of shares subject to additional Options; any share
delivered in payment of the exercise price must have been held of
record by the Optionee for a least six months or such other
period as may be required to avoid any adverse effect on the
financial position of the Company or a Subsidiary as a result of
incurring compensation expense or otherwise. Such shares, which
shall be fully paid and non-assessable upon the issuance thereof,
shall be represented by a certificate or certificates registered
in the name of the Participant and stamped with any appropriate
legend.
SECTION SEVEN
VESTING AND REDEMPTION OF STOCK UNITS
A. Vesting. The amount to be paid in redemption of any
Stock Unit as of the Redemption Date of such Stock Unit shall be
equal to the percentage of the "Stock Unit Value" of the Stock
Unit in which the Participant has a vested interest as of the
Redemption Date. The Committee may, in its discretion, issue
Stock Units to a participant in which the Participant has an
immediate fully vested interest or may impose such vesting
requirements, expressed in terms of years of continuous
employment with the Company and/or a Subsidiary, as the
Committee, in its sole discretion, may determine is appropriate
in any given situation.
B. Stock Unit Value. The "Stock Unit Value" of a Stock
Unit shall be determined as of the Redemption Date of the Stock
Unit and shall consist of the appreciation, if any, in the value
of one share of Stock of the Company, between (i) the value of
one share of the Company's Stock as of the date of grant of the
Stock Unit, and (ii) the value of one share of Stock of the
Company as of the Redemption Date of such Stock Unit.
C. Payment of Stock Unit Value. Each Stock Unit granted to
a Participant which has become vested shall be redeemed by the
Committee on the Redemption Date of such Stock Unit. The "Stock
Unit Value" of the Stock Unit shall be paid to the Participant in
cash, in Stock or in a combination of cash and Stock as soon as
is practicable after the Redemption Date, at the discretion of
the Committee. To the extent that payment of the Stock Unit
Value is made in shares of Stock, the value of the Company's
Stock as of the Redemption Date shall be used in determining the
number of shares of Stock to be received by the Participant. Any
shares of stock received by a Participant upon exercise of a
Stock Unit shall be non-transferable until a period of at least
six months has elapsed since the date of the grant of such Stock
Unit.
SECTION EIGHT
NON-TRANSFERABILITY OF OPTIONS AND STOCK UNITS
Any Option or Stock Unit granted to an Eligible Individual
may not be sold, exchanged, assigned, pledged, discounted,
hypothecated or otherwise transferred except by will or by the
laws of descent and distribution. During the lifetime of the
Eligible Individual to whom an Option or Stock Unit is issued,
such Option or Stock Unit may be exercised only by the Eligible
Individual to whom it was issued or his representative. Upon any
attempt to so sell, transfer, assign, pledge, discount,
hypothecate or otherwise transfer any Option or Stock Unit, or
any right thereunder, contrary to the provisions hereof, such
Option of Stock Unit and all rights thereunder shall immediately
become null and void.
SECTION NINE
COMPLIANCE WITH SECURITIES LAWS
Unless a registration statement under the Securities Act of
1933 is then in effect with respect to the Stock a Participant
receives upon the exercise of an Option or the redemption of a
Stock Unit the Committee, in its discretion, may require, at the
time that a Participant so receives such Stock, that the
Participant agrees in writing to acquire any such Stock he may so
receive for investment and not for distribution, or to consent to
such other agreement as the Committee, in its discretion, may
deem to be necessary to comply with the requirements of the
Securities Act of 1933 or any applicable state securities laws.
A reference to any such agreement shall be inscribed on the Stock
certificate(s). Each Option shall be subject to the requirement
that, if at any time the Committee determines, in its discretion,
that the listing, registration or qualification of the shares of
Stock subject to the Option upon any securities exchange or under
any state or federal law, or the consent or approval of any
governmental regulatory body, is necessary or desirable as a
condition of, or in connection with, the issuance or purchase of
shares thereunder, the Option may not be exercised in whole or in
part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained and the same shall
have been free of any conditions not acceptable to the Committee.
SECTION TEN
CHANGES IN CAPITAL STRUCTURE OF COMPANY
In the event of the splitting or consolidation of shares of
Stock of the Company, the payment of a stock dividend by the
Company or a similar transaction, the number of shares of Stock
specified in Section Three of this Plan, the number each outstanding
Stock Unit shall be based and the value per share and the number and
price per share of shares subject to then outstanding Options shall be
proportionately adjusted.
SECTION ELEVEN
REORGANIZATION, DISSOLUTION, LIQUIDATION
CHANGE OF CONTROL OR SIMILAR EVENT
A. Treatment of Options. In the event of an occurrence of
any of the following events and upon approval of the Committee:
(i) the commencement of a bona fide "tender offer"
acceptable to the Company's Board for the shares of the Company
as provided under Rule 14d-2 promulgated under the Federal
Securities Exchange Act of 1934, as amended, or any subsequent
comparable Federal rule or regulation governing tender offers;
(ii) a successful tender offer not previously approved
by the Company's Board of Directors resulting in a change of
control of the Board;
(iii) the Company's execution of an agreement
concerning the sale of substantially all of its assets (other
than to a subsidiary in a mere corporate restructuring);
(iv) the Company's adoption of a plan of dissolution
or liquidation; or
(v) the Company's execution of an agreement concerning
a merger or consolidation involving the Company in which the
Company is not the surviving corporation or if, immediately
following such merger or consolidation, less than fifty percent
(50%) of the surviving corporation's outstanding voting stock is
held by persons who were shareholders of the Company immediately
prior to such merger or consolidation; each Participant shall
have the right, immediately following such occurrence, to
exercise his or her Option in full to the extent not theretofore
exercised regardless of any provision herein or any provision in
the Option contract providing for the deferment of the vesting or
exercise thereof.
The Participant shall be entitled to exercise the options
regardless of whether the tender offer (described in subsection
A(i), directly above), is successful, regardless of whether the
dissolution or liquidation is consummated, and regardless of
whether the other corporation which is the surviving corporation
in a merger or consolidation shall adopt and maintain any plan
under which options are granted to the Participant. In the event
the agreement concerning the sale of substantially all of its
assets or the agreement concerning a merger or consolidation is
not consummated by the parties, then the Options not exercised
prior to the formal determination by the Board that the
contemplated transaction will not be consummated shall on and
after the date of such determination again be subject to the
exercise restrictions set forth in the Option agreement. In the
case of a merger, consolidation, reorganization,
reclassification, sale of assets or similar event, all
outstanding Options shall pertain to the securities or other
property to which a holder of the number of shares of Stock
covered by the Option would have been entitled to receive in
connection with such event, and in the case of any other event
specified herein, each outstanding Option shall remain
outstanding and exercisable in accordance with its terms.
B. Treatment of Stock Units. In the event of an occurrence
of any of the following events and upon approval of the
Committee:
(i) the commencement of a bona fide "tender offer"
acceptable to the Company's Board for the shares of the Company
as provided under Rule 14d-2 promulgated under the Federal
Securities Exchange Act of 1934, as amended, or any subsequent
comparable Federal rule or regulation governing tender offers;
(ii) a successful tender offer not previously approved
by the Company's Board of Directors resulting in a change of
control of the Board;
(iii) the Company's execution of an agreement
concerning the sale of substantially all of its assets (other
than to a subsidiary in a mere corporate restructuring);
(iv) the Company's adoption of a plan of dissolution
or liquidation; or
(v) the Company's execution of an agreement concerning
a merger or consolidation involving the Company in which the
Company is not the surviving corporation or if, immediately
following such merger or consolidation, less than fifty percent
(50%) of the surviving corporation's outstanding voting stock is
held by persons who were shareholders of the Company immediately
prior to such merger or consolidation; the Redemption Date with
respect to all Stock Units theretofore granted hereunder and
outstanding at that time shall be the date of such event,
regardless of any provision
herein or any provision in the Stock Unit contract providing for
the deferment of the vesting or redemption of any provision
herein or any provision in the Stock Unit contract providing for
the deferment of the vesting or redemption thereof.
The Participant shall be entitled to require redemption (the
"Redemption Date") of the Stock Units regardless of whether the
tender offer is successful, regardless of whether the dissolution
or liquidation is consummated, and regardless of whether the
other corporation which is the surviving corporation in a merger
or consolidation shall adopt and maintain any plan under which
Stock Units are granted to the Participant. In the event the
agreement concerning the sale of substantially all of its assets
or the agreement concerning a merger or consolidation is not
consummated by the parties, then the Stock Units not exercised
prior to the formal determination by the Board that the
contemplated transaction will not be consummated shall on and
after the date of such determination again be subject to the
vesting restrictions set forth in the Option agreement.
In the case of a merger, consolidation, reorganization,
reclassification, sale of assets or similar event, the Stock Unit
Value of any Stock Unit upon the redemption of such Stock Unit
shall be determined on the basis of the difference, if any,
between (i) the value of a single share of the Company's Stock as
of the date of grant of such Stock Unit, and (ii) the current
value, as of the Redemption Date of such Stock Unit, of the
shares of stock or other securities into which a single share of
the Company's Stock would have been converted on the date of such
reclassification, consolidation, merger, reorganization, sale of
assets or other similar event.
SECTION TWELVE
TERMINATION OF EMPLOYMENT
A. Severance.
(i) Stock Units - Termination of Employment. In the
event that a Participant's employment with the Company or a
Subsidiary terminates for any reason, other than due to his death
or "total disability," any Stock Unit granted to him will be
forfeited, whether or not such Stock Unit had been vested, unless
the Committee, in its sole discretion, decides to authorize the
redemption of the Stock Unit, to the extent then vested. If the
Committee so decides to redeem the Stock Unit, it shall be
redeemed as of the third business day following the next date on
which quarterly and/or annual summary statements of sales and
sales earnings of the Company are released for publication on a
wire service, in a financial news service, in a newspaper of
general publication or are otherwise made publicly available.
(ii) Stock Units - Total Disability. In the event
that a Participant's employment with the Company or a Subsidiary
is terminated due to his incurring a "total disability", any
Stock Units granted to him will be redeemed, to the extent then
vested, upon the expiration of six months following the date of
tll be permitted to retireability".
(iii) Options - Termination of Employment. In the
event that a Participant's employment with the Company or a
Subsidiary terminates for any reason, other than due to his death
or "total disability", any Option granted to such Participant
will expire in accordance with the provisions of the Options
document dealing with the effect of a termination of employment.
Such provisions must provide for an expiration of the Option not
later than six months after the date of such termination.
Notwithstanding the foregoing, in the event that the
Participant's employment is terminated for cause any Option
granted to him shall be revoked as of the date his employment
terminates. Notwithstanding any other provisions of this Plan,
no payment under any Stock Unit or issuance of any Stock pursuant
to any Option or Stock Unit shall be made and all rights of the
Participant who received such Option or Stock Unit (or his
designated beneficiary or legal representatives) under this Plan
shall be forfeited if, prior to the time of such payment or
issuance, the Participant (1) shall be employed without the
Company's or affiliate's consent by a competitor of, or shall be
engaged in any activity in competition with, the Company or an
affiliate; (2) divulges without the consent of the Company any
secret or confidential information belonging to the Company or an
affiliate; (3) has been dishonest or fraudulent in any matter
affecting the Company or (4) has committed any act which, in the
sole judgment of the Committee, has been substantially
detrimental to the interests of the Company. The Company shall
give a Participant written notice of the occurrence of any such
event (described in the foregoing clauses (1) - (4)) prior to
making any such forfeiture. The determination of the Committee
as to the occurrence of any of the events specified in the
foregoing clauses (1)-(4) of this Section 11 shall be conclusive
and binding upon all persons for all purposes. Any Award shall
be subject to forfeiture for the reasons provided in this Section
in such manner as shall be provided by the Committee.
(iv) Options - Total Disability. In the event that a
Participant's employment with the Company or a Subsidiary is
terminated due to his incurring a "total disability," any Option
granted to such Participant will expire twelve months after the
date of such termination.
(v) Definition of "Total Disability". For purposes of
this Section Twelve, a Participant is totally disabled if he is
unable to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which
can be expected to result in death or which has lasted or can be
expected to last for a continuous period of not less than 12
months.
(vi) Definition of "Subsidiary". For purposes of this
Section Twelve, a Participant's employer shall continue to be
deemed a Subsidiary notwithstanding that such entity is no longer
directly or indirectly controlled by the Company and therefore no
longer a Subsidiary, provided that the Participant's employer was
a Subsidiary at the time the Options or Stock Units were granted
to such Participant.
B. Death. If a Participant dies while in the employ of
the Company or a Subsidiary, his vested Stock Units will be
redeemed as soon as is practicable after his death and the
proceeds of such redemption shall be paid over to the executor or
administrator of the estate of the Participant or to the person
to whom the Stock Units shall pass by will or by the laws of
descent and distribution. If a Participant dies while in the
employ of the Company or a Subsidiary, any Option may provide
that it can be exercisable not later than six months after his
death by the executor or administrator of the estate of the
Participant or by the person to whom the Option shall pass by
will or by the laws of descent and distribution, but only to the
extent the Participant was entitled to exercise the Options as of
the date of his death.
SECTION THIRTEEN
PARTICIPANT'S RIGHTS AS A HOLDER OF SHARES
A Participant has no rights as a stockholder with respect to
any shares of Stock paid in redemption of any Stock Units or
acquired pursuant to the exercise of an Option until the date a
certificate is issued to him for such shares. Except as
otherwise provided in Section Ten of this Plan, no adjustment
shall be made for dividends or other rights for which the record
date occurs prior to the date such stock certificate is issued.
SECTION FOURTEEN
AMENDMENTS TO THE PLAN
The Board of Directors of the Company may amend or terminate
this Plan at any time; provided, however, that (i) any such
amendment or termination shall not adversely affect the rights of
Participants under Options or Stock Units granted prior thereto;
and (ii) any amendment which increases the total number of
Options, Stock Units or shares of Stock covered by this Plan,
changes the definition of Eligible Individual, changes the
criteria for becoming a member of the Compensation Committee or
any other material change to this Plan shall be subject to
obtaining the approval thereof by the Company's stockholders.
Notwithstanding the foregoing, this Plan shall not be amended
more than once every six months, other than to comport with
changes in the, the Code, the Employee Retirement Income Security
Act of 1974, as amended or the rules thereunder.
SECTION FIFTEEN
EFFECTIVE AND EXPIRATION DATES OF THE PLAN
This Plan shall be effective on September 12, 1995, after
approval of it by the Company's shareholders. No Option shall be
granted after September 10, 2005.
SECTION SIXTEEN
INCENTIVE STOCK OPTIONS PROVISIONS
The provisions of this Section Sixteen shall apply only to
Incentive Stock Options.
A. Over Ten-Percent Shareholders. Incentive Stock Options
shall not be issued to individuals then owning more than ten
percent (10%) of the total combined voting power of all classes
of stock of the Company or any parent or subsidiary of the Company.
B. Limit. Incentive Stock Options shall not be granted which
will cause the aggregate fair market value (determined at the time
each Option is granted) of the Stock for which options are granted
to any Eligible Individual under all incentive stock option plans
of the Company during the calendar year to exceed $100,000 plus
the "unused limit carry-over" referred to in Section 422 (b) (8) of
the Internal Revenue Code of 1954.
EXIBIT B
COMNET CORPORATION
1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
1. Definitions. The terms below shall be defined as indicated.
1.1 Administrator means the Board or any executive officer or
officers of the Company designated by the Board.
1.2 Board means the Board of Directors of the Company, including
any directors who may be Optionees.
1.3 Change in Control means the occurrence of and of the
following:
(i) Any "person," as defined in Section 3(a)(9) of the Exchange
Act and as used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) of the Exchange Act (but
excluding the Company and any successor to the Company which became
a successor of the Company Change in Connected. Change in Control,
any Subsidiary and any employee benefit plan sponsored or maintained
by the Company or any Subsidiary and any employee benefit plan
sponsored or maintained by the Company or any Subsidiary,
including any trustee of any such plan acting as trustee),
becomes directly or indirectly the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act) of, or makes an offer to
purchase, securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding
securities with respect to election of directors.
(ii) During any period of 12 consecutive months during the existence
of the Plan, the individuals who, at the beginning of such period,
constitute the Board ( the "Incumbent Directors") cease for any
reason other than death to constitute at least a majority thereof;
provided, however, that a director who was not a director at the
beginning of such 12-month period shall be deemed to have
satisfied such requirement and be an Incumbent Director if such
director was elected by, or on the recommendation of or with
the approval of, at least two-thirds of the directors of the
Company who then qualified as Incumbent Directors either because
they were directors at the beginnning of such 12-month period or
by operation of this clause. (ii).
(iii) The stockholders of the Company approve a merger or consolidation
of the Company or a reclassification of its voting stock without the
consent or approval of a majority of the Incumbent Directors.
(iv) The stockholders of the Company approve a sale or other
disposition of all or substantially all of the Company's assets.
(v) The stockholders of the Company approve or adopt a plan of
liquidation, dissolution or winding up.
1.4 Code means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute thereof.
1.5 Common Stock means the Company's common stock, par value
$.50, subject to the provisions of Section 9.
1.6 Company means COMNET Corporation, a Delaware corporation,
and any successor corporation which adopts the Plan.
1.7 Exchange Act means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute thereof.
1.8 Fair Market Value means, on a specified date, the last sales
price of a Share traded on the over-the counter market, as
reported on the NASDAQ National Market System, or the last
closing price for a Share on the stock exchange, if any, on
which Shares are primarily traded (or if no Shares were traded
on such date, then on the last previous date on which any Shares
were so traded), or if none of the above is applicable, the
value of a Share for such date as established by a nationally
recongnized appraisal firm or investment bank, using any
reasonable method of valuation.
1.9 Non-Employee Director means a director of the Company who is
not an officer or employee of the Company or any subsidiary.
1.10 Option means an option to purchase Shares granted by the
Company pursuant to the Plan.
1.11 Option Agreement means a written agreement as described in
Section 7 between the Company and the Optionee evidencing an
option.
1.12 Option Period means the period from the date of the
granting of an Option to the date on which that Option
terminates pursuant to Section 5.2 hereof.
1.13 Option Price means the price to be paid for the Shares
purchased pursuant to an Option.
1.14 Optionee means any person who is granted an Option under the Plan.
1.15 Plan means the Company's 1995 Non-Employee Directors' Stock
Option Plan, as adopted by the Board in substantially the form
set forth herein and as the same may be amended or otherwise
modified from time to time.
1.16 Shares means shares of Common Stock.
1.17 Subsidiary means a subsidiary of the Company as defined under
section 424 of the Code.
2. Purpose; Construction.
2.1 The Plan is intended to encourage ownership of Common Stock
by directors of the Company, upon whose judgment and interest
the Company is dependent for its successful operation and
growth, in order to increase their proprietary interest in
the Company's success and to encourage them to serve as
directors of the Company.
2.2 The Plan is intended to comply with the terms and provisions
of Rule 16b-3 promulgated under the Exchange Act. Any provision
of the Plan or any option Agreement inconsistent with the terms
of such Rule in effect on such date shall be inoperative and
shall not affect the validity of the Plan, such Option Agreement
or any other provision thereof.
3. Administration and Interpretation. The terms and conditions
under which options shall be granted under the Plan are set
forth in Section 5. Subject to the provisions of Section 12,
the Administrator shall have authority to interpret the
provisions of the Plan, to establish such rules and procedures
as may be necessary or advisable to administer the Plan and to
make all determinations necessary or advisable for the
administration of the Plan; provided, however, that no such
interpretation or determination shall change or affect the
selection of participants eligible to receive grants under the
Plan, the number of shares covered by or the timing of any
grant of Options under the Plan or the terms and conditions
thereof. The interpretation and construction by the
Administrator of any provision of the Plan or of any Option
Agreement shall be final and conclusive.
4. Eligible Persons. Options shall be granted pursuant to the
provisions hereof to persons who are Non-Employee Directors
at the time of grant.
5. Grant of Options.
5.1 Procedure. Subject to the provisions of Section 8.1 limiting
the maximum number of Shares subject to purchase under Options,
(a) each Non-Employee Director whose initial term commences
after the date of adoption of the Plan by the Board shall be
granted an option as of the date such director is first elected
to the Board of Directors to purchase 5,000 Shares, and (b) on
the first day of each fiscal year of the Company, each
Non-Employee Director (including Non-Employee Directors whose
initial terms co 5,000 Shares. Each such Option shall become
exercisable as to 20% of the Shares covered thereby on each of
the first five successive anniversaries of the date of grant;
provided, however, that upon the occurrence of a Change in
Control any portion of each such Option not then exercisable
shall immediately and automatically (without notice) become
fully exercisable. The Option Price for each option shall be
the Fair Market Value of a Share on the date of grant. No
Option shall be granteed unthing to the contrary contained
herein, in no event shall any option be exercisable following
the fifteenth anniversary of the date of grant.
5.3 Additional Grants. Nothing contained in the Plan shall be
construed to preclude the granting of an Option or Options
pursuant to Section 5.1 to an Optionee in addition to an Option
or options for the purchase of Shares already held by that
Optionee or the granting of more than one option pursuant to
Section 5.1 to an Optionee at the same time.
5.4 Subject to Exchange Rules. Any and all grants of Options
shall be subject to all applicable rules and regulations of
any exchange on which the Company's Common Stock may then be
listed.
6. Effective and Expiration Dates of Plan. The Plan shall be
effective on September 12, 1995, after approval by the
Company's stockholders at the 1995 annual meeting of
stockholders. No Option shall be granted after September
10, 2005.
7. Option Agreements. Option Agreements shall be in such form as
the Administrator shall approve or determine; provided, however,
that all Option Agreements shall comply with and be subject to
the following terms and conditions.
7.1 Manner, Time, and Medium and Payment. An Option shall be
execised in the manner set forth in the Option Agreement relating
thereto and payment in full of the Option Price for all Shares
shall be made at the time of exercise. Payment shall be in
United States dollars in the form of cash, certified check or bank
draft, or by delivery of fully paid Shares valued at their Fair
Market Value on the date of exercise, or, if the Option
Agreement so provides (subject to compliance with any applicable
rules promulgated under Section 16 of the Exchange Act requiring
elections to be made six months in advance or during a window
period or as may otherwise hereafter be required), by withholding
Shares with respect to which the Optionee has exercised such Option
having a Fair Market Value on the date of exercise equal to the
sum of the Option Price for the withheld Shares and the remaining
shares with respect to which the Optionee has exercised such
option, or any combination of such methods of payment.
7.2 Number of Shares. Subject to Section 9, the Option Agreement
shall state the number of Shares to which it pertains.
7.3 Date of Exercise. An Option may be exercised, to the extent
vested, in whole or in part from time to time during the Option
Period. Notwithstanding anything in this Plan or any Option
Agreement to the contrary, no Option shall be exercisable prior
to the approval of this Plan by the stockholders of the Company.
7.4 Reorganization. In case the Company is merged or consolidated
with another corporation, or in case of a reorganization, separation
or liquidation of the Company, the Board or the board of directors
of any corporation assuming the obligations of the Company hereunder
shall either (i) make appropriate provisions for the protection of any
outstanding options by the substitution on an equitable basis of
appropriate securities of the Company, or appropriate shares or
other securities of the merged, consolrganized corporation, or
the appropriate adjustment in the Option Price, or both, or (ii)
give written notice to Optionees that their Options must be
exercised, to the extent then exercisable after giving due
effect to Section 7.3, within 60 days of the date of such
notice or they will terminate, and to the extent that such
Options are not exercised within such 60-day period they
shall terminate and be of no further effect.
7.5 Assignability. No option shall be assignable or transferable
except by will, by the laws of descent and distribution or pursuant
to a qualified domestic relations order (as defined in the Code),
and no option may be exercised other than by an Optionee or,
after the death of an Optionee, by that Optionee's personal
representatives, heirs, or legatees.
7.6 No Right to Continue as Director. Nothing in the Plan nor
in any option granted under the Plan shall confer (or be deemed
to confer) any right on any Optionee to continue as a director
of the Company or any Subsidiary or shall interfere in any way
with the right of the Board or the stockholders of the Company,
or the board of directors or stockholders (including the Company)
of any subsidiary, to terminate such status at any time, with or
without cause and with or without notice except as otherwise
as otherwise provided by the certificate of incorporation or by
laws of the Company or such Subsidiary or applicable law.
7.7 Rights as a Stockholder. An Optionee shall have no rights
as a stockholder with respect to Shares covered by any Option
until the date the Company has issued or delivered such Shares
to the Optionee, and then only as to such Shares as are actually
issued and delivered to the Optionee.
7.8 Other Provisions. Option Agreements shall contain such other
terms and conditions not inconsistent with the Plan as the
Administrator shall deem advisable.
7.9 Compliance with Law. Notwithstanding any provision of
the Plan or any Option Agreement to the contrary, no option
may be granted or exercised at any time when such Option or
the granting or exercise thereof or payment therefor may result
in the violation of any law or governmental order or regulation.
7.10 Securities Laws. The Company intends to register the Shares
issuable pursuant to exercise of Options under the Securities Act
of 1933, as amended, and to effect similar compliance under
applicable state laws, but shall be under no obligation to do
so. The Administrator may require, as a condition of the
issuance and delivery of certificates evidencing Shares
issuable pursuant to exercise of Options, that the Optionee
make such covenants, agreements and representations, including,
without limitation, as to compliance with applicable securities
laws, and that such certificates bear such legends, as the
Administrator in its sole discretion deems necessary or desirable.
8. Shares Available for Option.
8.1 Maximum. Subject to Sections 7.4 and 9, no more than 150,000 Shares
shall be subject to purchase pursuant to options granted under the Plan,
which Shares may be either Shares held in treasury or authorized but
unissued Shares. At all times during the term of the Plan, the Company
shall have reserved that number of Shares less an amount equal to the
number of Shares held in treasury and the number of Shares which have
been issued pursuant to the exercise of Options. At all times after
termination of the Plan the Company shall have reserved for issuance a
number of Share; equal to the aggregate number of Shares subject to
outstanding options less the number of Shares held in treasury.
8.2 Expiration or Termination. If any outstanding option under the
Plan expires for any reason or is terminated prior to the expiration
date of the Plan as set forth in Section 6, the Shares allocable to any
unexercised portion of such Option may again be subject to an option.
9. Recapitalization or Change in Par Value of Common Stock. The
aggregate number of Shares purchasable under options granted and
which may be granted pursuant to the Plan and the option Price for
Shares covered by each outstanding option shall all be proportionately
adjusted, as deemed appropriate by the Administrator, if the Shares are
split up, converted, exchanged, reclassified or in any way substituted
for. The Administrator shall provide for appropriate adjustments of
the numbers of shares purchasable under the Plan and of outstanding
options in the event of stock dividends or distributions of assets or
securities of other companies owned by the Company to stockholders
to Common Stock for which the record date is prior to the date the
Shares purchased by exercise of an Option are isssued or transferred,
except that no such adjustment shall be made for cumulative stock
dividends of 10% or less (in the aggregate) or cash dividends. Any
such adjustment may include an adjustment of the Option Price or
the number of Shares for which an Option may be exercised, or may
provide for an escrow of assets or securities so distributed to
be available upon future exercise. In the event of a change in
the Company's presently authorized Common stock which is limited to
a change of the then authorized Shares of Common Stock with par
value into the same number of shares of Common Stock with a different
par value, the shares resulting from any such change shall be
deemed to be Shares as defined in Section 1, and no change in the
number of Shares covered by each option or in the Option Price
shall take place.
10. Indemnification; Reliance; Exculpation.
10.1 Indemnification. Each person who is or shall have been a member
of the Board of the Company shall be indemnified and held harmless by
the Company against and from any and all loss, cost, liability, or
expense that may be imposed upon or reasonably incurred by such person
in connection with or resulting from any claim, action, suit, or
proceeding to which such person may be a party or in which such
person may be involved by reason of any action taken or failure to
act under the Plan and against and frn writing give the Company an
opportunity to intervene at the Company's expense on his or her behalf.
The foregoing right of indemnification shall not be exclusive of any
other right to which such person may be entitled as a matter of law
or otherwise, or any power that the Company may have to indemnify
such person or hold his or her harmless.
10.2 Reliance. Each member of the Board and each officer and employee
of the Company in performing duties under the Plan shall be entitled
to rely upon information and reports furnished in connection with
the administration of this Plan by any duly authorized officer or
agent of the Company.
10.3 Exculpation. No a member of the Board and no officer or
employee of the Company shall be liable for any action or
determination made in good faith with respect to the Plan or
any Option granted under the Plan.
11. Income Tax Withholding. Any Option Agreement may include
provisions that if the Company or a Subsidiary shall be required
to withhold any amounts by reason of any federal, state or local tax
rules or regulations in respect of the issuance of Shares pursuant
to the exercise of an Option, the Company or the Subsidiary shall be
entitled to deduct and to withhold such amount from any cash payments
to be made to the Optionee. The Administrator may establish such
rules and procedures, including, without limitation, any rules or
procedures necessary to comply with Rule 16b-3, as it may deem
neccessary or advisabl relating to the exercise of any option.
12. Amendment or Termination of Plan. The Plan may be terminated and
may be modified or amended by the Board at any time and from time to
time; provided, however, that (i) no modification or amendment
increasing the aggregate number of Shares which may be issued
under Options, materially increasing benefits accruing to Optionees,
or materially modifying the requirements as to eligibility to
receive options hereunder shall be effective without stockholder
approval, (ii) no such termination, modification, he Option Price
for such Options shall not be amended more than once every six
months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended,
or the rules thereunder.
13. Set-Off. If at any time an Optionee is indebted to or otherwise
obligated to make any payment to the Company or any Subsidiary, the
Company may (a) withhold from the Optionee (i) following the exercise
by the Optionee of an Option, Shares issuable to the Optionee having
a Fair Market Value on the date of exercise up to the amount of
indebtedness to the Company or (ii) following the sale by an Optionee
of Shares received pursuant to the exercise of an Option amounts due to
an Optionee in connection with the sale of such Shares up to the amount
of the indebtedness to the Company, or (b) take any substantially
similar action. The Company may establish such rules and procedures
as it may deem neccessary or advisable in connection with the
taking of any action contemplated by this Section 13.
14. Headings. The section headings contained herein have no substantive
meaning or content and are not part of this Plan.
EXHIBIT 10.46
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE (this "Amendment") is made as
of the 13th day of February, 1996, by and between ROUTE 50
LIMITED PARTNERSHIP ("Landlord"), and COMNET CORPORATION, a
Delaware corporation (" Tenant").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Office Lease dated
September 25, 1992, as amended by that certain First Amendment to
Lease dated February 26, 1993, and that certain Second Amendment
to Lease dated April 28, 1993, by and between Landlord and Tenant
(collectively, the "Lease"), Tenant has leased from Landlord
approximately thirty-eight thousand two hundred eight (38,208)
square feet of Gross Rentable Area of office space (the "Demised
Premises'') in the building located at 4200 Parliament Place,
Lanham, Maryland, as more particularly set forth in the Lease;
and
WHEREAS, Landlord and Tenant desire to expand the Demised
Premises to include the Enlargement Space (as hereafter defined)
on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the foregoing premises
and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and
Tenant, intending to be legally bound, hereby agree as follows:
1. Incorporation of Recitals. The foregoing recitals are
hereby incorporated in this Amendment and made a part hereof by
this reference.
2. Definitions. All capitalized terms used herein shall
have the meanings ascribed to them in the Lease, unless otherwise
defined herein.
3. Expansion. From and after the Enlargement Commencement Date
(as hereinafter defined), the Demised Premises shall hereby be
expanded to include, in addition to such space heretofore
comprising the Demised Premises, that additional space consisting
of approximately thirteen thousand seven hundred seventeen
(13,717) square feet of Gross Rentable Area of office space
located on the fourth (4th) floor of the Building, as more
particularly set forth on Exhibit A attached hereto and
incorporated herein (the "Enlargement Space"); and, accordingly,
the entire Demised Premises shall, as of such date, consist of
approximately fifty-one thousand nine hundred twenty-five
(51,925) square feet of Gross Rentable Area. Landlord shall
construct the Tenant Work (as defined in Exhibit B hereof) in the
Enlargement Space in accordance with Exhibit B attached hereto
and made a part hereof. Except as otherwise set forth herein, all
terms rights and obligation of Landlord and Tenant applicable to
the Demised Premises shall apply to the Enlargement Space. It is
understood and agreed that Landlord is under no obligation to
make any structural or other alterations, decorations, additions
or improvements in or to the Enlargement Space in connection with
Tenant's initial occupancy thereof, except as set forth in
Exhibit B.
4. Enlargement Commencement Date.
(a) (1) The "Enlargement Commencement Date" shall be
April 15, 1996, subject to adjustment as hereinafter set forth.
In the event that the Enlargement Space is not substantially
completed by the Enlargement Commencement Date for any reason or
cause, other than those set forth in Paragraph 8 of Exhibit B,
then the Enlargement Commencement Date shall be delayed and shall
be the earlier of (i) the day that the Enlargement Space is
occupied by Tenant or (ii) the day that the Enlargement Space is
substantially completed (as defined in Section 4(a)(2) below).
Notwithstanding the foregoing, in the event that the Enlargement
Space is not substantially completed by the Enlargement
Commencement Date for any reason or cause set forth in Paragraph
8 of Exhibit B, then the Enlargement Commencement Date and all
the obligations of Tenant hereunder, including, but not limited
to, the obligations of Tenant to pay Base Rent and Additional
Rent on such Enlargement Space, shall not be delayed and shall
begin on the Enlargement Commencement Date.
(2) For purposes of this Amendment the
Enlargement Space shall be deemed substantially completed when
(i) all items of Tenant Work (excluding specialized or long
leadtime items) have been completed subject only to items of work
which do not substantially interfere with Tenant's intended use
of the Enlargement Space, and (ii) all governmental requirements
applicable to the construction and occupancy of the Enlargement
Space are satisfied. The satisfaction of all governmental
requirements shall be deemed to exist if either a temporary or
permanent certificate of occupancy for the Enlargement Space has
been issued by any governmental authority having jurisdiction
over the Enlargement Space.
(b) Within five (5) days after the occurrence of the
Enlargement Commencement Date, Landlord and Tenant shall execute
an Amendment to Lease (substantially in the form of Exhibit C
attached hereto and made a part hereof) setting forth the
Enlargement Commencement Date.
(c) In the event the Enlargement Space is occupied by
Tenant prior to April 15, 1996, the Enlargement Commencement Date
shall be the first day of such occupancy and all of Tenant's
obligations hereunder shall commence as of such date. The
foregoing sentence shall not be deemed to imply a right of Tenant
to occupy the Enlargement Space prior to the Lease Commencement
Date.
(d) Notwithstanding anything to the contrary contained
in Section 4(a) above, if the Enlargement Space is not
substantially completed on or before the date that is thirty (30)
days after the scheduled Enlargement Commencement Date (as set
forth in Section 4(a)(1), above), for any reason or cause, other
than those set forth in Paragraph 8 of Exhibit B or due to an
event of Force Majeure (hereinafter defined), then Tenant shall
receive a one (1) month abatement of Base Rent applicable to the
Enlargement Space (i.e. $21,775.74) otherwise due and payable to
be applied against the first full month after the Enlargement
Commencement Date, and Landlord shall not be otherwise liable or
responsible for any claims, damages, or liabilities by reason of
such delay. For purposes of this Section 4, an event of Force
Majeure shall mean any acts of God, strikes, sabotage, accidents,
acts of war, fire and casualty, legal requirements, government
restrictions or controls on construction, insurance reimbursement
problems, emergencies, shortages or inability to obtain labor,
materials or equipment, energy shortage, or causes beyond the
reasonable control of Landlord. An event of Force Majeure shall
also include the failure of any applicable governmental entity to
promptly make any required inspections or promptly issue any
required permits, approvals or a certificate of occupancy,
including without limitation (i) the failure of the applicable
governmental entity to issue a construction permit for the Tenant
Work within seven (7) days after a request is made therefor, (ii)
the failure of an inspector for the applicable governmental
entity to conduct any inspection (including without limitation,
the inspection of any plumbing, electrical or structural work
(rough-in or final) or any fire and life/safety work) required by
the applicable governmental entity in connection with the Tenant
Work (and issue its approval or disapproval thereof) within two
(2) business days after such inspection is requested, and (iii)
the failure of the applicable governmental entity to issue a
certificate of occupancy for the Demised Premises within two (2)
business days after such certificate of occupancy is requested.
5. Basic Rent for Enlargement Space. From and after the
Enlargement Commencement Date, the Base Rent for the Enlargement
Space during the indicated periods shall be as follows:
Enlargement Space Monthly
Period Base Rent per Period Base Rent
ECD* - 02/12/97 $261,308.88 $21,775.74
02/13/97 - 02/12/98 $267,841.56 $22,320.13
02/13/98 - 02/12/99 $274,537.68 $22,878.14
02/13/99 - 02/12/00 $281,401.08 $23,450.09
02/13/00 - 02/12/01 $288,436.08 $24,036.34
02/13/01 - 02/12/02 $295,647.00 $24,637.25
02/13/02 - 02/12/03 $303,038.16 $25,253.18
02/13/03 - 02/12/04 $310,614.12 $25,884.51
02/13/04 - 03/31/04 $318,379.44 $26,531.62
* Enlargement Commencement Date
6. Tenant's Expense Increase Share. Tenant's Expense
Increase Share for the Enlargement Space shall be
calculatedseparately from Tenant's Expense Increase Share for the
remainder of the Demised Premises. The Expense Base for the
Enlargement Space shall be obtained by dividing (i) the amount of
Real Estate Taxes and Operating Costs incurred in calendar year
1996 by (ii) the Gross Office Rentable Area of the Building.
Tenant shall not be required to pay Tenant's Expense Increase
Share for the Enlargement Space for the twelve (12) month period
beginning with the Enlargement Commencement Date.
7. Right to Lease Additional Fourth Floor Office Space.
Pursuant to and subject to the provisions of the Lease (including
without limitation the provisions of Rider 4 of the Lease) and
provided that Tenant is not then in monetary default under the
Lease at any time during the Term, Tenant shall have the right of
first opportunity to lease additional office space on the fourth
(4th) floor of the Building that becomes freely available to
Landlord to lease to Tenant after Landlord's initial lease of
such additional fourth (4th) floor space to another tenant, all
in accordance with the terms and conditions of Rider 4 of the
Lease. Tenant's expansion into the Enlargement Space pursuant to
this Amendment shall not be construed as being in lieu of any
other rights of Tenant under the Lease (including any renewal
rights pursuant to Rider 2 of the Lease, Tenant's Option to Add
Expansion Space pursuant to Rider 3 of the Lease or Tenant's
First Opportunity to Lease Space pursuant to Rider 4 of the
Lease), which shall continue in full force and effect pursuant to
the terms of the Lease.
8. Ratification. Except as expressly amended by this
Amendment, all other terms, conditions and provisions of the
Lease are hereby ratified and confirmed and shall continue in
full force and effect.
9. Broker. Landlord shall pay the commission payable to The
Fred Ezra Company (the "Broker") pursuant to a separate agreement
between the Broker and Landlord. Landlord and Tenant each
represent and warrant one to the other that if either has engaged
any broker or agent (other than the Broker) in carrying on the
negotiations relating to the Lease, it will pay any brokerage
commission payable to said broker or agent. Landlord shall
indemnify and hold Tenant harmless, and Tenant shall indemnify
and hold Landlord harmless, from and against any claim or claims
for brokerage or other commissions arising from or out of any
breach of the foregoing representation and warranty by the
respective indemnitors. Any representation or statement by a
leasing company or other third party (or employee thereof)
engaged by Landlord as an independent contractor which is made
with regard to the Demised Premises, the Enlargement Space or to
the rest of the Building or the Property shall not be binding
upon Landlord nor serve as a modification of the Lease and
Landlord shall have no liability therefor, except to the extent
such representation is also contained in the Lease (as hereby
amended).
10. Representations. Tenant hereby represents and warrants
to Landlord that Tenant (i) is not in default of any of its
obligations under the Lease and that such Lease is valid, binding
and enforceable in accordance with its terms, (ii) has full power
and authority to execute and perform this Amendment, and (iii)
has taken all action necessary to authorize the execution and
performance of this Amendment.
11. Miscellaneous. This Amendment (i) shall be binding upon
and inure to the benefit of the parties hereto and their
respective successors and assigns (subject to the restrictions on
assignment set forth in the Lease), (ii) shall be governed by and
construed in accordance with the laws of the State of Maryland,
and (iii) may be executed in multiple counterparts, each of which
shall constitute an original and all of which shall constitute
one and the same agreement. This Amendment contains and embodies
the entire agreement of the parties hereto with respect to the
matters set forth herein, and supersedes and revokes any and all
negotiations, arrangements, letters of intent, representations,
inducements or other agreements, oral or in writing with respect
to such matters. No representations, inducements or agreements,
oral or in writing, between the parties with respect to such
matters not contained in this Amendment shall be of any force or
effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this
Third Amendment to Lease as of the day and year first above
written.
ATTEST: TENANT:
COMNET CORPORATION, a Delaware
corporation
____________________
WITNESS/ATTEST
_______________________ By: _________________________
Name:
LANDLORD
ROUTE 50 LIMITED PARTNERSHIP
By: Q50 Limited Partnership,
general partner
By: Quadrangle Development
Corporation, general partner
_________________________ By:
_________________________
Christopher D.
Gladstone
President
Exhibit A, Expansion Space
Exhibit A-1, 1 of 3
Exhibit A-1, 2 of 3
Exhibit A-1, 3 of 3
EXHIBIT B
WORK AGREEMENT AND ALLOWANCES
This Exhibit B sets forth the understandings and agreements
of Landlord and Tenant regarding the performance by Landlord or
Tenant of work in the Enlargement Space in connection with the
preparation of the Enlargement Space for Tenant's original
occupancy and use thereof (herein referred to as "Tenant Work").
Any capitalized terms used herein, not otherwise defined herein,
shall have the meanings set forth elsewhere in the Lease.
I. Tenant hereby designates Ms. Laurie MaltLy ("Tenant's Agent")
as having authority to approve plans and specifications, to
accept cost estimates, and to authorize changes or additions to
Tenant Work during construction. Landlord shall not be authorized
to proceed with any Tenant Work without authorization by Tenant's
Agent, and such authorization by Tenant's Agent shall be deemed
to be authorization by Tenant. Neither Tenant nor Tenant's Agent
shall be authorized to direct Landlord's contractors or
subcontractors in the performance of Tenant Work, and in the
event that Landlord's contractors or subcontractors perform any
Tenant Work under the direction of Tenant or Tenant's Agent, then
Landlord shall have no liability for the cost of such Tenant
Work, for the cost of corrective work required as a result of
such Tenant Work or for any delay that may result from such
Tenant Work.
2. (A) It is agreed that Tenant will develop plans and
necessary specifications for completion of Tenant Work in
accordance with the following schedule; provided, however, that
Tenant's architect shall be entitled to deliver, on Tenant's
behalf, any such plans and specifications required hereunder to
be delivered by Tenant to Landlord; and provided further, that at
Tenant's sole cost, Tenant shall use the engineering firm
designated by Landlord to prepare any plans, specifications
and/or drawings involving mechanical, electrical, structural,
plumbing, sprinkler and/or life/safety work for the Enlargement
Space:
(i) Tenant will deliver to Landlord Tenant's
Preliminary Plans (as defined below) which Tenant has, in
writing, approved, agreed to, and provided that the date of such
approval for the entire Enlargement Space is not later than -
Completed - . The "Preliminary Plans" shall set forth:
(a) the location of furniture and office equipment;
(b) the location and specification of telephone
and other communications outlets;
(c) the location and specification of electrical
outlets, especially those required to accommodate items such
as computers and 220-volt equipment;
(d) the location of copy machines larger than
table-top size, computer equipment, telex machines, and
other heat-producing machines, and specification of heat
output (BTU/hour) and required operating conditions
(maximum/minimum temperature, hours of operation);
(e) the location of conference rooms and other
rooms subject to occupancy by more than six (6) persons at a
time and the specification of maximum expected occupancy;
(f) a reflected ceiling plan for all lighting
desired by Tenant, and specification of any Tenant Work
involving lighting;
(g) any Tenant Work which is likely to require
a longer-than-usual period of time to construct or acquire;
(h) the location of all partitions in the
Enlargement Space; and
(i) any special requirements.
(ii) No later than - Completed - , Landlord shall
deliver to Tenant in writing its approval of the Preliminary
Plans or changes to the Preliminary Plans that will be required
to obtain Landlord's approval.
(iii) No later than - Completed - , Tenant shall
deliver to Landlord revised Preliminary Plans containing the
required revisions and such suggested revisions as Tenant chooses
to incorporate.
(iv) No later than - Completed - , Landlord shall
deliver its confirmation that all required revisions have been
made (if such is the fact) and its approval of the revised
Preliminary Plans.
(v) No later than January 19, 1996, Tenant shall
deliver to Landlord architectural, mechanical and electrical (and
structural, if required) working drawings, based upon the
approved Preliminary Plans, prepared by Tenant's architects and
engineers, which working drawings Tenant has, in writing,
approved, agreed to and provided the date of such approval (the
"Working Drawings").
(vi) No later than January 29, 1996, Landlord
shall indicate its approval of the Working Drawings in writing by
signing and dating such Working Drawings in the space provided,
or shall indicate the revisions required due to errors or
omissions in the drawings.
(vii) No later than five (5) business days after
Landlord has indicated to Tenant the revisions required due to
errors or omissions in the drawings (as set forth
in item (vi), above), Tenant shall correct such errors or
omissions and resubmit the Working Drawings to Landlord for its
approval. Provided such errors or omissions have been corrected,
Landlord shall then approve the Working Drawings. If Tenant
desires to make revisions in the Working Drawings which are not
consistent with the approved Preliminary Plans, any delays caused
by such revisions shall be a Tenant-Caused Delay (described in
Paragraph 8 hereof). Any such changes inconsistent with the
original Working Drawings shall require Tenant to approve and
date the revised Working Drawings.
(B) The Preliminary Plans and the Working Drawings, as
finally approved by both Landlord and Tenant in accordance with
the foregoing provisions of this Paragraph 2, shall collectively
constitute the "Plans." The Plans are expressly subject to
Landlord's prior written approval; provided, however, that Tenant
shall be solely responsible for the content of the Plans and
coordination of the Plans with base building design. In addition,
Landlord's approval of the Plans shall not constitute a warranty,
covenant or assurance by Landlord that (i) any equipment or
system shown thereon will have the features or perform the
functions for which such equipment or system was designed, (ii)
the Plans satisfy applicable code requirements; provided,
however, once Landlord has finally approved the Plans, Landlord
shall be responsible for the cost of any revisions to such Plans
and the corresponding additional alterations to the Enlargement
Space (specifically excluding the Tenant Work that complied with
applicable code requirements and was set forth in such finally
approved Plans) that are required in order to pass the
inspections with respect to, and receive, a building permit for
the Tenant Work and/or a certificate of occupancy for the
Enlargement Space, but Landlord shall have no responsibility for
the Plans or alterations to the Enlargement Space after a
building permit for the Tenant Work and a certificate of
occupancy for the Enlargement Space have been issued and Landlord
shall not be responsible for revisions to the Plans or
alterations to the Enlargement Space required as a result of
Tenant's change orders or revisions to the Plans or the Tenant
Work made after Landlord has approved the Plans in accordance
with Paragraph 2(A) hereof, (iii) the Plans are sufficient to
enable the Landlord's contractor or Tenant's contractor (as
applicable) to obtain a building permit for the Tenant Work, or
(iv) the Tenant Work described thereon will not interfere with,
and/or otherwise adversely affect, base Building systems. Except
as expressly set forth above, Tenant shall be solely responsible
for the Plans' compliance with all applicable laws, rules and
regulations of any governmental entity having jurisdiction over
the Building and the Enlargement Space. Notwithstanding the
foregoing, if Landlord determines, at anytime prior to commencement
of construction of the Tenant Work, that the Tenant Work
described on the Plans (as approved pursuant to Paragraph 2(A),
above) does or will interfere with and/or otherwise adversely
affect any base Building systems or does not or will not
comply with any applicable law, rule or regulation, then the
Plans shall then be amended, at Tenant's cost, so that the
Tenant Work will not interfere with, and/or otherwise adversely
affect, such base Building systems and/or will not violate any
applicable law, rule or regulation, and any delay arising in
connection therewith shall constitute a Tenant-Caused Delay
(described in Paragraph 8 hereof). The foregoing provisions of
this Paragraph 2(B) shall not diminish any obligation or
responsibility of Landlord or Tenant otherwise set forth in
the Lease with respect to the condition and maintenance of
the Demised Premises, the Building Systems or any other portion
of the Building (including without limitation, the responsibility
for their compliance with Applicable Laws).
3. Tenant shall pay the cost of preparing the Plans. Tenant may
elect to apply a portion of the Tenant Work Allowance as a credit
toward the cost of the Plans. Any amounts to be paid by Tenant
under this Paragraph 3 shall be payable as Additional Rent within
ten (10) calendar days after receipt of invoice from Landlord.
4. Landlord agrees to provide and install, on Tenant's behalf,
the Tenant Work shown on the Plans. Tenant shall pay the cost of
all Tenant Work, subject to application of the Tenant Work
Allowance as set forth in Section 9 hereof. Prior to commencing
any Tenant Work, Landlord will submit to Tenant written estimates
of the cost thereof in accordance with the following schedule:
(i) Within seven (7) business days after approval by Tenant
of the Plans, Landlord shall submit to Tenant written estimates
of the cost of Tenant Work. Such estimates shall separately state
estimates for major trade subcontractors (which may form a basis
for Tenant to revise the Plans pursuant to Paragraph 4 (iii) in
order to possibly achieve certain cost savings).
(ii) Within three (3) business days after Landlord's
submission of such estimates to Tenant, Tenant shall deliver to
Landlord its written acceptance of such estimates, or if Tenant
does not wish to accept such estimates, Tenant shall have the
right to revise the Plans and obtain rebids in accordance with
subparagraph (iii) below. The construction contract with the
selected contractor shall require such contractor to complete the
items set forth on Exhibit D of the Third Amendment to Lease for
no more than Twenty-three Dollars ($23.00) per square foot of
Gross Rentable Area in the Enlargement Space.
(iii) If Tenant desires to make revisions to the Plans and
obtain rebids for Tenant Work, Tenant shall be responsible for
directing Landlord's architects and engineers in revising the
Plans and shall pay all fees incurred in making such revisions.
Tenant shall deliver to Landlord any such revised Plans approved
and dated by Tenant in writing. Upon delivery of any approved
revised Plans by Tenant, Landlord shall attempt to obtain rebids
within a reasonable time period and resubmit them for Tenant's
acceptance. Landlord shall not be responsible for escalations in
the original cost estimates due to delays in acceptance caused by
Tenant's desire for rebids. The time necessary to revise the
Plans and obtain rebids shall constitute a Tenant-Caused Delay
under Paragraph 8 hereof.
(iv) Upon Tenant's written acceptance of cost estimates and
payment of the first installment of the cost as set forth in
subparagraph 4(v) below and the Excess Costs as set forth in
4(vi) below, Landlord shall authorize its contractors to proceed
with construction of Tenant Work.
(v) Tenant shall pay an administrative fee to compensate
Landlord for supervising the Tenant Work equal to One Dollar
($1.00) per square foot of Gross Rentable Area in the Demised
Premises. The cost of the Tenant Work to be paid for by Tenant
and such administrative fee shall be payable as Additional Rent
and at Landlord's election shall be either paid by Tenant to
Landlord within ten (10) calendar days after receipt of invoice
from Landlord, or deducted from any available Tenant Work
Allowance.
(vi) Within twenty (20) days of acceptance of the cost
estimates for the Tenant Work, Tenant shall pay to Landlord (if
Landlord is undertaking the Tenant Work) an amount equal to the
total estimate of the Tenant Work including the administrative
fees payable to Landlord, less the Tenant Work Allowance ("Excess
Costs"). Landlord shall not be obligated to commence any work
until such Excess Costs are paid, and any delay in such payment
shall be deemed a Tenant-Caused Delay.
5. If Tenant shall request changes or additions to the Tenant
Work being performed by Landlord after approval of the Plans and
acceptance of cost estimates, Landlord shall have no obligation
to perform such changes or additions except insofar as, in
Landlord's sole opinion, such changes can be accommodated in
Landlord's good faith construction schedule for completion of
Tenant Work. Landlord shall be authorized to perform any such
changes or additions only upon written authorization by Tenant
and payment of 100` of Landlord's informal estimate of the cost
of the new Tenant Work, it being expressly understood that due to
time requirements Landlord may not deliver to Tenant a final
price for such Tenant Work until after it has been performed, and
that Tenant shall be required to make final payment of the
difference between Landlord's estimate and actual price as
Additional Rent within twenty (20) days upon being invoiced
therefor, subject to reasonable verification that charges are
actual charges of contractor but not subject to dispute as to the
reasonableness of such charges.
6. Landlord is authorized to contract, on Tenant's behalf, with
Regency Commercial Construction, Inc. to construct the Tenant
Work in accordance with Exhibits A-1, B and D of the Lease.
7. Tenant, by taking possession of the Enlargement Space, is
deemed to acknowledge that Landlord has satisfactorily performed
all work to be performed by it as hereinabove set forth, subject
to certain punch list items as may be agreed to by Landlord and
Tenant.
8. If the date Tenant takes occupancy of the Enlargement Space is
after the Lease Commencement Date specified in the Basic Lease
Information, and such delay in taking occupancy is a result of:
(i) Tenant's failure to deliver its approved Preliminary
Plans or Working Drawings or take any other actions described in
Paragraph 2 above, by the dates specified in Paragraph 2;
(ii) Tenant's request for changes in the Plans or rebids as
set forth in Paragraph 4;
(iii) Tenant's failure to approve cost estimates for Tenant
Work within the time required under Paragraph 4 hereof;
(iv) Tenant's request for materials, finishes or
installations which are out of the ordinary or which would take a
longer-than-normal time to obtain or install;
(v) The performance of a person, firm, or corporation
employed by Tenant and the completion of the said work of said
person, firm or corporation; or
(vi) Any other delays resulting from the actions or
inactions of Tenant, then such delay shall be conclusively deemed
a "Tenant-Caused Delay," and Tenant shall be liable for the
payment of Base Rent and Additional Rent commencing on the Lease
Commencement Date.
9. Landlord agrees to provide Tenant with an allowance ("Tenant
Work Allowance") in the amount of Twenty-three Dollars ($23.00)
per square foot of Gross Rentable Area in the Enlargement Space,
to be applied against the actual out-of-pocket costs and expenses
incurred in connection with the design, supervision and
construction of the Tenant Work (including the actual
construction costs and architectural and engineering fees
incurred in connection therewith). The Tenant Work Allowance
shall not be applied to the costs of any voice/data related
software or hardware or any furniture, computers, equipment,
personal property, or for any other costs other than as provided
above. If the full amount of the Tenant Work Allowance has not
been used in accordance with the foregoing as of the date the
Tenant Work is complete, the balance thereof shall be applied to
the next installment(s) of Base Rent coming due hereunder. Except
as otherwise provided in this Paragraph 9, Landlord shall pay the
Tenant Work Allowance directly to the contractor(s) performing
the Tenant Work. If Tenant uses a contractor other than Landlord
or Landlord's contractor pursuant to the terms of this Work
Agreement, Landlord shall pay the Tenant Work Allowance to Tenant
upon satisfaction of each of the following conditions: (a)
receipt by Landlord of an occupancy permit for the Enlargement
Space, and Tenant's occupancy of the Enlargement Space, (b)
Tenant's execution and delivery to Landlord of the Amendment to
Lease, attached to the Third Amendment to Lease as Exhibit C, (c)
receipt by Landlord of appropriate paid receipts or invoices and
lien waivers from all contractor and subcontractors performing
any Tenant Work in a form satisfactory to Landlord, and (d)
Tenant shall have fully performed all of its obligations under
this Work Agreement and the Lease. Notwithstanding the foregoing,
Landlord shall have the right, without the obligation, to apply
all or any portion of the undisbursed Tenant Work Allowance to
remedy any default by Tenant occurring hereunder; provided,
however, it is expressly covenanted and agreed that such remedy
by Landlord shall not be deemed to waive, or release, the default
of Tenant. Tenant shall not be entitled to any other allowances
for the Tenant Work, except as expressly set forth in this Work
Agreement, and no provision of the Work Agreements attached to
the Lease (or attached to any of the amendments thereto prior to
the Third Amendment to Lease) shall apply to the Tenant Work for
the Enlargement Space.
10. Landlord is acting as Tenant's agent and on Tenant's behalf
in the selection of the architect, engineer and general
contractor to be used for completion of improvements to the
Enlargement Space based upon improvement information provided to
Landlord by Tenant. It is understood and agreed that Landlord
does not and will not generate improvement information for build-
out of the Enlargement Space.
11. (A) Attached to the Third Amendment to Lease, as Exhibit D,
is a list of certain of the materials (and the unit prices
thereof) that are anticipated by Landlord and Tenant to be used
in connection with the completion of the Tenant Work for the
Enlargement Space (the "Itemized Materials"), which list is based
upon the Tenant Work reflected on the approved preliminary plans
last revised December 12, 1995 and attached to the Third
Amendment to Lease as Exhibit A-1, comprised of pages 1 through 3
(the "Preliminary Plans"). If the Preliminary Plans are not
revised and the scope of the Tenant Work reflected in such
Preliminary Plans does not change and the cost of the Tenant Work
exceeds the Tenant Work Allowance, then Landlord shall pay for
that portion of the additional cost of the Tenant Work that
results solely from (i) the quantity of any Itemized Material
(i.e., any of the materials listed on Exhibit D to the Third
Amendment to Lease) actually used in connection with the
construction of the Tenant Work exceeding the quantity of such
Itemized Material anticipated to be used (as designated on
Exhibit D to the Third Amendment to Lease); (ii) the unit cost of
any Itemized Material actually used in connection with the
construction of the Tenant Work exceeding the anticipated unit
cost of such Itemized Material (as designated on Exhibit D to the
Third Amendment to Lease); and (iii) the design, supervision and
permitting fees associated with the construction of the Tenant
Work exceeding the design, supervision and permitting fees set
forth in Exhibit D to the Third Amendment to Lease.
(B) Landlord shall not be liable for any costs associated
with (i) any changes to the Preliminary Plan, (ii) any changes in
the scope of the Tenant Work from the scope reflected on the
Preliminary Plans, (iii) the use of any materials not listed on
Exhibit D to the Third Amendment to Lease, or (iv) any other
change or cause whatsoever, other than the items expressly set
forth in Paragraph ll(A), above (and only to the extent that the
Tenant Work Allowance is insufficient to cover such costs).
Except to the extent Landlord is liable for certain additional
cost set forth above, Tenant shall at all times remain liable for
any and all costs associated with Tenant's build-out of the
Enlargement Space that exceed the Twenty-three Dollar ($23.00)
per square foot Tenant Work Allowance provided to Tenant by
Landlord.
EXHIBIT C
FORM OF AMENDMENT TO LEASE
THIS ______ AMENDMENT TO LEASE is entered into this ______
day _________________ of ________, 19 _, by and between
_______________________("Landlord") and _____________( "Tenant" )
.
WITNESSETH:
WHEREAS, on _________, 19)), Landlord and Tenant entered
into a lease, as amended by (the "Lease") covering certain
premises located on the (______) floor of the office building
located at _____________ (the "Demised Premises"), as more
particularly described in the Lease; and
WHEREAS, Section 4(b) of the Third Amendment to Lease
requires Landlord and Tenant to execute an amendment to the Lease
setting forth the Enlargement Commencement Date.
NOW, THEREFORE, in consideration of the foregoing, of the
mutual promises of the parties hereto contained herein, and of
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto
agree to amend the Lease as follows:
1. In accordance with the provisions of Section 4 (b) of the
Third Amendment to Lease, Landlord and Tenant hereby confirm that
________, 19_ is the Enlargement Commencement Date.
2. Terms not defined herein shall have the meaning provided
therefor in the Lease.
3. Except as provided herein, all other terms and conditions of
the Lease remain in full force and effect.
The foregoing Amendment is hereby agreed to by Landlord and
Tenant who have executed this Amendment to Lease under seal as of
the date first above written.
ATTEST: TENANT
______________________ By _________________________
WITNESS/ATTEST: LANDLORD
By _________________________