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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 333-49389
COOPERATIVE COMPUTING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2160013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6207 BEE CAVE ROAD
AUSTIN, TEXAS 78746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 512/328-2300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 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]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant. (The aggregate market
value shall be computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common
equity, as of a specified date within 60 days prior to the date of
filing.)
No established published trading market exists for the Common Stock,
par value $0.01 per share, of Cooperative Computing, Inc. All of the
outstanding shares of Common Stock, par value $0.01 per share, of
Cooperative Computing, Inc. are held by Cooperative Computing Holding
Company, Inc.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at December 28, 1998
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Common Stock 1,000 shares
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FORWARD-LOOKING STATEMENTS
INFORMATION SET FORTH IN THIS ANNUAL REPORT ON FORM 10-K REGARDING EXPECTED OR
POSSIBLE FUTURE EVENTS, INCLUDING STATEMENTS OF THE PLANS AND OBJECTIVES OF
MANAGEMENT FOR FUTURE GROWTH, OPERATIONS, PRODUCTS AND SERVICES AND STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE, IS FORWARD-LOOKING AND SUBJECT TO RISKS
AND UNCERTAINTIES. FOR THOSE STATEMENTS, THE COMPANY CLAIMS THE PROTECTION OF
THE SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS PROVIDED FOR BY SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON
ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY, WHICH, ALTHOUGH
BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE
SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE
GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY
THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE THE
FOLLOWING: (1) INCREASED COMPETITION; (2) RAPID TECHNOLOGICAL CHANGE; (3)
INCREASED COSTS; (4) RISKS ASSOCIATED WITH THE INTRODUCTION OF NEW PRODUCTS AND
PRODUCT UPGRADES AND DEPENDENCE ON PROPRIETARY TECHNOLOGY; (5) LOSS OR
RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (6) INABILITY OF THE COMPANY TO
SUCCESSFULLY INTEGRATE THE OLD CCI AND TRIAD BUSINESSES OR BUSINESSES ACQUIRED
IN THE FUTURE AND TO REALIZE ANTICIPATED REVENUE AND COST SAVINGS OPPORTUNITIES;
(7) INCREASES IN THE COMPANY'S COST OF BORROWINGS OR UNAVAILABILITY OF
ADDITIONAL DEBT OR EQUITY CAPITAL; AND (8) CHANGES IN GENERAL ECONOMIC
CONDITIONS IN THE MARKETS IN WHICH THE COMPANY MAY, FROM TIME TO TIME, COMPETE.
MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND ITS
MANAGEMENT. IN ADDITION, OTHER FACTORS THAT COULD AFFECT THE FUTURE RESULTS OF
THE COMPANY AND COULD CAUSE THOSE RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN THE FORWARD-LOOKING STATEMENTS ARE DISCUSSED AT GREATER LENGTH
UNDER ITEM 1. "BUSINESS" AND ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND APPEAR ELSEWHERE IN THIS
ANNUAL REPORT. THESE RISKS, UNCERTAINTIES AND OTHER FACTORS SHOULD NOT BE
CONSTRUED AS EXHAUSTIVE, AND THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY
DISCLAIMS ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS TO REFLECT
OCCURRENCES OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH
STATEMENTS.
USE OF TRADEMARKS AND TRADENAMES
Several trademarks and tradenames appear in this Annual Report. CCI, Triad,
Automotive Aftermarket Information Highway, ServiceExpert, Series 11, Series 12,
Series 14, Eagle, Eagle LS, Ultimate, MarketPace, AdviceLine, RepairSource,
ServiceExpert, Prism, J-CON, A-DIS, Telepart, ServiceCat and VISTA are federally
registered trademarks of the Company. The Company has a federal trademark
application pending with respect to CCI AutoBahn. Other trademarks and
tradenames are used in this Annual Report on Form 10-K to identify the entities
claiming the marks and names of their products. References herein to Snap-on,
TruServ, Ace Hardware, AutoZone, Discount Auto Parts, Pep Boys, Home Depot,
Lowe's, Mitchell, Sears, Midas and Aamco mean, respectively, Snap-on
Incorporated, Cotter & Company, Ace Hardware Corporation, AutoZone, Inc.,
Discount Auto Parts, Inc., The Pep Boys -- Manny, Moe & Jack, The Home Depot,
Inc., Lowe's Home Centers, Inc., Mitchell Repair Information Company, Sears,
Roebuck and Co., Midas International Corporation and Aamco Transmissions, Inc.
The Company disclaims proprietary interest in the marks and names of others.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Cooperative Computing, Inc., a Delaware corporation (hereinafter referred to as
the "Company" or "CCI"), is the largest designer, provider and servicer of
management information systems and solutions for the automotive parts
aftermarket industry and is a leading designer, provider and servicer of
management information systems and solutions for the hardlines and lumber
industry. The automotive parts aftermarket industry consists of the production,
sale and installation of both new and remanufactured parts used in the
maintenance and repair of automobiles and light trucks. The hardlines and lumber
industry consists of the sale of products for residential and commercial
building construction, maintenance and repair, lawn and garden and agribusiness.
The system offerings are enhanced by extensive information services featuring
specialized database products and by customer support and maintenance services.
The revenues associated with these services are of a recurring nature and
represented approximately 62% of total revenues in fiscal 1998. The Company's
total revenues for the year ended September 30, 1998 were $227.2 million.
The Company's products are designed to improve the operating efficiency and
profitability of suppliers and retailers by improving inventory turns and
associated gross profits. The Company's products enable users to conduct
computerized identification, location and selection of parts, to manage
inventory and to obtain sales history and point-of-sale information. In the
automotive parts aftermarket industry, interconnectivity throughout the
distribution channel is provided by the Company's network of electronically
linked customers, which adds to the efficiency and functionality of the
Company's products and enhances customer profitability.
The Company is the only provider of industry-specific management information
systems and solutions to every level of the wholesale distribution channel in
the automotive parts aftermarket, which includes manufacturers, warehouse
distributors, parts sales outlets ("PSOs") and service dealers. By servicing all
of these levels, the Company has acquired substantial industry knowledge to
improve and support the information products and services that are made
available to its customers.
COMPANY HISTORY AND OWNERSHIP
As used herein, unless the context otherwise requires, the "Company" represents
the combined businesses of Cooperative Computing, Inc., a Texas corporation
("Old CCI"), and Triad Systems Corporation, a Delaware corporation ("Triad").
Old CCI was founded in 1976 by Glenn E. Staats, Ph.D. Old CCI's original
customer focus was a diverse segment of businesses, including the automotive
parts aftermarket industry. As the automotive parts aftermarket industry began
to experience significant growth and moved toward computerization, the Company
expanded its automotive parts customer base and developed a wider range of
products and services.
Triad was founded in 1973 as a provider of business and management information
solutions. Over the years, Triad established a presence in the automotive parts
aftermarket industry throughout the United States, Canada, Puerto Rico, and the
United Kingdom. Triad also developed a significant presence in the hardlines and
lumber industry throughout the United States and Canada. From 1979 until
February 27, 1997, Triad was a publicly held company, with its common stock
quoted on the Nasdaq National Market.
On February 27, 1997, Old CCI joined with Hicks, Muse, Tate & Furst Incorporated
("Hicks Muse") to acquire 100% of the stock of Triad in a leveraged buy-out (the
"Triad Acquisition"). Prior to the Triad Acquisition, Old CCI maintained a
strong relationship with warehouse distributors and a growing relationship with
PSOs and service dealers. The Triad Acquisition was consummated to broaden Old
CCI's relationship with PSOs in order to provide a platform to further penetrate
the service dealer market and to establish a presence in the hardlines and
lumber industry. Since the Triad Acquisition, management of the Company has
focused on integrating the strengths of Old CCI and Triad.
On March 1, 1998, the Company acquired certain assets of ADP Claims Solutions
Group, Inc. for total consideration (including the assumption of certain
liabilities) of approximately $9.3 million (the "ARISB Acquisition"). These
assets provide products and services to the automotive recycling industry.
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INDUSTRY OVERVIEW
AUTOMOTIVE PARTS AFTERMARKET INDUSTRY
It is estimated that the automotive parts aftermarket industry will generate
approximately $200 billion in revenues for goods and services delivered to the
United States motoring public in 1998. Historically, industry revenues are
divided between the sale of auto parts (approximately 51%) and labor
(approximately 49%).
Distribution Channels. There are three distinct vertical distribution channels
through which auto parts distribution occurs: the traditional wholesale channel,
the retail channel and the new car manufacturer channel. Additionally, within
each of these three channels there are varying levels of distribution. In the
wholesale channel there are generally four primary levels of distribution:
manufacturers, warehouse distributors, PSOs (wholesale PSOs, retailers and new
car dealers) and service dealers. Manufacturers supply automotive parts to
warehouse distributors, which distribute automotive parts to PSOs, which stock
and sell the automobile parts used by service dealers and "do-it-yourself"
purchasers. The retail channel is similarly structured, but with fewer
intermediaries. In the retail channel, parts flow directly from the manufacturer
to the retailer. In turn, the retailer sells directly to the "do-it-yourself"
market, as well as to many service dealers. Parts in the new car manufacturer
channel are distributed directly from the manufacturer to new car dealers, often
through a feeder warehouse. Additionally, new car dealers sell parts to
independent service dealers.
o Wholesale Channel. The wholesale channel is the predominant distribution
channel in the automotive parts aftermarket industry. Warehouse
distributors sell to service dealers through PSOs. PSOs, which are
smaller than warehouse distributors and positioned geographically near
the service dealers they serve, are utilized due to the time-critical
nature of the repair business and the inability of the service dealer to
stock an extensive part selection.
Historically, the wholesale channel has involved the four distribution
levels described above in a three-step process. However, this channel
has recently undergone changes, moving toward a two-step distribution
process. The two-step process consolidates the warehouse distributor and
PSO into an operation that sells directly to service dealers.
Apart from the shift toward a two-step distribution process, many
warehouse distributors have also begun purchasing PSOs. This
consolidation improves warehouse distributors' buying power with
manufacturers and, therefore, strengthens their competitive position in
the market. The Company, as the largest provider of systems and services
to the warehouse distributor market, has benefited from the industry
consolidation as many warehouse distributors have replaced acquired
PSOs' existing systems with the Company's systems.
Service dealers consist of independent professional dealer/installers
and specialized shops affiliated with national chains, such as Midas and
Aamco. The service dealer segment has experienced slow consolidation
over the last 10 to 15 years. Throughout the 1970s, full service
stations providing gasoline, automotive accessories and repairs, and
independent repair garages had the largest share of the service dealer
market. During the early 1980s, service stations lost market share to
general repair national chainstores and specialized shops. However,
since the late 1980s, the market share of service stations and
independent garages has remained relatively stable.
o Retail Channel. With over 13,000 retail establishments, the retail
channel is highly fragmented. This market has traditionally consisted of
"mom and pop" stores and small regional chains that sell to
"do-it-yourself" customers. Recently, however, consolidation has begun
to alter the retail distribution channel. The larger specialty
retailers, such as AutoZone, Discount Auto Parts and Pep Boys, carry a
greater number of parts and accessories at more attractive prices than
traditional retail outlets and are gaining market share. The management
information systems used to communicate between levels in this channel
are generally developed internally by the specialty retailers.
o New Car Manufacturer Channel. The new car manufacturer channel in the
United States is dominated by General Motors, Chrysler, Ford, Toyota,
Nissan and Honda. New car manufacturers distribute parts
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through a feeder warehouse to new car dealers. New car dealers purchase
information systems from a variety of third party system providers
including Reynolds and Reynolds Company, Automatic Data Processing, Inc.
and several car manufacturers themselves.
HARDLINES AND LUMBER INDUSTRY
The hardlines and lumber industry consists of the sale of products for
residential and commercial building construction, maintenance and repair, lawn
and garden, and agribusiness. Management estimates that this industry, comprised
primarily of hardware retailers, home centers, lumber and building materials
suppliers and manufacturers, agribusiness retailers, lawn and garden retailers
and paint retailers, will generate over $150 billion in revenues in 1998.
o Top 10 Market. The ten largest retailers in the hardlines and lumber
industry (the "Top 10") represent approximately 2,600 stores and
accounted for approximately 30% of the annual industry sales volume. The
Top 10 include mass merchandisers such as Home Depot, Lowe's and Sears.
As a result of their size, it is cost effective for the Top 10 to
develop and update their own systems, and, therefore, the Top 10
generally do not purchase systems from the Company. The Company believes
that the Top 10 generally have driven the need to reduce costs and
pursue consolidation strategies throughout the industry. The Top 10 have
been able to reduce costs and improve merchandising efficiency through
economies of scale and the implementation of automated retail systems.
In order to remain competitive, companies outside the Top 10 need to
match the merchandising efficiencies of the Top 10 and increase
productivity.
o Top 500 Market. The 500 largest retailers in the hardlines and lumber
industry, excluding the Top 10 (the "Top 500"), is estimated to account
for approximately 20% of the industries annual sales volume. There are
approximately 4,000 stores in this market, of which a majority are
lumber and home center businesses. The Top 500 market is fragmented and
has experienced consolidation as firms try to compete with the Top 10.
In addition, this market has been a significant source of revenues as
firms upgrade existing systems and shift from in-house systems to
turnkey systems produced by the Company. The Company believes that
retailers will continue to upgrade systems as the industry continues to
respond to competition and innovation by the Top 10.
o Top 500+ Market. The hardlines and lumber retailers which do not rank in
the Top 500 (the "Top 500+") are typically smaller, independent stores
with a niche focus. Management believes that there are approximately
64,000 stores in this market, which accounted for nearly 50% of the
industry annual sales volume. This market is extremely fragmented and
has
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experienced limited consolidation. The Company believes that
approximately 42% of this market is affiliated with cooperatives, which
encourage their members to install computerized point-of-sale systems to
more effectively compete with the rest of the industry. The Company
believes the largest stores in this segment will continue to represent a
large portion of the Company's revenue base as firms computerize in
order to protect their niche market positions.
Drivers of Computerization. Computerization within the hardlines and lumber
industry has been predominantly driven by the Top 10 which have expanded their
business throughout the United States by providing products and services by
using a mass merchandising format. As a result of this strategy, hardlines and
lumber consumers have been able to purchase products and services cheaper from
the Top 10 than was traditionally available. This has driven the Top 500 and the
Top 500+ to computerize in order to reduce costs and improve service to maintain
their market positions.
PRODUCTS AND SERVICES
The Company's software and systems, together with its database products, provide
comprehensive business solutions targeted to its two key markets. The Company
provides a different set of standard application programs for each market that
includes user options allowing the selective structuring of applications files
and reports to meet customers' specific requirements. These software products
also allow the Company's customers to access its proprietary databases. Hardware
components include central processing units ("CPUs"), disk drives, video display
terminals, CD-ROM storage devices, point-of-sale terminals, communication
devices, printers and other peripherals. The Company's systems also have
communication capabilities allowing users to exchange purchase orders and
pricing and inventory information with suppliers and, in some cases, customers.
AUTOMOTIVE PARTS AFTERMARKET SYSTEMS (18.6% OF 1998 REVENUES)
The Company's automotive parts aftermarket products have been designed to
provide interconnectivity to all levels of the wholesale distribution channel.
This electronic network, which the Company calls the "Automotive Aftermarket
Information Highway," enables the automotive parts aftermarket industry to
efficiently market parts throughout the distribution channel.
Principal Products
The Company's principal automotive parts aftermarket industry products, based on
the level of the distribution channel for which such products are targeted, are
as follows:
o Manufacturer. The Company has one product, CCI AutoBahn, devoted to the
needs of manufacturers. CCI AutoBahn is designed to provide connectivity
between manufacturers of auto parts and warehouse distributors and
enables warehouse distributors and manufacturers to place and confirm
orders electronically.
o Warehouse Distributor. The Company has three products available to
meet the needs of warehouse distributors. One of these products, A-DIS,
provides applications for the management of large warehouse
distributors, handling complex inventory management issues, parts
purchasing, product pricing, parts returns management, sales history and
complete financial management services. A-DIS is fully connected to CCI
AutoBahn, as well as to J-CON, a PSO product, and to ServiceExpert EZ, a
service dealer product. A second product, Ultimate, is designed and
targeted at regional and local warehouse distributors or at national
distributors that primarily service stores in a compact geographic area
that are looking to manage multiple locations and inventories on a
single system. For independent warehouse distributors that have
specialty products and services, the Company's third product, Eclipse,
offers the additional flexibility needed for these customers.
o Parts Sales Outlet. The Company currently markets three products to
PSOs: J-CON, Eclipse and Prism. These products all operate on platforms
that are assembled and integrated by the Company. J-CON was developed
for the management of PSOs that are members of a national account
program, trade principally with a single warehouse and are connected to
that warehouse by an A-DIS system. J-CON also allows the PSO to connect
with service dealers through ServiceExpert EZ. Much like A-DIS, J-CON
serves as an inventory management and electronic purchasing tool.
Eclipse tracks inventory, performs accounting functions and executes
point-of-sale operations such as invoicing and billing. Prism, the
newest generation of PSO applications, is designed to meet the needs of
both national and independent PSOs as well as PSOs in a two-step
distribution process. In addition to its existing product lines, the
Company maintains and supports three products that it no longer sells,
the Series 11, 12 and 14 products, which account for a significant
portion of the Company's installed base of customers.
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o Service Dealer. The Company has two products that it markets to service
dealers, including ServiceExpert EZ and PACE, which are all focused to
specific segments of the service dealer market. The ServiceExpert EZ
family of products is the Company's platform of the future in the
service dealer market. These products offer a complete shop management
solution which blends the Company's databases, software applications,
detailed labor estimates and recommended vehicle service intervals with
the latest in workstation technology, incorporating easy-to-use
pull-down windows. ServiceExpert EZ creates printed repair estimates,
automated work orders and maintains individual vehicle records and
histories, enabling users to notify customers of required preventive
maintenance and create other special promotions tailored to the service
dealers' individual customer base. ServiceExpert EZ can be connected to
the Company's PSO and warehouse distributor products to allow parts
inquiry and ordering functions in the service dealer's parts supplier
network. ServiceExpert EZ can be expanded to include inventory
management and can be integrated with general accounting applications.
The PACE product is specifically tailored to the Canadian service dealer
market and is exclusively marketed in Canada.
HARDLINES AND LUMBER SYSTEMS (16.6% OF 1998 REVENUES)
Principal Products
The Company's hardlines and lumber systems automate inventory control,
point-of-sale functions (such as invoicing and billing), payroll, accounting and
purchase orders. The Company's principal hardlines and lumber industry products
are as follows:
o Triad Eagle. Triad Eagle blends the power and flexibility of the
Company's management information systems with applications and features
created to meet the unique needs of lumber and building materials
operations. The Triad Eagle system manages the flow of a typical
transaction, including estimating, ordering, inventory management,
shipping, invoicing and tracking accounts receivable.
o Triad CSD. The Triad CSD series of systems is designed for mid- to
large-sized hardlines and lumber dealers due to its greater power and
functionality. Triad CSD allows for product offerings suitable for
hardlines and building materials chains with up to 20 stores and $150
million in annual sales.
o Triad Falcon. Triad Falcon is the Company's recently introduced, next
generation product targeted at larger lumber and building material and
home center retailers. Triad Falcon provides flexibility in tailoring
the system to meet the needs required of individuals, groups,
departments and single or multiple store locations.
o Triad Gemini. The Triad Gemini system was recently acquired and is
designed for large hardlines and lumber dealers. Triad Gemini customers
represent some of the largest companies in the hardlines and lumber
industry. Gemini's largest customer has over 160 locations with revenue
exceeding $1 billion and is currently in the Top 10.
o True Start. The True Start product incorporates the TruServ database
product. It is designed as a stand-alone unit but may also be integrated
as part of a hardlines system for TruServ members.
CUSTOMER SUPPORT SERVICES (39.1% OF 1998 REVENUES)
The Company's customer support services organization provides service, training
and support to the Company's customers. The Company's system owners are
principally small business proprietors without the internal staffing or
expertise to train users or to maintain computer systems on a consistent basis.
These customers require a high level of service, training and support.
The Company typically provides a limited warranty on its systems ranging from 30
to 90 days. The Company also sells a variety of post-sale support programs
through its system support agreements, including on-site preventive and remedial
maintenance, hardware engineering modifications, depot repair services and daily
system operating support by phone. The Company's customers can call the
Company's AdviceLine service which gives them access to trained personnel able
to perform on-line diagnostics or to field engineers if on-site service is
necessary. Virtually all new system customers enter into system support
agreements, and most retain such service agreements as long as they own the
system. Monthly fees vary with the system size and configuration. The agreements
are generally one year in length with 30 to 90 day cancellation notice periods.
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The Company offers training for new and existing customers at the facilities of
both the Company and its customers. In addition to training in system operations
and software enhancements, the Company offers seminars and workshops to assist
customers in understanding the capabilities of their systems.
For many of the Company's large automotive warehouse distributor customers, the
Company provides information facilities management services. Many of these are
facilitated through a limited partnership arrangement. Through these
arrangements the Company provides customers with on-site managers and employees
experienced in warehouse and store applications to operate the customers'
computer facilities.
INFORMATION SERVICES (22.5% OF 1998 REVENUES)
The Company licenses its proprietary databases to its customers in return for a
license fee and monthly subscription fees entitling customers to periodic
updates. These database products generate recurring revenues through monthly
subscription fees and differentiate the Company's products from those of its
competitors. The Company currently offers databases to its automotive parts
aftermarket industry customers as well as point-of-sale data and analysis to
manufacturers in both the automotive parts aftermarket and hardlines and lumber
industries.
o Electronic Catalog. The Company's electronic catalog product
provides information relating to over 17 million automobile application
parts. This database virtually eliminates the time consuming and
cumbersome use of printed catalogs and is designed to increase
productivity and accuracy in parts selection and handling. Proprietary
software on the Company's warehouse distributor, PSO and service dealer
systems enables the user to access the electronic catalog database.
Customers use the catalog feature within their warehouse distributor,
PSO or service dealer system to identify parts associated with a
specific vehicle. The Company charges a monthly subscription fee for its
electronic catalog database and provides customers with periodic
updates. At September 30, 1998, approximately 10,000 customers had
licensed the Company's electronic catalog. Customers are provided
updates to the Company's electronic catalog monthly.
o Interchange. Interchange is a database product that allows the cross
reference of original equipment manufacturers part numbers to
aftermarket manufacturers part numbers and from one aftermarket supplier
to another for the same part. This product, which is sold on a monthly
subscription basis enables the warehouse distributor, PSO or service
dealer to identify a suitable replacement part when only the part number
of the old part is known. Interchange replaces a cumbersome paper-based
process that can involve many different catalogs to identify the correct
part. Customers are provided updates to the Company's Interchange
monthly.
o Telepricing. The Telepricing service provides electronic price updates
directly to the warehouse distributor, PSO or service dealer system for
automotive parts following a manufacturer's price change, eliminating a
customer's need to input this data manually. Telepricing service
customers pay an initial license fee and a monthly subscription fee for
this updating service. Customers are provided updates to the Company's
Telepricing service daily and weekly.
o LaborGuide Database. The Company has licensed from Mitchell the
LaborGuide database, which provides authorized guidance of labor hours
for car repairs. This database, which can be integrated with the
Company's PSO systems and the ServiceExpert EZ family of products, is
targeted to the approximately 340,000 service dealers in the United
States. LaborGuide permits users to comply more easily with regulations
in many states that require written estimates of repair costs. The
repair functions within LaborGuide have been mapped to the appropriate
parts in the electronic parts catalog database, providing for a
seamless, efficient process of gathering of parts and labor information
by the service dealer in preparing a repair estimate. Customers are
provided updates to the Company's LaborGuide database monthly.
o RepairSource. The Company has a license for the integration and
distribution of Mitchell's "Mitchell on Demand" electronic automobile
repair information product. The Company has integrated this product into
its ServiceExpert EZ system and markets it under the name RepairSource.
RepairSource is an electronic database which includes original equipment
manufacturers' technical service bulletins, repair information and
wiring diagrams specific to each automobile model. This information,
coupled with the Company's parts and labor databases, enables a service
dealer to easily and quickly prepare a service estimate and associated
technical repair instructions for each job. Customers are provided
updates to the RepairSource database monthly.
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o Databases for Manufacturers. The Company markets database services
to auto parts manufacturers. In addition to the full Telepricing
database, manufacturers may select only certain categories of parts, or
may choose the Competitive Analysis service, which compares price levels
and number of applications to a competitor's product line. The Company's
transaction analysis services, MarketPACE for the automotive parts
aftermarket and VISTA for the hardlines and lumber industry, report
product movement information based on point-of-sale data collected at
the independent retail levels in the respective markets. MarketPACE
services supply comprehensive point-of-sale information and inventory
analysis providing the decision support tools required to increase
sales, boost productivity, improve distribution and enhance customer
service for warehouse distributors and PSOs. VISTA information services
provide product manufacturers with ongoing measurement of brand and item
movement with major product classifications using point-of-sale business
analysis data from independent hardware stores, home centers and lumber
and building materials outlets. Information provided by the MarketPACE
and VISTA services give manufacturers insight into how a specific
product or brand performs against its competitors and the market in
general.
CUSTOMER FINANCING (3.2% OF 1998 REVENUES)
The Company believes that the ability to offer lease financing to its customers
shortens the sales cycle by eliminating the need for third party financing and
provides a competitive advantage in marketing and promoting the Company's
products. The Company offers such financing through its wholly owned subsidiary,
Triad Financial. These financing leases are noncancelable with terms from one to
six years. At September 30, 1998, Triad Systems Financial Corporation ("Triad
Financial") had a portfolio of outstanding leases to over 6,000 customers with a
balance of approximately $154 million.
Periodically, lease receivables are sold pursuant to discounting agreements with
banks and lending institutions under which available lines were approximately
$40.3 million at September 30, 1998. At the time of sale, the Company records
the newly-created servicing liabilities (lease servicing obligation and recourse
obligation) at their estimated fair value. Gains resulting from the sale of
lease receivables are reflected in finance revenue.
The discounting agreements contain restrictive covenants which allow the Company
to discount only while in compliance with such covenants. In the event of
non-compliance, the banks and lending institutions could assume administrative
control (servicing) of the lease portfolio and could discontinue future
transactions under the discounting programs. During the year ended September 30,
1998, the Company was in compliance with the covenants, and management believes
that it will maintain compliance with such covenants in the foreseeable future.
Pursuant to the discounting agreements, the Company is contingently liable for
losses in the event of lessee nonpayment up to stated recourse limits (up to 10%
of the aggregate initial proceeds adjusted for certain expenses and payments
remitted on the leases) and full recourse on lease receivables discounted that
did not meet the bank or lending institutions credit worthiness test. At
September 30, 1998, the Company had an immaterial amount of lease receivables
discounted that are subject to full recourse.
At September 30, 1998, the contingent liability for leases sold was
approximately $27.2 million. The Company provides for the fair value of the
recourse obligation based upon an analysis that considers among other things,
the credit worthiness of the lease receivable, the recourse provision the lease
receivable is subject to and the Company's historical experience, which includes
loss recoveries through resale of repossessed systems.
SALES AND MARKETING
The Company markets its products to the automotive parts aftermarket industry
through a geographically-based direct sales force and a telesales/telemarketing
organization with approximately 120 employees. Incentive pay is a significant
portion of the total compensation package for all sales representatives and
sales managers. Additionally, the Company leverages its relationships with large
warehouse distributors through its National Account Program, in which these
accounts resell PSO systems to either company owned stores or to other customers
that are closely associated to the warehouse distributor.
Similarly, the Company markets its products and services to the hardlines and
lumber industry through a geographically-based direct and
telesales/telemarketing sales force of approximately 100 employees. As in the
automotive parts sales organization, incentive pay is a significant portion of
the total compensation package for all sales personnel.
7
<PAGE> 10
The Company's marketing approach in the hardlines and lumber industry has been
to develop close relationships with key market influencers. This strategy
includes obtaining endorsements and developing exclusive relationships,
distributor partnerships and other alliances. Currently, the Company enjoys over
40 such relationships in the industry. The goal of this relationship program is
to enhance the productivity of the field sales team and create leveraged selling
opportunities for system sales, information services and support revenues.
In 1997, the Company entered into a seven year alliance with TruServ that gives
the Company an endorsement and computerization responsibility for many of
TruServ's approximately 5,800 TruServ stores. Management believes that this
approach will make computerization benefits more visible to noncomputerized
stores while improving the utilization of previously computerized stores. Ace
Hardware and Hardware Wholesalers Inc. also work closely with the Company
through a small team of national account managers.
SYSTEM INTEGRATION AND ASSEMBLY
The Company does not manufacture any of the hardware components of its systems,
but the Company does assemble and integrate its products with hardware
components and software products of third party vendors. As of September 30,
1998, the Company employed approximately 90 employees in its system integration
operation.
The Company utilizes a just-in-time inventory system to help ensure that
efficient cost controls are in place. The commodity nature of the component
business ensures a consistent supply of required components. In addition to the
external customer base, the Company's manufacturing facility also produces
engineering workstations and personal computers for internal use.
SOFTWARE DEVELOPMENT AND TECHNOLOGY
The Company has approximately 200 copyrights and approximately 130 registered
trademarks. The Company attempts to protect its proprietary information in a
number of ways. First, the Company distributes its software through licensing
agreements, which require licensees to acknowledge the Company's ownership of
the software and the confidential nature of the Company's proprietary
information. Secondly, all Company personnel are required to assign all rights
of such personnel to inventions, patents and confidential information to the
Company and to agree to keep confidential and not disclose to third parties the
Company's proprietary information. Finally, the Company requires that all other
third parties receiving proprietary information of the Company execute a
non-disclosure agreement.
CUSTOMERS AND SUPPLIERS
No single customer accounted for more than 10% of the Company's total sales in
fiscal 1998. The Company experiences limited customer turnover, with retention
rates in excess of 95% on an annual basis. The Company has a significant number
of suppliers predominantly associated with its assembly operations. The Company
does not obtain more than 10% of its components from a single supplier.
EMPLOYEES
As of September 30, 1998, the Company had approximately 1,800 employees, none of
which were represented by unions. The Company has not experienced any labor
problems resulting in a work stoppage and believes it has good relations with
its employees.
ITEM 2. PROPERTIES.
Other than its Newton, New Jersey facility, the Company does not own any real
property. The Company's properties include assembly, software development and
data entry facilities and administrative, executive and sales offices. The
Company's principal executive offices are located at 6207 Bee Cave Road, Austin,
Texas. The Company considers its properties to be modern and well maintained and
suitable for their present and intended purposes and adequate for the Company's
current level of operations.
8
<PAGE> 11
Listed below are the principal properties operated by the Company as of
September 30, 1998.
<TABLE>
<CAPTION>
APPROX.
SIZE LEASE
LOCATION (SQ. FT.) DESCRIPTION OF USE TERMINATION
-------- --------- ------------------ -----------
<S> <C> <C> <C>
Owned:
Newton, New Jersey........... 28,000 Administrative; software development NA
Leased:
Livermore, California........ 220,000 Divisional executive offices; software 2002
development; data entry; sales; administrative
Austin, Texas................ 49,000 Systems integration and assembly 2002
Austin, Texas................ 36,000 Principal executive offices; software development 2002
Longford, Ireland............ 21,000 Data entry 2027
Austin, Texas................ 20,000 Secondary executive offices; finance and 1999
accounting
Pleasanton, California....... 20,000 Administrative; sales 1999
Florence, Alabama............ 18,000 Administrative; sales; customer support 2001
Austin, Texas................ 18,000 Data entry 2000
Denver, Colorado............. 17,000 Administrative; software development 1999
Plymouth, Minnesota.......... 13,000 Administrative; sales and customer support 1999
Austin, Texas................ 11,000 Administrative 1999
Toronto, Canada.............. 8,600 Sales 2002
</TABLE>
In addition, the Company has short-term leases on over 100 offices and field
service locations in the United States, Canada, the United Kingdom, France and
Puerto Rico. The Company has also signed a lease for approximately 57,000 square
feet of office space in Austin, Texas and will move its automotive division
operations into the new facility in the second quarter of fiscal 1999,
consolidating out of Austin facilities with leases expiring in 1999. The Company
has leased this facility through January 2006.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings and administrative actions,
all of which are of an ordinary or routine nature incidental to the operation of
the Company. In the opinion of the Company's management, such proceedings and
actions should not, individually or in the aggregate, have a material adverse
effect on the Company's results of operations, financial condition or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's securityholders in the
Company's fourth fiscal quarter in 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for any class of the Company's
common equity. All of the Company's common stock is held by Cooperative
Computing Holding Company, Inc. ("Holding"). Neither the Company nor Holding
paid any dividends in fiscal 1998, nor do they anticipate paying any dividends
in the foreseeable future. The Company's ability to pay such dividends is
limited by the terms of the Company's Restated Senior Credit Facilities (as
hereinafter defined). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of the Company for the
years ended November 30, 1994, 1995 and 1996, the ten-month period ended
September 30, 1997 and the year ended September 30, 1998. The balance sheet data
as of September 30, 1997 and 1998, and the statement of operations data for the
year ended November 30, 1996, the ten-month period ended September 30, 1997, and
the year ended September 30, 1998 set forth below are derived from the audited
consolidated financial statements of Old CCI and the Company included elsewhere
herein. The balance sheet data as of November 30, 1996 and the statement of
operations data as of November 30, 1995 set forth below are derived from audited
consolidated financial
9
<PAGE> 12
statements of Old CCI and the Company not included herein. The selected
financial data for the year ended November 30, 1994 and the balance sheet data
as of November 30, 1994 and 1995 are derived from unaudited financial statements
of Old CCI. The unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the consolidated financial
position and the consolidated results of operations for these periods. The
selected financial data below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the audited consolidated financial statements of the Company included elsewhere
herein.
<TABLE>
<CAPTION>
OLD CCI CCI
------------------------------------------- -------------------------
TEN-MONTH
PERIOD
YEAR ENDED NOVEMBER 30, ENDED YEAR ENDED
------------------------------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1997 1998
--------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (Dollars in Thousands)
Revenues ........................................ $ 27,508 $ 29,245 $ 36,734 $ 140,316 $ 227,221
Cost of revenues ................................ 15,356 16,733 21,857 84,464 143,516
--------- --------- --------- --------- ---------
Gross profit .................................... 12,152 12,512 14,877 55,852 83,705
Sales and marketing ............................. 1,773 2,061 2,038 28,161 49,197
Product development ............................. 6,768 7,485 8,347 11,890 15,401
General and administrative ...................... 3,311 2,675 2,992 19,929 37,643
Write off of purchased in-process research
and development ................................ -- -- -- 23,100 --
--------- --------- --------- --------- ---------
Total operating expenses ........................ 11,852 12,221 13,377 83,080 102,241
Operating income (loss) ......................... 300 291 1,500 (27,228) (18,535)
Interest expense ................................ -- -- -- 8,403 15,868
Other income (expense), net ..................... -- 414 4,231(1) 443 766
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary charge ........................... 300 705 5,731 (35,188) (33,637)
Income tax benefit .............................. -- -- -- 1,001 8,731
--------- --------- --------- --------- ---------
Income (loss) before extraordinary charge ....... 300 705 5,731 (34,187) (24,906)
Extraordinary charge, net of taxes .............. -- -- -- -- 3,017
--------- --------- --------- --------- ---------
Net income (loss) ............................... $ 300 $ 705 $ 5,731 $ (34,187) $ (27,923)
========= ========= ========= ========= =========
UNAUDITED PRO FORMA INFORMATION:(2)
Historical income (loss) before provision
for income taxes ............................... $ 300 $ 705 $ 5,731 $ (35,188)
Pro forma income tax (provision) benefit ........ (73) (157) (1,931) 2,392
--------- --------- --------- ---------
Pro forma net income (loss) ..................... $ 227 $ 548 $ 3,800 $ (32,796)
========= ========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents ....................... $ 2,716 $ 1,415 $ 4,004 $ 1,633 $ 1,159
Working capital (deficit) ....................... (1,271) (2,231) (3,490) 603 6,101
Total assets .................................... 13,807 16,115 18,763 307,940 300,849
Total debt, including current maturities ........ 4,389(3) 5,089(3) 5,089(3) 144,967(4) 183,318(4)
Stockholders' equity ............................ 5,124 5,273 5,227 53,699 25,363
</TABLE>
(1) Included in other income, net, are net gains of $3.4 million related to
settlement of two breach of contract lawsuits recognized by Old CCI.
(2) Concurrent with the Triad Acquisition, Old CCI terminated its S
Corporation status. The unaudited pro forma (provision) benefit for
income taxes computes the tax as if Old CCI and CCI had been subject to
corporate income tax for the entire period.
(3) Consists of advances from stockholders repaid during fiscal 1997.
(4) Total debt does not include any amounts relating to lease receivables
that have been sold by the Company.
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<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the audited historical
consolidated financial statements and notes thereto, which are included
elsewhere herein.
On February 27, 1997, the Company consummated the Triad Acquisition. The Triad
Acquisition has been accounted for as a purchase and, accordingly, the results
of operations of Triad are included in the consolidated financial statements
from the date of the Triad Acquisition. In accounting for the Triad Acquisition,
certain intangible assets were assigned values greater than historic book
values, and the amortization of these assets impact the financial statements
since the date of the Triad Acquisition.
On February 10, 1998, the Company refinanced approximately $149.7 million of
indebtedness, primarily incurred in connection with the Triad Acquisition,
through the issuance of $100.0 million of 9% Senior Subordinated Notes (the "Old
Notes") due 2008 and the restructuring of an existing $170.0 million Senior
Credit Facility into a $50.0 million term loan facility and a $50.0 million
revolving credit facility ("Restated Senior Credit Facilities"). The Old Notes
were issued subject to an exchange and registration rights agreement, pursuant
to which the Company filed a registration statement on April 4, 1998 and
subsequently exchanged the Old Notes for identical registered 9% Senior
Subordinated Notes due 2008 (together with the Old Notes, the "Notes").
On March 1, 1998, the Company consummated the ARISB Acquisition for
approximately $9.3 million in total consideration (including the assumption of
certain liabilities). This acquisition was funded through the Restated Senior
Credit Facilities, and the results of operations from the ARISB Acquisition,
which are immaterial, are included in the consolidated financial statements from
the date of the acquisition.
As a result of the significant impact on operations of the Triad Acquisition,
the debt restructuring on February 10, 1998, the ARISB Acquisition, and the
Company changing its fiscal year end from November 30 to September 30 in 1997,
resulting in a ten-month fiscal year for 1997, the results of operations for
fiscal 1997 and fiscal 1998 are not directly comparable to corresponding future
and prior periods.
GENERAL
The Company is the largest designer, provider and servicer of management
information systems and solutions for the automotive parts aftermarket industry
and is a leading designer, provider and servicer of management information
systems and solutions for the hardlines and lumber industry. The automotive
parts aftermarket industry consists of the production, sale and installation of
both new and remanufactured parts used in the maintenance and repair of
automobiles and light trucks. The hardlines and lumber industry consists of the
sale of products for residential and commercial building construction,
maintenance and repair and agribusiness. The Company's system offerings are
enhanced by extensive information services featuring highly specialized database
products and customer support and maintenance services. These products and
services are designed to significantly improve the profitability of the
Company's customers and, in turn, provide the Company with a stable customer
base as well as a receptive market for new products. The revenues associated
with customer support and information services are of a recurring nature and
represented approximately 62% of total revenues in fiscal 1998. The Company's
total revenues for the year ended September 30, 1998 were $227.2 million.
HISTORICAL RESULTS OF OPERATIONS
Year Ended September 30, 1998 Compared to Ten Months Ended September 30, 1997
Revenues for the year ended September 30, 1998 were $227.2 million compared to
$140.3 million for the ten months ended September 30, 1997, an increase of $86.9
million or 62%. The majority of this increase is attributable to the acquisition
of Triad, which had total revenues $66.4 million for the five months prior to
the acquisition in 1997. The ARISB Acquisition accounted for $7.3 million of the
increase and the remaining increase was due to increases in recurring customer
services and information services revenues and the effect of the shorter
comparison period in 1997.
Systems revenues for the year ended September 30, 1998, increased $24.8 million
or 45% to $79.9 million as compared to the ten months ended September 30, 1997,
primarily due to the Triad Acquisition and the effect of the shorter comparison
period in 1997. Triad had systems revenues of $21.1 million during the five
months prior to the acquisition.
11
<PAGE> 14
Revenues from customer support services and information services which are
recurring in nature increased $60.3 million or 76% to $140.0 million for the
year ended September 30, 1998 as compared to the ten months ended September 30,
1997. The majority of this increase is due to the acquisition of Triad, which
had customer support services and information services revenues of $43.1 million
for the five months prior to the acquisition in 1997. Additionally, the ARISB
Acquisition accounted for $7.3 million of the increase. The remaining increase
in revenues primarily was due to the shorter comparison period in 1997 and
increases in hardlines customer support services and information services
revenues. The increase in customer support services revenues was driven by
systems sales to new customers, and the increase in information services
revenues was driven by increases in sales of point-of-sale information within
the hardlines industry.
Revenues from financing activities increased $1.7 million to $7.3 million for
the year ended September 30, 1998 as compared to the ten months ended September
30, 1997. This increase is primarily a result of the financing activities
acquired in the Triad Acquisition being included for the entire twelve month
period ending September 30, 1998 versus seven months in the previous year.
Cost of revenues were $143.5 million for the year ended September 30, 1998
compared to $84.5 million for the ten months ended September 30, 1997, an
increase of $59.0 million or 70%. The majority of the increase was due to the
acquisitions of Triad and ARISB, the shorter comparison period for 1997, and
increased revenues. Triad had cost of revenues of $38.3 million for the five
months prior to the acquisition in 1997. Additionally, the additional five
months of amortization of intangible assets acquired in the Triad Acquisition
and revalued through purchase accounting increased cost of revenues by $6.3
million for the year ended September 30, 1998. The ARISB Acquisition accounted
for $5.4 million of the increase in cost of revenues.
Cost of systems revenues for the year ended September 30, 1998 increased $19.1
million to $54.3 million as compared to the ten months ended September 30, 1997,
primarily due to the Triad Acquisition and associated purchase accounting and
the shorter comparison period for 1997. Triad had cost of systems revenues of
$12.0 million during the five months prior to the acquisition, and the
additional five months of amortization of developed software acquired in the
Triad Acquisition and revalued through purchase accounting increased costs by
$5.1 million for the year ended September 30, 1998.
Cost of revenues for services and finance for the year ended September 30, 1998
increased $39.9 million to $89.2 million as compared to the ten months ended
September 30, 1997. The acquisitions of Triad and ARISB and the shorter
comparison period for 1997 accounted for the majority of the increase. Triad had
cost of revenues for services and finance of $26.4 million for the five months
prior to the acquisition in 1997. The additional five months of amortization of
intangible assets acquired during the Triad Acquisition and revalued through
purchase accounting entries increased costs by $1.2 million for the year ended
September 30, 1998. The ARISB Acquisition also increased cost of services
revenues by $5.4 million.
Cost of revenues for customer services and information services have increased
due to increased revenues, driven by the shorter comparison period in 1997 and
growth in the installed customer base, primarily within the hardlines industry.
As a percentage of revenues, cost of revenues for customer services has
increased as the Company has invested in additional headcount in the customer
services area in order to improve customer response times. Additionally, growth
in revenues from customer training and education services, which carry a lower
gross margin, have contributed to this increase as well.
Operating expenses for the year ended September 30, 1998 were $102.2 million, an
increase of $19.2 million over the ten months ended September 30, 1997. This
increase primarily is related to the Triad Acquisition. Triad had operating
expenses of $27.7 million for the five months prior to acquisition, and the
additional five months of amortization of intangible assets acquired and
revalued in the Triad Acquisition increased operating expenses by $5.9 million.
The operating expenses for the ten months ended September 30, 1998 include $23.1
million write-off of purchased in-process research and development acquired
during the Triad Acquisition.
Product development expenses for the year ended September 30, 1998 increased
$3.5 million to $15.4 million as compared to the ten months ended September 30,
1998, primarily due to the Triad Acquisition and the shorter comparison period.
Triad had product development expenses of $4.1 million for the five months prior
to the acquisition in 1997. Sales and marketing expenses for the year ended
September 30, 1998 increased $21.0 million to $49.2 million as compared to the
ten months ended September 30, 1998, primarily due to the Triad Acquisition and
the shorter comparison period. Triad had sales and marketing expenses of $18.8
million for the five months prior to the acquisition in 1997. General and
administrative expenses for the year ended September 30, 1998 increased $17.7
million to $37.6 million as compared to the ten months ended September 30, 1997,
primarily due to the Triad Acquisition and the shorter comparison period. Triad
had general and administrative expenses of
12
<PAGE> 15
$4.8 million for the five months prior to the acquisition in 1997, and the
amortization of intangible assets acquired in the Triad Acquisition and revalued
through purchase accounting increased general and administrative costs by $5.9
million. The remaining increase in general and administrative expenses is due to
the shorter comparison period in 1997 and expense increases due to a number of
factors, including the consolidation of the Triad and ARISB finance functions to
Austin, Texas, the acquisition of ARISB, an increase in rent expense on the
Livermore, California facility, and investments in staffing, infrastructure, and
communications to support the Company's internal information systems.
Interest expense for the year ended September 30, 1998 was $15.9 million, an
increase of $7.5 million from the ten months ended September 30, 1997. The
increase was due to the increased interest expense generated by the additional
five months of interest from the debt incurred from the Triad Acquisition and
the additional debt incurred during 1998. Other income for the year ended
September 30, 1998 was $0.8 million, a $0.4 million increase over the ten months
ended September 30, 1997.
The Company recorded an income tax benefit attributable to continuing operations
of $1.0 million and $8.7 million for the ten months ended September 30, 1997 and
year ended September 30, 1998, respectively. Additionally, the Company recorded
an income tax benefit of $2.0 million related to the extraordinary charge for
the year ended September 30, 1998. Prior to the Triad Acquisition, the Company
elected to be treated as an S Corporation. As such, the Company's taxable income
was included in the individual income tax returns of its stockholders. The
effect of the termination of S Corporation status was to recognize a
non-recurring charge of $2.4 million. The difference in benefit recognized for
the periods ended September 30, 1997 and 1998 was impacted primarily by the
$23.1 million write-off of in-process research and development associated with
the Triad Acquisition in 1997.
On February 10, 1998, the Company refinanced its existing debt resulting in an
extraordinary charge of $3.0 million, net of a tax benefit of $2.0 million, due
to the write-off of debt issuance costs associated with the original debt
facilities. Such charge is included in the results of operations for the year
ended September 30, 1998.
As a result of the above factors, the Company experienced a net loss of $27.9
million for the year ended September 30, 1998, an improvement of $6.3 million
from the loss recorded for the ten months ended September 30, 1997. Excluding
income tax benefits, the $3.0 million extraordinary charge in 1998, the
additional five months of amortization in 1998 of the intangible assets acquired
during the Triad Acquisition and revalued through purchase accounting, and the
$23.1 million write-off in 1997 of developed software acquired in the Triad
Acquisition, the Company's loss for the year ended September 30, 1998 would have
been $21.3 million compared to $12.1 million for the ten months ended September
30, 1997, primarily due to the $7.2 million increase in interest expense.
Ten Months Ended September 30, 1997 Compared to Year Ended November 30, 1996
Revenues for the ten months ended September 30, 1997 were $140.3 million
compared to $36.7 million for the year ended November 30, 1996, an increase of
$103.6 million or 282%. The Triad Acquisition accounted for essentially all of
the increase. Excluding the Triad Acquisition, CCI's revenues decreased $0.7
million to $36.0 million in the ten months ended September 30, 1997. The Company
minimized the effect of the shorter period through an increase in system sales
to national accounts and in information services revenue.
Cost of revenues for the ten months ended September 30, 1997 were $84.5 million
(or 60% of revenues) compared to $21.9 million (or 60% of revenues) for the year
ended November 30, 1996. The effects of the Triad Acquisition accounted for
$66.7 million, essentially all of the increase. Excluding the effects of the
Triad Acquisition, cost of revenues decreased from $21.9 million (or 60% of
revenues) for the year ended November 30, 1996 to $17.8 million (or 50% of
revenues) for the ten months ended September 30, 1997. The decrease in the
absolute dollar amount is due primarily to the shorter comparison period. The
decrease in the cost of revenues as a percentage of revenue is due to a
combination of an increase in sales of products serving warehouse distributors
which carry a lower percentage cost of revenues and the additional information
services revenues which carry low incremental costs.
Operating expenses (excluding the effects of the non-recurring charge) for the
ten months ended September 30, 1997 were $60.0 million compared to $13.4 million
for the year ended November 30, 1996, an increase of $46.6 million or 348% due
primarily to the effects of the Triad Acquisition. Operating expenses excluding
the Triad Acquisition decreased $0.5 million to $12.9 million primarily due to
the shorter period.
13
<PAGE> 16
The $23.1 million charge for purchased in-process research and development was a
charge to expense resulting from the value assigned to certain software
development activities in process at Triad which did not qualify for
capitalization in the purchase price allocation.
Interest expense of $8.4 million for the ten months ended September 30, 1997 is
due to interest expenses related to debt incurred in order to effect the Triad
Acquisition. Interest expense for the year ended November 30, 1996 was zero.
Other income for the ten months ended September 30, 1997 was $0.4 million
compared to $4.2 million for the year ended November 30, 1996, a decrease of
$3.8 million due primarily to the favorable settlement of two breach of contract
lawsuits in 1996.
The pro forma income tax (provision) benefit reflects the estimated corporate
income taxes as if CCI and Old CCI had not elected S Corporation status. See
Note 13 to the audited consolidated financial statements of the Company included
elsewhere herein.
CCI's net loss was $34.2 million for the ten months ended September 30, 1997,
compared to net income of $5.7 million for the year ended November 30, 1996.
Excluding the Triad Acquisition, net income was $2.2 million, a decrease of $3.5
million from the previous period, primarily due to a provision for income taxes
resulting from the termination of the Company's S Corporation status
concurrently with the Triad Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had $183.3 million in outstanding
indebtedness, an increase of $38.4 million from September 30, 1997. For the year
ended September 30, 1998, net cash provided by operations was $2.3 million. Cash
provided from operations was impacted adversely by a $10.9 million increase in
accounts receivable and a $9.6 million decrease in accrued expenses and other
liabilities, net of the effect of acquisitions. The increase in accounts
receivable was partially due to the strong systems sales during the last two
months of the year which caused accounts receivable to increase approximately
$6.0 million, disruption in the collections process due to the transition of
accounting functions acquired with the Triad and ARISB acquisitions to Austin,
and an approximate 10% decrease in sales financed by leases which could be sold
through arrangements with banks and lending institutions. The decrease in
accrued expenses and other liabilities was primarily due to decreases in accrued
compensation, tax-related liabilities, accrued severance expenses for the
consolidations of accounting and manufacturing which were substantially
completed in 1998, and lease loss reserves. Cash flow was also negatively
affected by a $2.0 million increase in inventories and a $1.6 million increase
in investment in leases which were offset by a $6.4 million increase in accounts
payable, net of the effect of acquisitions.
On February 10, 1998, the Company refinanced approximately $149.7 million of
indebtedness through the issuance of $100.0 million in Notes and the
restructuring of an existing $170.0 million Senior Credit Facility into a $50.0
million term loan facility and a $50.0 million revolving credit facility. The
Notes require semi-annual interest payments of $4.5 million, and the Company
estimates that, based on current debt levels, the Restated Senior Credit
Facilities will require annual interest payments of $7.5 million.
In addition to servicing its debt obligations, the Company requires substantial
liquidity for capital expenditures and working capital needs. The Company
requires working capital as it funds its customer leasing operations and then
periodically liquidates its lease portfolio through discounting arrangements
with banks and lending institutions. For the year ended September 30, 1998, the
Company's capital expenditures were $22.6 million, which includes $13.6 million
for capitalized computer software costs and databases. Additionally, the Company
is obligated to a minimum annual commitment of $1.0 million through 2011 for a
software license which allows the Company to sublicense software to customers in
the automotive industry.
The Restated Senior Credit Facilities impose certain restrictions on the
Company, the most significant of which include limitations on additional
indebtedness, liens, guarantees, payment or declaration of dividends, sale of
assets, investments, capital expenditures, and transactions with affiliates. The
Company must also meet certain tests relating to financial amounts and ratios
defined in the agreement. As of September 30, 1998, the Company was in
compliance with the amounts and ratios as defined in the agreement and measured
quarterly. Based on current financial projections, the Company anticipates that
it will be out of compliance with certain of these covenants during the year
ended September 30, 1999. Management is working with its lenders and anticipates
resetting the specified financial amounts and ratios defined in the agreement in
the first half of 1999 whereby no violation will occur or exist. However, there
can be no assurance that the Company will be successful in modifying
14
<PAGE> 17
its credit facilities. Management has successfully worked with the lenders in
the past to reset financial amounts and ratios and is not aware of any events or
circumstances that would preclude the Company from successfully resetting the
financial amounts and ratios with its lenders.
In connection with the Triad Acquisition in February 1997, the Company recorded
liabilities of $5.2 million for costs to be incurred in connection with the
consolidation of Triad's management, administration, manufacturing and finance
operations with the Company's. Such costs include the involuntary termination
of certain Triad employees ($4.1 million) and costs associated with a leased
building to be vacated as a result of the consolidation ($1.1 million).
Substantially all of these costs were incurred as of September 30, 1998.
During the year ended September 30, 1998, the Company completed an expense
alignment project which is anticipated to generate approximately $12.0 million
in annual expense savings. The Company did not record a material charge
associated with this action. These expense savings will contribute to
improvements in cash flow from operations. Additionally, the Company expects
working capital to improve in fiscal year 1999 due to a forecasted reduction in
accounts receivable, reducing the need for external financing. The Company
believes that, with the actions taken in 1998, cash flow from operations,
together with the amounts available under the Company's credit facility, should
be sufficient to fund its working capital requirements which include the
funding of the customer leasing operations. The revolving credit facility
allows the company to borrow up to $50 million, of which $32.8 million was
outstanding as of September 30, 1998.
Repayment of the $50.0 million term loan facility begins on March 31, 1999 at a
beginning rate of $2.0 million per quarter. All borrowings under the credit
facilities are scheduled to be repaid by March 31, 2003. While the Company
expects to service these obligations with cash flow from operations, its ability
to service its debt obligations is subject to future economic conditions and to
financial, business, and other factors, many of which are beyond the Company's
control. A portion of the Company's debt bears interest at floating rates;
therefore, its financial condition is and will be affected by changes in
prevailing rates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the AICPA issued SOP 97-2, Software Revenue Recognition, which
changes the requirements for revenue recognition effective for transactions
that the Company will enter into beginning October 1, 1998. In March 1998, the
AICPA also issued SOP 98-4, Deferral of the Effective Date of a Provision of
SOP 97-2, Software Revenue Recognition. The Company has determined that the
impact of the adoption of the SOP will not be material on its 1999 financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related
Information. This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company has not yet determined the
impact, if any, of adopting this standard. The disclosures prescribed by SFAS
131 are effective in 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 ("SFAS 130"), Reporting Comprehensive Income. This standard establishes
standards for reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in equity during
a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustment and unrealized gain/loss on available for sale
securities. The disclosure prescribed by SFAS 130 must be made beginning with
the first quarter of 1999 and is not anticipated to have a material impact on
the Company's financial position or results of operations.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company determined that it was required to modify or replace significant
portions of its software so that its internal computer systems will function
properly with respect to dates in the year 2000 and thereafter. The Company has
had formal communications with all of its significant suppliers to determine the
extent to which the Company's interface systems are
15
<PAGE> 18
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. Some third party software vendors have notified the Company that their
products will not be compliant. In those cases, the Company has purchased new
versions of software or replaced the third party software completely. The
Company is utilizing internal resources to reprogram or replace and test the
software for Year 2000 modifications. The Company has completed a portion of the
modifications to its software and expects to have all modifications completed by
July 1999, which is prior to any anticipated impact on its operating systems.
The Company has not established a separate budget for making its internal
systems Year 2000 ready, rather, these expenditures are part of the Company's
regular capital budget.
The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its internal computer systems, the cost of which is not
expected to be material in relation to the Company's operations and historical
capital spending levels, however, if such modifications and conversions are not
successful, or are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company.
The Company has completed an assessment of the Year 2000 status of products that
it sells or has installed at customers. The majority of the Company's products
have been reprogrammed over the past year to make them Year 2000 ready. This
programming was completed by December 31, 1998. Product releases with the Year
2000 corrections were made available to customers during the first quarter of
1999 and are expected to be fully distributed to all customers with systems that
are being made Year 2000 ready by the end of the second quarter of 1999.
Certain older products which the Company was no longer marketing were determined
not to be upgradable for Year 2000 issues, due either to third party software
vendor constraints or hardware incompatibility. This affected a small number of
the Company's customers. The customers were notified of the situation in writing
during 1998. The Company has converted many of these customers to newer Year
2000 ready products and continues to work with the remaining customers to work
out viable options.
While there can be no assurance, based on currently available information, the
Company does not believe that the Year 2000 Issue as it relates to the
Company's products sold to customers will have a material adverse impact on the
Company's business, financial condition or results of operations. In addition,
there can be no assurance that the failure to ensure Year 2000 capability by a
supplier or other third party would not have a material adverse effect on the
Company's business, financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
At September 30, 1998, approximately $83 million of the Company's long-term
debt, specifically, borrowings outstanding under its Restated Senior Credit
Facilities, bears interest at variable rates. Accordingly, the Company's net
loss and after tax cash flow are affected by changes in interest rates. Assuming
the current level of borrowings at variable rates and assuming a two percentage
point change in the 1998 average interest rate under these borrowings, it is
estimated that the Company's 1998 interest expense would have changed by $1.7
million, resulting in a change in the Company's 1998 net loss and after tax cash
flow of $1.0 million. In the event of an adverse change in interest rates,
management would likely take actions to further mitigate its exposure; however,
due to the uncertainty of the actions that would be taken and their possible
effects, this analysis assumes no such actions. Further, this analysis does not
consider the effects of the change in the level of overall economic activity
that could exist in such an environment.
At September 30, 1998, the Company had several interest rate protection
agreements. The Company put these agreements in force to mitigate the interest
rate risk on its variable rate long-term debt. The fair value of these
agreements are not material at September 30, 1998, are not expected to become
material in the near-term, and have not been considered in the above analysis as
such agreements expire in fiscal 1999. At September 30, 1998, the interest rate
cap was 8% based on the LIBOR rate. Assuming a two percentage point increase in
the 1998 average LIBOR interest rate, it is estimated that the fair value of
these agreements would still not be material.
At September 30, 1998, the Company had $100 million of outstanding Notes. The
Notes were originally issued in February 1998 at their par value. At September
30, 1998, the Notes were trading at 84% of their par value, representing a fair
value of $84 million. The Notes bear interest at a fixed rate of nine percent
and are not subject to changes in interest rates.
16
<PAGE> 19
Foreign Currency Risk
The majority of the Company's operations are based in the U.S. and, accordingly,
the majority of its transactions are denominated in U.S. dollars; however, the
Company does have foreign based operations where transactions are denominated in
foreign currencies and are subject to market risk with respect to fluctuations
in the relative value of currencies. Currently, the Company has operations in
Canada, the United Kingdom and Ireland and conducts transactions in the local
currency of each location.
The Company monitors its foreign currency exposure and, from time to time, will
attempt to reduce its exposure through hedging. At September 30, 1998, the
Company had a foreign currency contract outstanding with notional amounts of
approximately $2.1 million. Such contracts mature in December 1998. Gains and
losses on foreign currency hedging have not been material.
17
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
Cooperative Computing Holding Company, Inc.
Audited Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................................19
Consolidated Balance Sheets as of September 30, 1997 and 1998........................................20
Consolidated Statements of Operations for the year ended November 30, 1996, the ten-month
period ended September 30, 1997, and the year ended September 30, 1998.............................21
Consolidated Statements of Changes in Stockholders' Equity for the year ended
November 30, 1996, the ten-month period ended September 30, 1997, and the year ended
September 30, 1998.................................................................................22
Consolidated Statements of Cash Flows for the year ended November 30, 1996, the ten-month
period ended September 30, 1997, and the year ended September 30, 1998.............................23
Notes to Consolidated Financial Statements...........................................................24
</TABLE>
18
<PAGE> 21
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cooperative Computing Holding Company, Inc.
We have audited the accompanying consolidated balance sheets of Cooperative
Computing Holding Company, Inc. as of September 30, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended November 30, 1996, the ten-month period ended September
30, 1997, and the year ended September 30, 1998. Our audits also include the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 Cooperative
Computing Holding Company, Inc. at September 30, 1997 and 1998, and the
consolidated results of its operations and its cash flows the year ended
November 30, 1996, the ten-month period ended September 30, 1997, and the year
ended September 30, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ ERNST & YOUNG LLP
Austin, Texas
December 21, 1998
19
<PAGE> 22
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,633 $ 1,159
Trade accounts receivable, net 25,819 37,774
Inventories 4,031 6,005
Investment in leases 1,735 2,792
Deferred income taxes 7,871 1,818
Prepaid expenses and other current assets 7,245 7,742
---------- ----------
Total current assets 48,334 57,290
Service parts 3,801 3,605
Property and equipment 10,355 12,528
Long-term investment in leases 14,378 14,771
Capitalized computer software costs 32,569 25,174
Databases 20,688 16,824
Deferred financing costs 5,436 6,310
Other intangibles 161,247 153,689
Other assets 11,132 10,658
---------- ----------
Total assets $ 307,940 $ 300,849
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,882 $ 16,249
Income taxes payable 1,803 -
Payroll related accruals 13,129 9,362
Deferred revenue 4,223 6,269
Current portion of long-term debt 6,436 6,229
Accrued expenses and other current liabilities 12,258 13,080
---------- ----------
Total current liabilities 47,731 51,189
Long-term debt 138,531 177,089
Deferred income taxes 53,240 37,487
Other liabilities 14,739 9,721
---------- ----------
Total liabilities 254,241 275,486
Stockholders' equity:
Common Stock:
Par value $0.000125; authorized 50,000,000; issued and
outstanding 35,220,000 4 4
Additional paid-in capital 88,994 88,994
Retained earnings (deficit) (35,299) (63,635)
---------- ----------
Total stockholders' equity 53,699 25,363
---------- ----------
Total liabilities and stockholders' equity $ 307,940 $ 300,849
========== ==========
</TABLE>
See accompanying notes.
20
<PAGE> 23
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands)
<TABLE>
<CAPTION>
TEN-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
NOVEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
------------ ------------- --------------
<S> <C> <C> <C>
Revenues:
Systems $ 18,544 $ 55,085 $ 79,928
Customer support and information services 18,190 79,654 139,990
Finance - 5,577 7,303
---------- ---------- ----------
Total revenues 36,734 140,316 227,221
Cost of revenues:
Systems 11,172 35,169 54,315
Services and finance 10,685 49,295 89,201
---------- ---------- ----------
Total cost of revenues 21,857 84,464 143,516
---------- ---------- ----------
Gross margin 14,877 55,852 83,705
Operating expenses:
Sales and marketing 2,038 28,161 49,197
Product development 8,347 11,890 15,401
General and administrative 2,992 19,929 37,643
Write off of in-process research and development - 23,100 -
---------- ---------- ----------
Total operating expenses 13,377 83,080 102,241
---------- ---------- ----------
Operating income (loss) 1,500 (27,228) (18,535)
Interest expense - (8,403) (15,868)
Other income (expense), net 4,231 443 766
---------- ---------- ----------
Income (loss) before income taxes and extraordinary charge 5,731 (35,188) (33,637)
Income tax benefit:
Nonrecurring charge for termination of Subchapter S
election - (2,382) -
C Corporation benefit - 3,383 8,731
---------- ---------- ----------
Total income tax benefit - 1,001 8,731
---------- ---------- ----------
Income (loss) before extraordinary charge 5,731 (34,187) (24,906)
Extraordinary charge, net of income tax benefit of $1,969 - - 3,017
---------- ---------- ----------
Net income (loss) $ 5,731 $ (34,187) $ (27,923)
========== ========== ==========
Unaudited pro forma information:
Historical income (loss) before provision for income
taxes $ 5,731 $ (35,188)
Pro forma provision for income taxes (1,931) 2,392
========== ==========
Pro forma net income (loss) $ 3,800 $ (32,796)
========== ==========
</TABLE>
See accompanying notes.
21
<PAGE> 24
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
------------------------------------------------------
Cooperative Canadian
Computing Holding Applied Data Aftermarket
Company, Inc. Specialties, Inc. Network, Inc. Additional Retained Total
------------------------------------------------------ Paid-in Earnings Stockholders'
Shares Amount Shares Amount Shares Amount Capital (Deficit) Equity
---------- ------ ------- ------ ------ ------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1995 16,000,000 $ 2 1,000 $ 1 1,000 $ 1 $ 249 $ 5,020 $ 5,273
Net income - - - - - - - 5,731 5,731
Shareholder distribution - - - - - - - (5,777) (5,777)
---------- --- ----- --- ----- ---- ------- --------- ---------
Balance, November 30, 1996 16,000,000 $ 2 1,000 1 1,000 1 249 4,974 5,227
Shareholder distributions - - - - - - - (6,209) (6,209)
Merger of Applied Data
Specialties, Inc. and
Canadian Aftermarket
Network, Inc. into
Cooperative Computing - - (1,000) (1) (1,000) (1) 2 - -
Holding Company
Issuance of Common Stock 19,220,000 2 - - - - 96,098 - 96,100
Common Stock issuance costs - - - - - - (7,355) - (7,355)
Foreign currency
translation adjustments - - - - - - - 123 123
Net loss - - - - - - - (34,187) (34,187)
---------- --- ----- --- ----- ---- ------- --------- ---------
Balance, September 30, 1997 35,220,000 4 - - - - 88,994 (35,299) 53,699
Foreign currency
translation adjustments,
cumulative loss of $290 - - - - - - - (413) (413)
Net loss - - - - - - - (27,923) (27,923)
---------- --- ----- --- ----- ---- ------- --------- ---------
Balance, September 30, 1998 35,220,000 $ 4 - $ - - $ - $88,994 $ (63,635) $ 25,363
========== === ===== === ===== ==== ======= ========= =========
</TABLE>
See accompanying notes.
22
<PAGE> 25
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
TEN-MONTH PERIOD
YEAR ENDED ENDED YEAR ENDED
NOVEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 5,731 $ (34,187) $ (27,923)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 1,711 4,585 8,337
Amortization 4,683 24,758 43,622
Write-off of in-process research and development - 23,100 -
Extraordinary loss from early extinguishment of debt,
net of income tax benefit - - 3,017
Other, net (272) 118 1,385
Changes in assets and liabilities, net of effects of
businesses acquired:
Trade accounts receivable 1,014 (11,231) (10,856)
Inventories 482 2,547 (1,974)
Investment in leases - 7,401 (1,616)
Deferred income taxes - (4,710) (9,231)
Prepaid expenses and other assets (385) 10,697 (1,120)
Accounts payable 753 (1,102) 6,367
Taxes payable - 1,803 -
Deferred revenue 350 3,027 1,895
Accrued expenses and other liabilities 1,184 (1,773) (9,600)
--------- ---------- ----------
Net cash provided by operating activities 15,251 25,033 2,303
INVESTING ACTIVITIES
Acquisition of Triad, net of cash acquired - (179,893) -
Purchase of property and equipment (1,617) (3,347) (6,754)
Capitalized computer software costs and databases (5,118) (11,879) (13,623)
Purchase of service parts (406) (754) (2,199)
Distributions received from partnerships 256 221 -
Acquisition of businesses, net of cash acquired - - (10,206)
Other - - (1,806)
--------- ---------- ----------
Net cash used in investing activities (6,885) (195,652) (34,588)
FINANCING ACTIVITIES
Issuance of common stock - 96,100 -
Stock issuance costs - (7,355) -
Proceeds from long-term debt - - 100,000
Proceeds from debt facility - 201,087 240,075
Payments on long-term debt facilities - (103,844) (301,804)
Debt issuance costs - (6,442) (6,460)
Shareholder distributions (5,777) (6,209) -
Advances from stockholders - 2,496 -
Repayments of advances from stockholders - (7,585) -
--------- ---------- ----------
Net cash provided by (used in) financing activities (5,777) 168,248 31,811
Increase (decrease) in cash and cash equivalents 2,589 (2,371) (474)
Cash and cash equivalents, beginning of period 1,415 4,004 1,633
--------- ---------- ----------
Cash and cash equivalents, end of period $ 4,004 $ 1,633 $ 1,159
========= ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ 6,792 $ 13,484
Income taxes $ - $ 139 $ 344
</TABLE>
See accompanying notes.
23
<PAGE> 26
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements for the periods ended September 30, 1997
and 1998 include the accounts of Cooperative Computing Holding Company, Inc.
("Holdings" or the "Company"), and its wholly owned subsidiary, Cooperative
Computing, Inc., a Delaware corporation ("CCI"). Holdings has no assets or
liabilities other than its investment in its wholly owned subsidiary CCI;
accordingly, these consolidated financial statements represent the operations of
CCI and its subsidiaries. The consolidated financial statements for the period
ended September 30, 1997 and 1998 include the accounts of Holdings, Holdings'
wholly owned subsidiary CCI and the wholly owned subsidiaries of CCI, which
include Triad Systems Financial Corporation, after elimination of CCI of
intercompany accounts and transactions.
Prior to February 27, 1997, the operations reflected in these financial
statements are those of Cooperative Computing, Inc., a Texas corporation ("Old
CCI"), Canadian Aftermarket Network, Inc. and Applied Data Specialty, Inc., all
of which were owned by the same individuals and are therefore presented on a
combined basis. All intercompany accounts and transactions between these
companies have been eliminated. Effective February 27, 1997, Canadian
Aftermarket Network, Inc. and Applied Data Specialty, Inc. merged into Old CCI.
Subsequent to February 27, 1997, these financial statements reflect the
consolidated operations and accounts of these entities after elimination of
intercompany accounts and transactions. For purposes of presentation,
"consolidated" refers to both consolidated and combined periods.
Also on February 27, 1997, Old CCI acquired substantially all of the outstanding
shares of Triad Systems Corporation ("Triad"). Concurrently, CCI Acquisition
Corporation, a wholly owned subsidiary of Old CCI, merged into Triad. Old CCI
contributed its operating assets and liabilities to Triad, and the resulting
company was renamed Cooperative Computing, Inc., a Delaware corporation, and Old
CCI was renamed Cooperative Computing Holding Company, Inc. As a result of the
significant impact of the Triad Acquisition, the debt restructuring in February
1998, the ARISB Acquisition and the change of the Company's fiscal year end and
from November 30 to September 30 in 1997, resulting in a ten-month fiscal year
for 1997, the results of operations for fiscal 1996, 1997 and 1998 are not
directly comparable.
DESCRIPTION OF BUSINESS
CCI is a leading provider of business and information management services to the
automotive aftermarket and the hardlines and lumber industry. CCI produces and
markets complex databases and software products, and designs, develops,
manufactures, markets, services and leases computer systems. Development and
assembly facilities are located in Austin, Texas; Livermore, California; Denver,
Colorado and Newton, New Jersey. Principal markets are located in the United
States, Canada, United Kingdom, Ireland, France and Puerto Rico.
CASH EQUIVALENTS
The Company considers all investments with maturities of ninety days or less
when purchased to be cash equivalents.
INVENTORIES
Inventories primarily consist of purchased parts and finished goods. Inventories
are stated at the lower of cost (first-in, first-out method) or market and
include amounts which ultimately may be transferred to equipment or service
parts.
SERVICE PARTS
Service parts used for servicing installed equipment are stated at cost and are
depreciated over a period not exceeding five years using the straight-line
method.
24
<PAGE> 27
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets (two
to ten years). Leasehold improvements are amortized using the straight-line
method over the life of the lease or the estimated useful life, whichever is
shorter.
INVESTMENT IN LEASES
At the inception of a lease, the gross lease receivable, the reserve for
potential losses, the estimated residual value of the leased equipment and the
unearned lease income are recorded. The unearned lease income represents the
excess of the gross lease receivable plus the estimated residual value over the
cost of the equipment leased. Certain initial direct costs incurred in
consummating the leases, included in the investment in leases, are amortized
over the life of the lease. Lease receivables sold pursuant to agreements with
banks or lending institutions that meet the sales criteria of FASB Statement No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities ("FAS 125") are removed from the balance sheet and
the gains are reflected in operations.
During 1997, the Company adopted the requirements of FAS 125, which applies to
all transactions occurring subsequent to December 31, 1996. Accordingly, the
Company modified several agreements to meet the new requirements to enable it to
continue recognizing transfers of certain receivables to a special-purpose
entity as sales. As a result, the impact of adoption on net loss in 1997 was
immaterial.
CAPITALIZED COMPUTER SOFTWARE COSTS
Costs relating to the conceptual formulation and design of software products are
expensed as product development. Costs incurred subsequent to establishing the
technological feasibility of software products are capitalized. Amortization of
capitalized software costs begins when the products are available for general
release to customers. Costs are amortized over the expected product lives and
are calculated using the greater of the straight-line method, generally over a
period of two to five years, or a cost per unit sold basis.
DATABASES
Database development costs consist primarily of direct labor costs associated
with the accumulation of data received from auto parts manufacturers and
converting that information to an electronic format. Costs are amortized using
the straight-line method over the approximate life cycle of the data (18 to 60
months). Management assesses the recoverability of its database costs
periodically based principally upon comparison of the net book value of the
asset to the expected future revenue stream to be generated by the asset. If
management finds evidence of asset impairment, its net book value is adjusted to
its fair value.
DEFERRED FINANCING COSTS
Financing costs are deferred and amortized to interest expense using the
interest method over the terms of the related debt. Amortization of such costs
for the ten-month period ended September 30, 1997 and the year ended September
30, 1998 totaled approximately $1,000,000 and $946,000, respectively.
OTHER INTANGIBLES
Other intangibles consist of goodwill, trademarks and tradenames, assembled work
force and favorable lease. Goodwill represents the excess of cost over the fair
value of assets acquired and is amortized using the straight-line method over 15
years. Trademarks and tradenames are amortized over fifteen years, assembled
workforce is amortized over five years and favorable lease is amortized over two
years.
AMORTIZATION
Amortization of databases is included in services and finance cost of revenues
and amortization of capitalized software is included in systems cost of
revenues. Amortization of other intangibles is included in general and
administrative expense.
25
<PAGE> 28
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
LONG-LIVED ASSETS
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. As of September 30, 1998 there were no events or
circumstances which indicated that long-lived assets of the Company might be
impaired.
REVENUE RECOGNITION
Services revenue is recognized in the period that the services are performed.
Systems revenue is recognized upon product shipment provided there are no
remaining significant obligations and collection is probable. Finance revenue is
recognized ratably over the lease term, except gains on sales of lease
receivables, which are recognized at the time of the sale.
INCOME TAXES
Prior to February 27, 1997, Old CCI, Applied Data Specialty, Inc. and Canadian
Aftermarket Network, Inc. elected to be treated as Subchapter S Corporations,
under the Internal Revenue Code of 1986 as amended, whereby federal income taxes
are the responsibility of the individual stockholders. Accordingly, these
companies did not provide for federal income taxes. Effective February 27, 1997,
Canadian Aftermarket Network, Inc. and Applied Data Specialty, Inc. merged with
Old CCI, the surviving entity. Old CCI was renamed Cooperative Computing Holding
Company, Inc. and its Subchapter S status was terminated thus becoming subject
to corporate income taxes.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, deferred income taxes were provided for all
temporary differences existing at the date of the Company's termination of its
Subchapter S status. Deferred taxes are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Income taxes are provided on the undistributed earnings
of foreign subsidiaries that are not considered to be permanently reinvested.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable, and other
accrued liabilities approximate fair value because of their short maturities.
Lease receivables are stated at the present value using the internal rate of
return which approximates fair value.
The Company's long-term debt consists of obligations with both variable and
fixed interest rates. The carrying value of debt obligations with variable
interest rates is considered to approximate fair value. The fair value of debt
obligations with fixed interest rates is based on the market prices for such
debt obligations. The fair value of total long-term debt at September 30, 1998
with a carrying value of $100 million is $84 million.
The Company utilizes interest rate cap agreements and foreign exchange contracts
to manage interest rate and foreign currency exposures. The principal objective
of such contracts is to minimize the risks and/or costs associated with
financial and global operating activities. The Company does not utilize
financial instruments for trading or other speculative purposes. The
counterparties to these contractual arrangements are major financial
institutions with which the Company also has other financial relationships. The
Company is exposed to credit loss in the event of nonperformance by these
counterparties. However, the Company does not anticipate nonperformance by the
other parties, and no material loss would be expected from their nonperformance.
Unrealized gains and losses on foreign exchange contracts are recognized
currently in the statement of operations and are not material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates and are not material.
26
<PAGE> 29
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
CERTAIN RISKS AND CONCENTRATIONS
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral from its customers. Most of the Company's customers
are in the automotive aftermarket or the hardlines and lumber industry.
The Company had one customer whose sales represented more than 10% of the
Company's total revenues in 1996. Sales to this customer were $6,184,000 in
1996. No customers accounted for more than 10% of the Company's revenues during
the ten-month period ended September 30, 1997 or the year ended September 30,
1998
OFF BALANCE SHEET RISK
The Company conducts business on a global basis in several international
currencies. As such, it is exposed to adverse movements in foreign currency
exchange rates. The Company enters into foreign exchange forward contracts to
reduce currency exposures. These contracts principally hedge exposures
associated with intercompany product sales denominated in Canadian dollars. The
Company does not enter into foreign exchange contracts for trading purposes.
Pursuant to agreements with banks and lending institutions for the sale of
lease receivables, the Company is contingently liable for losses in the event
of lessee nonpayment up to stated recourse limits. At September 30, 1998, the
contingent liability for leases sold was $27,154,000.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of subsidiary operations denominated in foreign
currencies are translated at the year-end rates of exchange and the income
statements have been translated at the average rates of exchange for the year.
Local currencies are considered to be the functional currencies.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the AICPA issued SOP 97-2, Software Revenue Recognition, which
changes the requirements for revenue recognition effective for transactions that
the Company will enter into beginning October 1, 1998. In March 1998, the AICPA
also issued SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition. The Company has determined that the impact of the
adoption of the SOP will not have a material impact on its 1999 financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related
Information. This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company has not yet determined the
impact, if any, of adopting this standard. The disclosures prescribed by SFAS
131 are effective in 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 ("SFAS 130"), Reporting Comprehensive Income. This standard establishes
standards for reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in equity during
a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustment and unrealized gain/loss on available for sale
securities. The disclosure prescribed by SFAS 130 must be made beginning with
the first quarter of 1999 and is not anticipated to have a material impact on
the Company's financial position or results of operations.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
NOTE 2. ACQUISITIONS
On February 27, 1997, the Company completed the acquisition of the outstanding
stock of Triad Systems Corporation ("Triad"). The total purchase price was
$182,715,000, including a cash payment of $182,140,000 and related acquisition
costs of $575,000. The transaction was accounted for as a purchase and,
accordingly, the operating results of Triad have been included in the Company's
consolidated financial statements since the date of acquisition.
In conjunction with the acquisition of Triad, the Company issued 9,600,000 new
shares of common stock for approximately $96,100,000, excluding related issuance
costs, and the Company entered into a $170,000,000 credit facility consisting of
a $135,000,000 term loan and a $35,000,000 revolving credit facility with a
consortium of financial institutions. The proceeds from the issuance of common
stock and the new credit facility were utilized to fund the acquisition of Triad
and refinance portions of Triad's existing debt.
27
<PAGE> 30
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The purchase price, including related acquisition costs, was allocated based on
an independent valuation obtained by the Company to the tangible and intangible
assets acquired and liabilities assumed based upon their respective fair values
on the date of acquisition as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets $ 77,855
Favorable lease 3,864
Computer software costs 38,700
Databases 15,900
Trademark and tradenames 22,100
Assembled workforce 11,700
In-process research and development 23,100
Goodwill 132,093
-----------
Total assets 325,312
Liabilities assumed 142,597
-----------
Net assets acquired $ 182,715
===========
</TABLE>
Liabilities assumed include approximately $5,200,000 of costs to be incurred in
connection with the consolidation of Triad's management administration,
manufacturing and finance operations with the Company's. Such costs include the
involuntary termination of certain Triad employees ($4,100,000) and costs
associated with a leased building to be vacated as a result of the consolidation
($1,120,000). Substantially all of these costs were incurred as of September 30,
1998.
In-process research and development includes the value of products in the
development stage and not considered to have reached technological feasibility.
The $23,100,000 allocated to in-process research and development was determined
based on an independent valuation and was expensed at the time of the
acquisition.
Other intangible assets will be amortized on a straight-line basis over
estimated useful lives ranging from two to fifteen years.
The following summarized unaudited pro forma financial information assumes the
acquisition of Triad had occurred on December 1, 1995 and 1996. Included in the
amounts for the year ended November 30, 1996 are the operations of Triad for the
year ended September 30, 1996. Included in the amounts for the ten months ended
September 30, 1997 are the operations of Triad for the five months ended
February 27, 1997. The following pro forma information is not necessarily
indicative of the results that would have occurred had the transaction been
completed at the beginning of the period indicated, nor is it indicative of
future operating results (in thousands):
<TABLE>
<CAPTION>
TEN-MONTH
YEAR ENDED PERIOD ENDED
NOVEMBER 30, SEPTEMBER 30,
1996 1997
------------ --------------
<S> <C> <C>
Revenues $ 212,410 $ 206,748
Net loss $ (22,675) $ (41,201)
</TABLE>
In March 1998, the Company closed on an asset purchase agreement with ADP Claims
Solution Group, Inc. ("ADP") in which the Company agreed to purchase certain
assets and assume certain liabilities of ADP's ARISB Business (the "ARISB
Acquisition"). The purchase price ($9,000,000 in cash), related acquisition
costs ($199,405), and liabilities assumed ($1,001,443) have been allocated to
the tangible net assets acquired ($2,623,353) based on their respective fair
values at the date of acquisition. The resulting excess purchase price
($7,577,000) was allocated to assembled network of Orion users ($4,818,000),
purchased software ($2,065,000), trademarks and tradenames ($364,000) and
assembled workforce ($330,000). The acquired company is engaged in providing
inventory and business management systems for the automotive recycling industry.
The operating results of the acquired company are immaterial to the Company's
consolidated financial statements.
NOTE 3. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable at September 30, 1997 and 1998 include allowances for
doubtful accounts of $5,468,000 and $6,101,000, respectively.
28
<PAGE> 31
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 4. SERVICE PARTS
Service parts consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1998
-------- --------
<S> <C> <C>
Service parts $ 12,404 $ 13,454
Less accumulated depreciation (8,603) (9,848)
-------- --------
Total service parts $ 3,801 $ 3,605
======== ========
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1998
-------- --------
<S> <C> <C>
Land $ 138 $ 138
Furniture and equipment 13,897 23,757
Buildings and leasehold improvements 1,569 1,205
Less accumulated depreciation and amortization (5,249) (12,572)
-------- --------
Total property and equipment $ 10,355 $ 12,528
======== ========
</TABLE>
NOTE 6. INVESTMENT IN LEASES
The Company, through its wholly-owned finance subsidiary and special purpose
entity, leases hardware and software products to customers under direct
financing leases. Lease receivables are generally due in monthly installments
over a period of five years. Investment in leases is calculated as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1998
--------- ---------
<S> <C> <C>
Total minimum lease payments receivable $ 18,535 $ 15,178
Allowance for doubtful accounts (730) (720)
Initial direct costs 335 247
Estimated unguaranteed residual value 1,114 1,072
--------- ---------
Gross investment in leases 19,254 15,777
Unearned income (5,605) (4,263)
Leases pending acceptance 2,464 6,049
--------- ---------
Total investment in leases 16,113 17,563
Short-term investment in leases 1,735 2,792
--------- ---------
Long-term investment in leases $ 14,378 $ 14,771
========= =========
</TABLE>
A substantial portion of the lease receivables are sold prior to maturity.
Accordingly, a schedule of maturities for the next five years is not indicative
of future cash collections. Most of the Company's customers are in the
automotive aftermarket and the hardlines and lumber industry.
NOTE 7. LEASE RECEIVABLES
Periodically, lease receivables are sold pursuant to agreements with banks and
lending institutions under which available lines were $40,324,000 at September
30, 1998. At the time of sale, the Company records the newly-created servicing
liabilities (lease servicing obligation and recourse obligation) at their
estimated fair value. Gains resulting from the sale of lease receivables are
reflected in finance revenue, and were $3,478,000 in 1997 and $4,318,000 in
1998. There were no sales of leases in 1996. The fair value of the lease
servicing liability is based upon the present value of the costs required to
continue to service the leases sold for the remainder of the lease term.
29
<PAGE> 32
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The agreements contain restrictive covenants which allow the Company to
discount only while in compliance with such covenants. In the event of
non-compliance, the banks and lending institutions could assume administrative
control (servicing) of the lease portfolio and could prohibit further sales
under the available credit facilities. During the period ended September 30,
1998, the Company was in compliance with the covenants.
Pursuant to the agreements, the Company is contingently liable for losses in the
event of lessee nonpayment up to stated recourse limits (up to 10% of the
aggregate initial proceeds adjusted for certain expenses and payments remitted
on the leases) and full recourse on lease receivables discounted that did not
meet the bank or lending institutions credit worthiness test. At September 30,
1998, the Company has an immaterial amount of lease receivables discounted that
are subject to the full recourse provision. Proceeds from the sale of lease
receivables were approximately $39 million in 1997 and $44 million in 1998.
There were no proceeds from sales of lease receivables in 1996.
At September 30, 1998, the contingent liability for leases sold was $27,154,000.
The Company provides for the fair value of the recourse obligation based upon an
analysis that considers among other things: the credit worthiness of the lease
receivable, the recourse provision the lease receivable is subject to, and the
Company's historical experience which includes loss recoveries through resell of
repossessed systems. The Company provides for the fair value of the lease
servicing obligation based upon an analysis that considers, among other things:
the quantity of sold leases that are being serviced, the time and cost
associated with administration of leases, and the Company's historical
experience relating to the length of time leases generally are outstanding.
Activity in the servicing liability accounts (recorded in other liabilities in
the Company's balance sheet) is as follows (amounts in thousands):
<TABLE>
<CAPTION>
LEASE SERVICING RECOURSE
OBLIGATION OBLIGATION
--------------- ----------
<S> <C> <C>
Balance at November 30, 1996 $ - $ -
Liabilities assumed in acquisition of Triad 2,246 11,271
Newly-created liabilities 663 2,838
Recoveries - 527
Charges and write-offs (703) (4,974)
------- -------
Balance at September 30, 1997 2,206 9,662
Newly-created liabilities 710 3,402
Recoveries - 818
Charges and write-offs (1,135) (8,435)
------- -------
Balance at September 30, 1998 $ 1,781 $ 5,447
======= =======
</TABLE>
NOTE 8. CAPITALIZED COMPUTER SOFTWARE COSTS
<TABLE>
<CAPTION>
TEN-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
NOVEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
(amounts in thousands)
Beginning balance $ - $ - $ 32,569
Acquisition of assets - 38,700 1,833
Capitalized computer software costs - 1,427 5,020
Amortization of computer software costs - (7,558) (14,248)
--------- --------- ---------
Ending balance $ - $ 32,569 $ 25,174
========= ========= =========
</TABLE>
30
<PAGE> 33
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9. DATABASES
<TABLE>
<CAPTION>
TEN-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
NOVEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
(amounts in thousands)
Beginning balance $ 4,613 $ 5,048 $ 20,688
Acquisition of assets - 15,900 -
Capitalized database costs 5,118 7,052 8,603
Amortization of database costs (4,683) (7,312) (12,467)
--------- --------- ---------
Ending balance $ 5,048 $ 20,688 $ 16,824
========= ========= =========
</TABLE>
NOTE 10. OTHER INTANGIBLES
The Company had no other intangibles during the year ended November 30, 1996.
Activity in other intangibles during the ten-month period ended September 30,
1997 and the year ended September 30, 1998 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
TRADEMARKS ASSEMBLED
AND WORK FAVORABLE
GOODWILL TRADENAMES FORCE LEASE TOTAL
----------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1996 $ - $ - $ - $ - $ -
Acquisition of assets 132,093 22,100 11,700 3,864 169,757
Amortization (5,159) (859) (1,365) (1,127) (8,510)
----------- ---------- ---------- -------- -----------
Net balance at September 30, 1997 126,934 21,241 10,335 2,737 161,247
Acquisition of assets 7,413 323 293 - 8,029
Amortization (9,793) (1,486) (2,375) (1,933) (15,587)
----------- ---------- ---------- -------- -----------
Net balance at September 30, 1998 $ 124,554 $ 20,078 $ 8,253 $ 804 $ 153,689
=========== ========== ========== ======== ===========
</TABLE>
NOTE 11. DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1998
---------- ----------
(amounts in thousands)
<S> <C> <C>
Senior Subordinated Notes $ - $ 100,000
Term Loan Facility 135,000 50,000
Revolving Credit Facility 9,150 32,775
Other 817 543
---------- ----------
144,967 183,318
Current portion 6,436 6,229
---------- ----------
Long-term debt $ 138,531 $ 177,089
========== ==========
</TABLE>
Concurrently with the Triad Acquisition, and in order to refinance certain of
Triad's indebtedness assumed in the acquisition, the Company entered into a
credit agreement dated as of February 27, 1997 with a syndicate of various
banks, insurance companies and other lenders, which includes a term loan
facility and a revolving credit facility (collectively, the "Old Credit
Facilities").
On February 10, 1998, the Company consummated a private placement offering (the
"Offering") of $100 million of 9% Senior Subordinated Notes due 2008 (the "Old
Notes"). The Old Notes were issued subject to an exchange and registration
rights
31
<PAGE> 34
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
agreement, pursuant to which the Company filed a registration statement on April
4, 1998 and subsequently exchanged the Old Notes for identical registered 9%
Senior Subordinated Notes due 2008 (the "New Notes" and, together with the Old
Notes, the "Notes") of the Company.
Concurrently with the consummation of the Offering, the Company (i) amended and
restated its Old Credit Facilities by entering into a new $50 million term loan
facility and a new $50 million revolving credit facility (collectively, the
"Restated Senior Credit Facilities") and (ii) used the net proceeds from the
Offering and the Restated Senior Credit Facilities to repay the Old Credit
Facilities. The refinancing of the debt resulted in an extraordinary loss of
approximately $3.0 million, net of tax, as a result of the write-off of existing
financing costs.
Interest on the Notes is payable semiannually on February 1 and August 1. The
Notes are redeemable in whole or in part at the option of the Company on or
after February 1, 2003 at the redemption prices (expressed as a percentage of
the principal amount) of 104.5% in 2003, 103% in 2004, 101.5% in 2005 and 100%
in 2006 and thereafter. In addition, on or prior to February 1, 2002, the
Company may redeem up to 35% of the aggregate principal amount of the Notes with
the net cash proceeds of one or more private or public equity offerings at a
redemption price equal to 109% of the principal amount to be redeemed, together
with accrued and unpaid interest, if any, to the date of redemption, provided
that at least 65% of the originally issued aggregate principal amount of the
Notes remains outstanding after each such redemption. Upon the occurrence of a
change of control, as defined by the Notes indenture, the Company will be
required to make an offer to repurchase the Notes at a price equal to 101% of
the principal amount thereof, together with the accrued and unpaid interest, if
any. In addition, if the change of control occurs prior to February 1, 2003, the
Company will have the right to redeem the Notes at a price equal to 100% of the
principal amount thereof plus a premium, as specified by the Notes indenture.
The new $50 million term loan facility is payable in 17 consecutive quarterly
installments on the dates and in a principal amount equal to the amount set
forth below, together with all accrued interest thereon:
<TABLE>
<CAPTION>
QUARTERS ENDING QUARTERLY PRINCIPAL PAYABLE
---------------------------------------------------------------------------
<S> <C>
March 1999 through September 1999 $2,000,000
December 1999 through September 2000 2,500,000
December 2000 through September 2001 3,000,000
December 2001 through September 2002 3,500,000
December 2002 through March 2003 4,000,000
</TABLE>
The revolving credit facility, which includes revolving credit notes, swing line
notes (maximum of $10 million), and letters of credit (maximum of $15 million),
provides for maximum borrowings of $50 million. Principal amounts under the
revolving credit facility are due on March 31, 2003.
The Restated Senior Credit Facilities bear interest at the Company's option
either at (i) the greater of the lender's base rate plus 1.25%, the base CD
rate, as defined, plus 2.25% or the Federal Funds Effective Rate plus 1.75% or
(ii) the eurodollar rate plus 1.5% to 2.25% based upon certain financial ratios.
Interest on base rate loans is payable quarterly, and interest on eurodollar
loans is payable at the end of the applicable interest period or every three
months in the case of interest periods in excess of three months. A commitment
fee ranging from .375% to .5% per annum is charged on unused revolving loans and
is payable quarterly in arrears. The commitment fee at September 30, 1998 was
.5%.
In connection with the letters of credit, the Company is required to pay a
letter of credit commission fee equal to 2.25% per annum on the amount of the
letters of credit outstanding. Each letter of credit bears a fee equal to 2.25%.
As of September 30, 1998, there were no letters of credit outstanding.
Substantially all of the assets of the Company and its subsidiaries are pledged
as collateral on the Restated Senior Credit Facilities. The New Notes are
general, unsecured obligations of the Company and are subordinated in right of
payment to all existing and future senior indebtedness of the Company.
The terms of the Restated Senior Credit Facilities restrict certain activities
of the Company, the most significant of which include limitations on additional
indebtedness, liens, guarantees, payment or declaration of dividends, sale of
assets, investments, capital expenditures, and transactions with affiliates. The
Company must also meet certain tests relating to financial amounts and ratios
defined in the agreement. As of September 30, 1998, the Company was in
compliance with the financial amounts and ratios as defined in the agreement and
measured quarterly; however, management believes that based upon current
financial projections
32
<PAGE> 35
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
the Company may not comply with of certain financial amounts and ratios
currently specified during the year ended September 30, 1999. Management is
working with the pertinent lenders and anticipates resetting the specified
financial amounts and ratios defined in the agreement in the first half of
fiscal 1999 whereby no violation will occur or exist, however, there can be no
assurance that the Company will be successful in modifying its credit facility.
Management has successfully worked with the lenders in the past to reset
financial amounts and ratios and is not aware of any events or circumstances
that would preclude the Company from successfully resetting the financial
amounts and ratios in fiscal 1999.
Contractual maturities of debt, exclusive of interest, are as follows (in
thousands):
<TABLE>
<S> <C>
1999 $ 6,229
2000 10,314
2001 12,000
2002 14,000
2003 40,775
Thereafter 100,000
</TABLE>
The Company utilizes interest rate cap agreements to limit the impact of
increases in interest rates on its floating rate debt. The interest rate cap
agreements require premium payments to counterparties based upon a notional
principal amount, which was $67.5 million at September 30, 1997 and $67.5
million at September 30, 1998. Interest rate cap agreements entitle the Company
to receive from the counterparties the amounts, if any, by which the selected
market interest rates exceed the strike rates stated in the agreements. The fair
value of the interest rate cap agreements is estimated by obtaining quotes from
brokers and represents the cash requirement if the existing contracts had been
settled at year end. The carrying amount and fair value of these contracts are
not significant. At September 30, 1998, the Company interest rate cap was 8% and
was scheduled to expire June 16, 1999. The premium paid for the cap is amortized
to interest expense over the life of the cap.
NOTE 12. FINANCIAL INSTRUMENTS
The Company utilizes foreign currency forward contracts to reduce exposure to
exchange rate risks associated with intercompany payables to and receivables
from its foreign subsidiaries. The forward contracts establish the exchange
rates at which the Company will purchase or sell the contracted amount of local
currencies for specified foreign currencies at a future date. The Company
utilizes forward contracts which are short-term in duration (generally three
months) and receives or pays the difference between the contracted forward rate
and the exchange rate at the settlement date. The Company marks these contracts
to market, reflecting unrealized gains and losses in statement of operations
currently. The currency exposures hedged by the Company include the Canadian
dollar, Irish punt and British pound. The contract amount of foreign currency
forwards at September 30, 1998 is $2.1 million. The carrying amount and fair
value of these contracts are not significant.
NOTE 13. INCOME TAXES
From commencement through February 27, 1997, the Company and its affiliates had
elected to be treated as S Corporations under Subchapter S of the Internal
Revenue Code of 1986, as amended. As such, federal income taxes were the
responsibility of the individual stockholders.
Concurrently with the Triad Acquisition on February 27, 1997, the Company's
Subchapter S status was terminated and the Company became subject to federal
income taxes. Additionally, the Company was required to change its method of
accounting from the cash basis to the accrual basis for income tax reporting
purposes.
The estimated tax effect of recording deferred taxes upon the termination of the
Company's Subchapter S status was $2,382,000.
The pro forma disclosures on the statements of operations reflect adjustments to
record provisions for income taxes as if the Company had not been an S
Corporation. The pro forma (provisions) benefits for income taxes attributable
to continuing operations are $(1,931,000) for the year ended November 30, 1996,
and $2,392,000 for the ten-month period ended September 30, 1997.
33
<PAGE> 36
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Significant components of the income tax benefit attributable to continuing
operations are as follows (in thousands):
<TABLE>
<CAPTION>
TEN-MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C>
Current:
Federal $ (1,531) $ -
State (374) (200)
Foreign (247) (300)
--------- ---------
Total current (2,152) (500)
Deferred:
Federal 2,765 8,626
State 344 1,074
Foreign 44 -
--------- ---------
Total deferred 3,153 9,231
--------- ---------
Income Tax Benefit $ 1,001 $ 8,731
========= =========
</TABLE>
A reconciliation between income (loss) before income taxes and extraordinary
charge at the U.S. statutory rate and the (provision) benefit for income taxes
is as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
---------------------------------------------------------------------
TWELVE MONTH TEN-MONTH TEN-MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED
NOVEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------------
1996 1997 1997 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Income tax (provision) benefit at
U.S. statutory income tax rate $ (2,006) $ 12,191 $ 12,191 $ 11,773
State taxes, net of U.S. income tax (266) 375 265 1,048
benefit
Permanent differences, primarily goodwill (61) (2,008) (2,043) (3,361)
Write-off in-process research and
development - (8,085) (8,085) -
Nonrecurring charge due to subchapter
S termination - (2,382) - -
S-Corp. income not subject to tax - 844 - -
Tax credits and other 402 66 64 (729)
--------- ---------- --------- ----------
Income tax (provision) benefit $ (1,931) $ 1,001 $ 2,392 $ 8,731
========= ========== ========= ==========
</TABLE>
34
<PAGE> 37
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Inventory and sales return reserves $ 3,066 $ 3,584
Accrued expenses 11,552 5,059
Deferred income 1,308 2,352
Tax carryforwards 8,196 14,846
Depreciation 5,387 6,643
Other 1,105 105
---------- ----------
Total deferred tax assets 30,614 32,589
Deferred tax liabilities:
Direct financing leases (38,836) (41,938)
Fixed and intangible assets (34,316) (25,044)
Accrual to cash adjustment (1,310) (653)
Other (1,521) (623)
---------- ----------
Total deferred tax liabilities (75,983) (68,258)
---------- ----------
Net deferred tax liabilities $ (45,369) $ (35,669)
========== ==========
</TABLE>
Deferred taxes are included in the balance sheets of the Company as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1998
---------- ---------
<S> <C> <C>
Net current deferred tax asset $ 7,871 $ 1,818
Net noncurrent deferred tax liabilities (53,240) (37,487)
---------- ---------
Net deferred tax liabilities $ (45,369) $ (35,669)
========== =========
</TABLE>
Upon the consummation of the Triad Acquisition on February 27, 1997, the
Company recorded a net deferred tax liability of approximately $48,350,000 due
to differences between book and tax basis of acquired assets and assumed
liabilities.
As of September 30, 1998, the Company had federal net operating loss
carryforwards of approximately $18,584,000. The net operating loss carryforwards
will begin to expire in 2012 if not utilized. At September 30, 1998, the Company
had business tax credit carryforwards of $2,768,000, and alternative minimum tax
credit carryforwards of approximately $3,926,000. The business tax credit
carryforwards expire from 1999 through 2010 if not utilized and the alternative
minimum tax credits carryforward indefinitely. Utilization of the net operating
losses and tax credit carryforwards may be subject to an annual limitation due
to the "change in ownership" provisions of the Internal Revenue Code of 1986 as
amended. The annual limitation may result in the expiration of net operating
loss and tax credit carryforwards before utilization.
Substantially all of the Company's operating income was generated from domestic
operations during 1998. The Company has not provided for United States income
taxes on the earnings of certain foreign subsidiaries that are considered
invested indefinitely outside the United States. The cumulative earnings of the
foreign subsidiaries that are considered permanently invested outside the United
States amounted to $1,296,000 at September 30, 1998.
NOTE 14. COMMON STOCK OPTION PLAN
During 1998, the Company adopted the Cooperative Computing Holding Company,
Inc. 1998 Stock Option Plan. The Plan provides for the grant of incentive and
non-qualified stock options to employees and key individuals associated with
the Company. The option price may not be less than the fair market value at the
date of grant as set by the Company's Board of Directors from time to time.
Options vest in varying amounts over a six year period and expire ten years
from the date of the grant.
35
<PAGE> 38
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss is required by FASB Statement No. 123,
Accounting for Stock Based Compensation (FAS 123), which also requires the
information be determined as if the Company has accounted for its employee stock
options granted under the fair value method prescribed by FAS 123. The fair
value of these options was estimated at the date of grant using the minimum
value option pricing model with the following assumptions for the year ended
September 30, 1998:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Risk-free interest rate 6.0%
Dividend yield 0%
Volatility factor of the fair value
of CCI's common stock 0
Weighted average expect life of the options 5 years
- --------------------------------------------------------------------------------
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is expensed over the options' vesting periods. The Company's pro forma
information follows (in thousands) for the year ended September 30 1998:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Pro forma stock-based compensation expense $ 202
Pro forma net loss $ (28,048)
- --------------------------------------------------------------------------------
</TABLE>
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Average Shares
Exercise Contractual Life Options Reserved for
Shares Price Remaining Exercisable Future Grant
--------- --------- ---------------- ----------- ------------
(Amounts in thousands except share data)
<S> <C> <C> <C> <C> <C>
Balance at
September 30, 1997 - - - - -
Granted 3,239,650 $ 5.00 9.5 years - 1,560,350
Exercised - - - - -
Surrendered - - - - -
--------- --------- --------- --------- ---------
Balance at
September 30, 1998 3,239,650 $ 5.00 9.5 years - 1,560,350
========= ========= ========= ========= =========
</TABLE>
The weighted average fair value of options granted during the year ended
September 30, 1998 was $1.30.
NOTE 15. STOCKHOLDERS' EQUITY
STOCK WARRANT
On September 10, 1997, the Company sold 20,000 shares of Common Stock and issued
a warrant to purchase 20,000 shares of Common Stock, at the then-fair value of
the Common Stock of $5.00 per share, for total proceeds of $100,000. The warrant
is immediately exercisable and will expire seven years from the date of
issuance.
STOCK SPLIT
On February 24 and September 15, 1997, the Board of Directors declared Common
Stock splits of 3,595.50562-for-one and two-for-one, respectively. An amount
equal to the par value of the aggregate common shares issued was transferred
from additional paid-in capital to the common stock account. All share
information within the financial statements and notes thereto have been restated
to reflect the effect of the stock splits.
36
<PAGE> 39
COOPERATIVE COMPUTING HOLDING COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
RESERVED SHARES OF COMMON STOCK
At September 30, 1998, the Company had reserved 4,800,000 shares of its Common
Stock for issuance under the Company's 1998 Stock Option Plan. At September 30,
1998, another 20,000 shares of its Common Stock were reserved for exercise of a
warrant.
NOTE 16. SAVINGS AND INVESTMENT PLANS
The Company has a savings and investment plan known as the Triad Systems
Corporation Savings and Investment Plan (the "Plan") as allowed under Sections
401(k) and 401(a) of the Internal Revenue Code. The Plan provides employees
with tax deferred salary deductions and alternative investment options.
Employees are eligible to participate the first day of hire and are able to
apply for and secure loans from their account in the Plan.
The Plan provides for contributions by the Company as determined annually by
the Board of Directors. The Company matches 50% of the first 6% of
compensation contributed by each employee and the deferred amount cannot exceed
25% of the annual aggregate salaries of those employees eligible for
participation. Highly compensated executive participants are limited to a
maximum of 10%. Contributions to the Plan are allocated among eligible
participants in the proportion of their salaries to the total salaries of all
participants and amounted to $260,000 in 1996, $772,000 in 1997, and $1,663,000
in 1998.
NOTE 17. OTHER INCOME
Other income in 1996 includes lawsuit settlements of $3,000,000 and $710,000,
net of related legal expenses of $360,000.
NOTE 18. COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has guaranteed various debt obligations under agreements with
certain affiliated companies. At September 30, 1998, these guarantees totaled
$893,692. No material loss is anticipated by reason of such agreements and
guarantees.
OPERATING LEASES
The Company rents office facilities and certain office equipment under
noncancelable operating lease agreements. Certain lease agreements contain
renewal options and rate adjustments. The Company has leased office space from a
company owned by two of the Company's stockholders. Rental payments are $45,000
per month and this lease expires in May 2002. Rental expense related to all
operating leases was $873,000 in 1996, $3,779,000 in 1997, and $7,889,000 in
1998. Future minimum rental commitments under all noncancelable operating leases
are as follows:
<TABLE>
<S> <C>
1999 $6,141
2000 5,786
2001 5,226
2002 3,256
2003 1,457
Thereafter 3,919
</TABLE>
LEGAL MATTERS
The Company is involved in litigation arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the resolution of these matters will not have a material adverse effect on the
Company's results of operations or financial position.
NOTE 19. RELATED PARTY TRANSACTIONS
On February 27, 1997, the Company entered into a Financial Advisory Agreement
with an affiliate, the majority shareholder of the Company. The Company paid to
the affiliate approximately $4.9 million during fiscal 1997 for services
rendered
37
<PAGE> 40
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
in connection with the sale of the Company's Common Stock. The Financial
Advisory Agreement requires that the Company pay the affiliate additional fees
equal to 1.5% of the Transaction Value, as defined, whenever the Company
participates in an Add-on Transaction, as defined. In fiscal 1998, in connection
with the ARISB Acquisition the Company paid a fee of $135,000 for services
provided under the agreement.
Additionally, the Company entered into a ten-year Monitoring and Oversight
Agreement with the affiliate, pursuant to which the Company will pay the
affiliate an annual fee of no less than $350,000 for services provided to the
Company. The fee is due in quarterly installments, and upon the acquisition of
another business by the Company, the minimum fee is increased by an amount equal
to 0.2% of the consolidated annual net sales of the acquired entity for the
trailing twelve-month period. During fiscal 1997 the Company prepaid the annual
fee and is amortizing the amount over the service period. Amounts paid in fiscal
1998 were $408,898.
The Company's principal executive offices are leased from a corporation which is
wholly owned by two stockholders of the Company. The rental payments for such
facility were $450,000 and $540,000 in fiscal 1997 and 1998, respectively.
The Company leases an airplane for general corporate use from a corporation
which is wholly owned by a stockholder. Lease payments totaled $466,000 and
$465,430 in fiscal 1997 and 1998, respectively.
NOTE 20. UNAUDITED QUARTERLY RESULTS
The Company's quarterly results for 1997 and 1998 are presented below. The
quarterly results for the ten-month period ended September 30, 1997 have been
modified to include twelve months of operations to conform to the corresponding
quarters in the year ended September 30, 1998.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998
Total Revenues $ 51,915 $ 52,499 $ 59,250 $ 63,557
Gross margin 20,300 18,687 21,854 22,864
Loss before extraordinary charge(1) (6,790) (6,327) (6,157) (5,632)
Net loss (6,790) (9,344) (6,157) (5,632)
1997
Total Revenues $ 9,453 $ 27,805 $ 51,876 $ 57,947
Gross margin 5,374 12,983 19,740 22,008
Net income (loss) 2,771 (23,935) (5,357) (4,959)
</TABLE>
- --------------
(1) See Note 11 for discussion concerning the extraordinary loss recorded in
the second quarter.
38
<PAGE> 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the names, ages and positions of the respective directors
and executive officers of the Company and Holding as of September 30, 1998. All
directors hold office until the next annual meeting of stockholders of the
Company or Holding, as the case may be, and until their successors are duly
elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Glenn E. Staats 54 President and Chief Executive Officer and Director of
Holding and the Company
Preston W. Staats 56 Executive Vice President, Chief Operating Officer and
Director of Holding and the Company
Thomas O. Hicks.. 52 Director of Holding and the Company
Jack D. Furst 39 Director of Holding and the Company
A. Laurence Jones 45 Director of Holding and the Company
James R. Porter 62 Chairman of the Board and Director of the Company
Edgar M. Frandle 58 Chief Information Officer
Matthew Hale 45 Vice President of Finance and Chief Financial Officer of
Holding and the Company
Phillip L. Waters 52 Vice President of Administration of the Company
</TABLE>
Mr. Glenn Staats founded Old CCI in 1976 and has been President and Chief
Executive Officer and Director of the Company since February 1997. Mr. Staats
has a Ph.D. in Engineering from the University of Texas at Austin. Prior to
founding Old CCI, Mr. Staats was a Director of Graduate Studies in the College
of Engineering at the University of Missouri - Columbia. Mr. Staats is the
brother of Preston W. Staats.
Mr. Preston Staats joined the Company in 1977 and has been Executive Vice
President, Chief Operating Officer and Director of the Company since February
1997. Mr. Staats has a Ph.D. in Electrical Engineering from Rice University in
Houston, Texas. Prior to joining the Company, Mr. Staats was a Nuclear Submarine
Officer in the U.S. Navy and a private sector business consultant. Mr. Staats is
the brother of Glenn E. Staats.
Mr. Hicks has been a director of Holding and the Company since February 1997.
Mr. Hicks has been Chairman of the Board and Chief Executive Officer of Hicks
Muse since co-founding the firm in 1989. Prior to forming Hicks Muse, Mr. Hicks
co-founded Hicks & Haas Incorporated in 1983 and served as its Co-Chairman and
Co-Chief Executive Officer through 1989. Mr. Hicks also serves as a director of
Capstar Broadcasting Corporation., Chancellor Media Corporation, CorpGroup
Limited, Group MVS, S.A. de C.V., Home Interiors & Gifts, Inc., International
Home Foods, Inc., LIN Television Corporation, Olympus Real Estate Corporation,
Regal Cinemas, Inc., Sybron International Corporation, Triton Energy Limited and
Viasystems Group, Inc.
Mr. Furst has been a director of Holding and the Company since February 1997.
Mr. Furst is a Managing Director and Principal of Hicks Muse and has held such
position since 1989. From 1987 to May 1989, Mr. Furst was a vice president and
subsequently a partner of Hicks & Haas Incorporated. From 1984 to 1986, Mr.
Furst was a merger and acquisition/corporate finance specialist for The First
Boston Corporation in New York. Before joining First Boston, Mr. Furst was a
financial consultant at Price Waterhouse. Mr. Furst also serves as a director of
Home Interiors & Gifts, Inc., International Wire Holding Company, OmniAmerica,
Inc. and Viasystems, Group, Inc.
Mr. Jones has been a director of Holding and the Company since July 1997. He is
currently an Operating Affiliate with McCown DeLeeuw & Co. From August 1993 to
August 1997, Mr. Jones served as the Chief Executive Officer of Neodata Services
Inc., a provider of marketing services. Prior to his employment by Neodata
Services Inc., Mr. Jones served as Chief Executive Officer of GovPX, a provider
of U.S. Treasury data and pricing services from 1991 to August 1993. Mr. Jones
has an M.B.A. from Boston College. He also serves as Chairman of the Board of
SARCOM Inc., and as a director of Exabyte, Inc. and RSP/EMS Manufacturing.
39
<PAGE> 42
Mr. Porter has served as Chairman of the Board and Director of the Company since
the Triad Acquisition in February 1997. In February 1998, Mr. Porter retired as
an employee of the Company and is no longer involved in the day-to-day
management of the Company. Prior to the Triad Acquisition, Mr. Porter served as
President and Chief Executive Officer of Triad from September 1985 to February
1997 and as a director of Triad from 1985 until January 1998. Mr. Porter also
serves as a director of Silicon Valley Bank, FirstWave Technologies, Inc.,
Cardone Industries, Inc. and Cellular Technical Services.
Mr. Frandle has been Chief Information Officer of the Company since February
1998. Prior to joining the Company, Mr. Frandle served as Vice President of
Information Technology of AmeriData Corp., a value added computer reseller, from
December 1992 to November 1995 and as Vice President of Information Technology
of OutBoard Marine Corporation from November 1995 to February 1997. Mr. Frandle
has both a B.A. and M.B.A. from Minnesota Metropolitan State University.
Mr. Hale joined the Company in April 1995 and is currently serving as Vice
President of Finance and Chief Financial Officer of Holding and the Company.
Prior to joining the Company, Mr. Hale was employed by Arrowsmith Technologies,
Inc., where he was Vice President of Finance and Chief Financial Officer from
April 1993 to March 1995. From August 1991 to March 1993, Mr. Hale served as
Controller of MasPar Computer Corporation, a company engaged in the development
and sale of massively parallel computer systems. Mr. Hale has a Bachelors Degree
in Accounting and is a Certified Public Accountant.
Mr. Waters has been Vice President of Administration of the Company since 1990.
From 1987 to 1990, Mr. Waters was employed by Dell Computer Corporation as
Director of Human Resources, prior to which time he was Director of Human
Resources at Advanced Micro Devices. Mr. Waters has a Masters Degree from
Southwest Texas State University.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the cash and noncash compensation earned by the
Chief Executive Officer of the Company and the four other most highly
compensated executive officers of the Company and Holding, or their
predecessors, during the fiscal years ended September 30, 1998, September 30,
1997 and November 30, 1996. The Chief Executive Officer and such executive
officers are collectively referred to as the "Named Executive Officers."
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES ALL
FISCAL ------------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY ($) BONUS ($) OPTIONS(2) COMPENSATION ($)(3)
--------------------------- ------- ---------- ---------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Glenn E. Staats........................... 1998 321,532 58,777(4) - -
President and Chief Executive Officer 1997 172,820 4,666(5) - 5,330,924(6)
of Holding and the Company 1996 199,944 4,750(5) - 4,813,974(6)
Preston W. Staats......................... 1998 217,279 40,630(7) - -
Executive Vice President and Chief 1997 138,240 4,750(5) - 877,697(6)
Operating 1996 159,938 4,750(5) - 963,026(6)
Officer of Holding and the Company
Matthew Hale.............................. 1998 165,639 41,188(8) 220,000 -
Vice President of Finance and Chief 1997 129,520 38,562(8) - -
Financial Officer of Holding and the 1996 129,604 92,495(8) - -
Company
Phillip L. Waters......................... 1998 143,700 36,158(9) 145,000
Vice President of Administration 1997 111,800 6,700(9) - -
of the Company 1996 104,472 70,327(9) - -
Edgar M. Frandle.......................... 1998 103,385 56,350(10) 60,000
Chief Information Officer 1997 - - - -
1996 - - - -
</TABLE>
(1) Compensation for fiscal 1997 includes compensation for only the
ten-month period ended September 30, 1997.
(2) Represents grants of options to purchase shares of Holding's common
stock. See "1998 Stock Option Plan."
(3) For each of the periods reported, the aggregate amount of perquisites
and other personal benefits did not exceed the lesser of $50,000 or 10%
of the salary and bonus of each of the Named Executive Officers.
40
<PAGE> 43
(4) Includes a 401(k) matching contribution of $3,089.
(5) Represents 401(k) matching contributions.
(6) Represents corporate distributions of Subchapter S Corporation taxable
income.
(7) Includes a 401(k) matching contribution of $3,000.
(8) Includes 401(k) matching contribution of $4,188, $3,562 and $4,725 for
fiscal years 1998, 1997 and 1996.
(9) Includes 401(k) matching contribution of $4,188, $4,200 and $4,500 for
fiscal years 1998, 1997 and 1996.
(10) Includes a 401(k) matching contribution of $3,000.
EMPLOYMENT AGREEMENTS; CHANGE OF CONTROL ARRANGEMENTS
The Stockholders Agreement (as hereinafter defined) provides that Messrs. Glenn
and Preston Staats, for a period of five years after the date of the Triad
Acquisition, shall diligently devote substantially all of their working time,
attention and knowledge and skills solely to the business and interest of
Holding and shall discharge the duties and assume the responsibilities assigned
to each of them from time to time by the Chief Executive Officer and Board of
Directors of Holding. No other terms of their employment with Holding or the
Company is set forth in the Stockholders Agreement. Other than as described
above, the Company does not currently have employment agreements or other
binding employment arrangements with any Named Executive Officer.
1998 STOCK OPTION PLAN
The Plan
In December 1998, effective March 1, 1998, Holding adopted the Cooperative
Computing Holding Company, Inc. 1998 Stock Option Plan (the "Plan"), pursuant
to which options may be granted to key employees and eligible non-employees of
Holding and its subsidiaries (including the Company) for the purchase of shares
of Holding's common stock, par value $.000125 per share ("Holding Common
Stock"). The Plan was adopted subject to the approval of Holding's
shareholders, which is required to be obtained prior to March 1, 1999.
The employees and non-employees eligible for options under the Plan are those
persons who the Board of Directors (or a committee thereof) (in either case, the
"Committee") identifies as having a direct and significant effect on the
performance or financial development of Holding and its subsidiaries. The Plan
provides that, notwithstanding the foregoing, no grants of options may be made
under the Plan to any officer or employee who received "founder's shares" or any
officer or employee who is a member of Holding's Board of Directors. A total of
4,800,000 shares of Holding Common Stock are available in respect of options
granted under the Plan, and the maximum number of shares that may be granted to
any employee or eligible non-employee in respect of options granted under the
Plan is 250,000. Generally, options granted under the Plan may not have a term
in excess of ten years from the date the option is granted.
Although the Committee has discretion in determining the terms of any option, it
is expected that options will generally vest and become exercisable over a
six-year period beginning on the last day of the fiscal year in which the option
was granted, such that 0% would become vested on the first anniversary of the
end of the fiscal year of the date of grant, 10% would become vested on the
second anniversary, 20% would become vested on the third anniversary, 30% would
become vested on the fourth anniversary, 65% would become vested on the fifth
anniversary, and 100% would become vested on the sixth anniversary.
Notwithstanding the foregoing, in the event of a Public Offering (as defined in
the Plan) all options that were not exercisable at the time of the Public
Offering will vest ratably over a period of years equal to five minus the number
of complete years of vesting that had occurred prior to the Public Offering.
The Committee has the right, but not the obligation, to accelerate the vesting
of any outstanding options upon the occurrence of, or the entering into of an
agreement providing for, a Change of Control (as defined in the Plan). Both
incentive stock options and nonqualified stock options may be granted under the
Plan.
Holding has the right, under certain circumstances, to repurchase from any
optionee at the Fair Market Value (as defined in the Plan) any options held by
such optionee or any shares of Holding Common Stock issued on exercise of any
such options. The circumstances under which Holding may exercise this option
generally include (i) the termination of the optionee's employment or other
relationship with the Company, (ii) the occurrence of a Change of Control, or
(iii) Holding engages in a transaction (such
41
<PAGE> 44
as a merger or share exchange) whereby such optionee would receive securities
and such optionee is not qualified as an "accredited investor" within the
meaning of the Securities Act of 1933, as amended. Holding's purchase option
terminates on the consummation of a Public Offering. In addition to the
foregoing, if an optionee's employment or other relationship terminates as a
result of the death of such optionee, the estate of such optionee or other
person who inherits the right to exercise the option or the shares of Holding
Common Stock issued on exercise of options granted under the Plan, shall be
entitled to require the Company to purchase, for Fair Market Value, all or any
portion of the optionee's options or shares of Holding Common Stock issued on
exercise of such options. A deceased optionee's repurchase, or "put," right may
be exercised at any time prior to the first anniversary of the optionee's death.
The Board of Directors may amend, modify, suspend or terminate the Plan without
the approval of Holding's stockholders, except that, without stockholder
approval, the Board of Directors will not have the power or authority to
increase the number of shares of Holding Common Stock that may be issued
pursuant to the exercise of options under the Plan, decrease the minimum
exercise price of any incentive stock option or modify requirements relating to
eligibility with respect to incentive options.
Option Grants
Holding has granted nonqualified stock options covering an aggregate of
3,239,650 shares of Holding Common Stock at an exercise price of $5.00 per
share. The options granted vest in five installments over six years in
accordance with the vesting schedule described above and are otherwise on terms
and conditions consistent with those described above. No options are currently
exercisable, and, therefore, no options were exercised in fiscal 1998. The
following table discloses for the Named Executive Officers information on
options granted during the 1998 fiscal year:
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENTAGE OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM*
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- ---------- ------------ -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Glenn E. Staats - - - - - -
Preston W. Staats - - - - - -
Matthew Hale 220,000 6.7 $5.00 4/10/08 $691,784 $1,753,116
Phillip L. Waters 145,000 4.4 5.00 4/10/08 455,949 1,155,463
Edgar M. Frandle 60,000 1.8 5.00 4/10/08 188,668 478,123
</TABLE>
* The dollar amounts set forth under these columns are the result of
calculations at the five percent and ten percent assumed rates set by the
Securities and Exchange Commission. These assumed annual rates of
appreciation would result in a stock price in ten years of $8.14 and
$12.97, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation decisions are made by the Board of Directors of the Company.
Messrs. Glenn and Preston Staats served both as officers and directors of the
Company during 1998. Messrs. Glenn and Preston Staats are expected to continue
to serve in such capacities in 1999. Mr. Porter retired as an employee of the
Company in February 1998 and no longer participates in the day-to-day management
of the Company.
Directors who are officers, employees or otherwise an affiliate of Holding or
the Company receive no compensation for their services as directors. Each
director of Holding and the Company who is not also an officer, employee or an
affiliate of Holding or the Company receives a fee of $3,000 for each meeting of
the Board of Directors at which the director is present. Directors of Holding
and the Company are entitled to reimbursement of their reasonable out-of-pocket
expenses in connection with their travel to and attendance at meetings of the
Board of Directors or committees thereof. Additionally, in consideration for his
services as a director, Holding issued to Mr. A. Laurence Jones a warrant to
purchase 20,000 shares of Holding Common Stock at an exercise price of $5.00 per
share.
42
<PAGE> 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
All of the issued and outstanding shares of capital stock of the Company are
held by Holding. The following table sets forth as of September 30, 1998,
certain information regarding the beneficial ownership of the voting securities
of Holding by each person who beneficially owns more than five percent of
Holding Common Stock, and by the directors and certain executive officers of
Holding and the Company, individually, and by the directors and executive
officers of Holding and the Company as a group.
<TABLE>
<CAPTION>
SHARES OF
HOLDING COMMON STOCK
---------------------------
NUMBER OF PERCENT OF
NAME AND ADDRESS SHARES CLASS
---------------- ---------- ----------
<S> <C> <C>
Hicks Muse Parties (1)............................. 19,200,000 54.5%
c/o Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Glenn E. Staats.................................... 13,333,334 37.9%
Preston W. Staats.................................. 2,666,666 7.6%
Thomas O. Hicks (1)................................ 19,200,000 54.5%
Jack D. Furst (1).................................. 19,200,000 54.5%
A. Laurence Jones (2).............................. 40,000 *
James R. Porter.................................... - -
Edgar M. Frandle................................... - -
Matthew Hale....................................... - -
Phillip L. Waters.................................. - -
All executive officers and directors as
a group (nine persons)........................... 35,240,000(1) 100%
</TABLE>
- ----------
* Represents less than 1%.
(1) Includes (i) shares owned of record by Hicks, Muse, Tate & Furst Equity
Fund III, L.P. ("Fund III"), of which the ultimate general partner is
Hicks, Muse Fund III Incorporated, an affiliate of Hicks Muse, and (ii)
shares owned of record by HM3 Coinvestors, L.P., a limited partnership
of which the ultimate general partner is Hicks, Muse Fund III
Incorporated. Thomas O. Hicks is a controlling stockholder of Hicks
Muse and serves as Chairman of the Board, President, Chief Executive
Officer and Secretary of Hicks Muse. Accordingly, Mr. Hicks may be
deemed to be the beneficial owner of Holding Common Stock held by Fund
III and HM3 Coinvestors, L.P. John R. Muse, Charles W. Tate, Jack D.
Furst, Lawrence D. Stuart, Jr., Michael J. Levitt, Alan B. Menkes,
David B. Deniger and Dan H. Blanks are principals and minority
stockholders of Hicks Muse and as such may be deemed to share with Mr.
Hicks the power to vote or dispose of Holding Common Stock held by Fund
III and HM3 Coinvestors, L.P. Each of Messrs. Hicks, Muse, Tate, Furst,
Stuart, Levitt, Menkes, Deniger and Blanks disclaims the existence of a
group and disclaims beneficial ownership of Holding Common Stock not
respectively owned of record by him.
(2) Includes 20,000 shares of Holding Common Stock issuable to Mr. Jones
upon exercise of a currently exercisable warrant to purchase shares of
Holding Common Stock at an exercise price of $5.00 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Monitoring and Oversight Agreement
In conjunction with the Triad Acquisition, Holding and the Company entered into
a ten-year agreement (the "Monitoring and Oversight Agreement") with Hicks, Muse
& Co. Partners, L.P., an affiliate of Hicks Muse ("Hicks Muse Partners"),
pursuant to which Holding and the Company pay Hicks Muse Partners an annual fee
payable quarterly for oversight and monitoring services to Holding and the
Company. The annual fee is adjustable on January 1 of each calendar year to an
amount equal to the (i) sum of (A) the fee in effect at the beginning of the
immediately preceding calendar year plus (B) the aggregate amount of all
Acquisition Increments (as defined) with respect to such immediately preceding
calendar year, multiplied by (ii) the percentage increase in
43
<PAGE> 46
the Consumer Price Index during the immediately preceding calendar year, but in
no event less than $350,000. Upon the acquisition by the Company or any of its
subsidiaries of another entity or business, the fee is increased by an amount
equal to 0.2% of the consolidated annual net sales of the acquired entity or
business and its subsidiaries for the trailing twelve-month period (an
"Acquisition Increment"). Thomas O. Hicks and Jack D. Furst, directors of
Holding and the Company, are each principals of Hicks Muse Partners. Hicks Muse
Partners is also entitled to reimbursement for any expenses incurred by it in
connection with rendering services allocable to Holding or the Company under the
Monitoring and Oversight Agreement. In addition, Holding and the Company have
agreed to indemnify Hicks Muse Partners, its affiliates and their respective
directors, officers, controlling persons, agents and employees from and against
all claims, liabilities, losses, damages expenses, and fees and disbursement of
counsel related to or arising out of or in connection with the services rendered
by Hicks Muse Partners under the Monitoring and Oversight Agreement and not
resulting primarily from the bad faith, gross negligence or willful misconduct
of Hicks Muse Partners. The Monitoring and Oversight Agreement makes available
the resources of Hicks Muse Partners concerning a variety of financial and
operational matters. The Company does not believe that the services that have
been and will continue to be provided to Holding and the Company pursuant to the
Monitoring and Oversight Agreement could otherwise be obtained by Holding and
the Company without the addition of personnel or the engagement of outside
professional advisors. In the Company's opinion, the fees provided for under the
Monitoring and Oversight Agreement reasonably reflect the benefits received and
to be received by Holding, the Company and their respective subsidiaries. In
fiscal 1998, the Company paid Hicks Muse Partners a fee of $408,898 for services
under the Monitoring and Oversight Agreement.
Financial Advisory Agreement
In conjunction with the Triad Acquisition, Holding and the Company entered into
a ten-year agreement (the "Financial Advisory Agreement") pursuant to which
Hicks Muse Partners receives a fee equal to 1.5% of the "Transaction Value" (as
defined) for each "Add-on Transaction" (as defined) in which Holding or the
Company is involved. The term "Transaction Value" means the total value of the
Add-on Transaction, including, without limitation, the aggregate amount of the
funds required to complete the Add-on Transaction, including the amount of any
indebtedness, preferred stock or similar items assumed (or remaining
outstanding). The term "Add-on Transaction" means any respective subsidiaries,
and any other person or entity, excluding, however, any acquisition that does
not involve the use of (or any waiver or consent under) any debt equity
financing and in which neither Hicks Muse Partners nor any other person or
entity provides financial advisory investment on banking or similar services. In
addition, Holding and the Company, jointly and severally, have agreed to
indemnify Hicks Muse Partners, its affiliates, and their respective directors,
officers, controlling persons, agents and employees from and against all claims,
liabilities, losses, damages, expenses and fees related to or arising out of or
in connection with the services rendered by Hicks Muse Partners under the
Financial Advisory Agreement and not resulting primarily from the bad faith,
gross negligence, or willful misconduct of Hicks Muse Partners. The Financial
Advisory Agreement makes available the resources of Hicks Muse Partners
concerning a variety of financial and operational matters. The Company does not
believe that the services that have been and will continue to be provided by
Hicks Muse Partners pursuant to the Financial Advisory Agreement could otherwise
be obtained by Holding and the Company without the addition of personnel or the
engagement of outside professional advisors. In the Company's opinion, the fees
provided for under the Financial Advisory Agreement reasonably reflect the
benefits received and to be received by Holding and the Company. In fiscal 1998,
the Company paid Hicks Muse Partners fees of $135,000 for services provided by
Hicks Muse Partners under the Financial Advisory Agreement.
Stockholders Agreement
Each holder of Holding Common Stock has entered into a stockholders agreement
(the "Stockholders Agreement"). The Stockholders Agreement, among other things,
grants preemptive rights and certain registration rights to the parties thereto
and contains provisions requiring the parties thereto to sell their shares of
Holding Common Stock in connection with certain sales of Holding Common Stock by
the HMC Group (as defined therein) ("drag-along rights") and granting the
parties thereto the right to include a portion of their shares of Holding Common
Stock in certain sales in which other holders may engage ("tag-along rights").
All parties to the Stockholders Agreement agreed that (i) the HMC Group is
entitled to designate two individuals to the Board of Directors of Holding and
the Company so long as the HMC Group owns at least ten percent of the voting
capital stock of Holding or one individual so long as the HMC Group owns at
least five percent but less than ten percent of the voting capital stock of
Holding; (ii) Messrs. Glenn and Preston Staats are entitled to designate two
individuals to the Board of Directors of Holding and the Company so long as
Messrs. Glenn and Preston Staats together own at least ten percent of the voting
capital stock of Holding or one individual so long as Messrs. Glenn and Preston
Staats together own at least five percent but less than ten percent of the
voting capital stock of Holding; and (iii) any remaining positions on the Board
of Directors of Holding and the Company would be independent directors mutually
acceptable to Hicks, Muse, Tate & Furst Incorporated, an affiliate of Hicks
44
<PAGE> 47
Muse and the HMC Group, and Messrs. Glenn and Preston Staats. In addition, all
parties to the Stockholders Agreement agreed to vote any shares that they may
vote on any particular matter that comes before the Company's stockholders as a
separate class or series, on such matter as holders of a majority of the
outstanding shares of Holding Common Stock voted thereon.
Lease of Corporate Offices
The Company's principal executive offices are leased from a corporation that is
wholly owned by Messrs. Glenn and Preston Staats. In fiscal 1998, the rental
payments for such facility were $540,000.
The Company's Livermore, California offices are leased from Triad Park, LLC.
James R. Porter, Chairman of the Board of Directors of the Company, was an
officer, director and stockholder of the sole manager of Triad Park, LLC until
May 1998. The rental payment for 1998 under the lease during the period Mr.
Porter was associated with Triad Park were approximately $1.7 million.
Lease of Corporate Aircraft
The Company leases an airplane for general corporate use from a corporation that
is wholly owned by Mr. Glenn Staats. Lease payments, which the Company believes
reasonably reflect the benefits thereof, totaled $465,430 in fiscal 1998.
Related Officers
Sharon W. Staats, the wife of Mr. Preston Staats, served as Vice President of
Special Projects during 1998, during which she earned compensation of $117,213.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements -- See index to Consolidated Financial
Statements in Item 8 hereof.
(2) Financial Statements Schedules -- See Schedule II - Valuation and
Qualifying Accounts. All other schedules have been omitted because
they are not applicable, not required under the instructions, or
the information requested is set forth in the consolidated
financial statements or related notes thereto.
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
2.1 -- Agreement and Plan of Merger among Cooperative
Computing, Inc., CCI Acquisition Corp. and Triad
Systems Corporation dated October 17, 1996.*
2.2 -- First Amendment to Agreement and Plan of Merger
dated as of January 15, 1997.*
2.3 -- Second Amendment to Agreement and Plan of Merger
dated as of February 19, 1997.*
3.1 -- Restated Certificate of Incorporation of
Cooperative Computing, Inc. (formerly known as Triad
Systems Corporation).*
3.2 -- Certificate of Amendment of Certificate of
Incorporation of Cooperative Computing, Inc.
(formerly known as Triad Systems Corporation).*
3.3 -- Amended and Restated Bylaws of Cooperative
Computing, Inc. (formerly known as Triad Systems
Corporation).
4.1 -- Indenture dated as of February 10, 1998 between
Cooperative Computing, Inc., as Issuer, and Norwest
Bank Minnesota, National Association, as Trustee.*
4.2 -- Form of Note.*
4.3 -- Exchange and Registration Rights Agreement dated
February 10, 1998 among Cooperative Computing, Inc.,
Chase Securities Inc. and NationsBanc Montgomery
Securities LLC.*
10.1 -- Project Lease Agreement between 3055 Triad Dr.
Corp. and Triad Systems Corporation (now known as
Cooperative Computing, Inc.) dated as of August 1,
1988.*
10.2 -- First Amendment to Project Lease Agreement between
Triad Park, LLC successor in interest to 3055 Triad
Dr. Corp., and Triad Systems Corporation (now known
as Cooperative Computing, Inc.) effective as of
February 26, 1997.*
</TABLE>
45
<PAGE> 48
<TABLE>
<S> <C>
10.3 -- Lease dated as of January 11, 1992 by and between
Computerized Properties, Inc. and Cooperative
Computing, Inc.*
10.4 -- Credit Agreement among Cooperative Computing, Inc.
(formerly named Triad Systems Corporation), as
Borrower; Cooperative Computing Holding Company, Inc.
(formerly named Cooperative Computing, Inc.), as
Guarantor; and The Chase Manhattan Bank, as
Administrative Agent, dated as of February 27, 1997,
as amended and restated as of February 10, 1998.*
10.5 -- Guarantee and Collateral Agreement made by
Cooperative Computing, Inc. (formerly named Triad
Systems Cooperation); Cooperative Computing Holding
Company, Inc. (formerly named Cooperative Computing,
Inc.); and certain of their subsidiaries in favor of
the Chase Manhattan Bank dated as of February 27,
1997, as amended and restated as of February 6,
1998.*
10.6 -- Loan and Security Agreement dated as of January 1,
1997, between CCI/Triad Financial Holding
Corporation, as Borrower, and Heller Financial, Inc.
as Lender.*
10.7 -- Loan and Security Agreement dated as of January 1,
1997, between CCI/Triad Financial Holding
Corporation, as Borrower, and Metlife Capital
Corporation, as Lender.*
10.8 -- Loan and Security Agreement dated as of March 1,
1997, between CCI/Triad Financial Holding
Corporation, as Borrower, and Sanwa Business Credit
Corporation, as Lender.*
10.9 -- Agreement between the Industrial Development
Authority and Triad Systems Ireland Limited, Triad
Systems Corporation and Tridex Systems Limited.*
10.10 -- Supplemental Agreement between the Industrial
Development Authority and Triad Systems Ireland
Limited, Triad Systems Corporation and Tridex Systems
Limited.*
10.11 -- Real Estate Distribution Agreement dated February
26, 1997, among Triad Systems Corporation (now known
as Cooperative Computing, Inc.), 3055 Triad Dr.
Corp., 3055 Management Corp., and Triad Park, LLC.*
10.12 -- Assignment and Assumption Agreement dated February
27, 1997, between Triad Systems Corporation and Triad
Park, LLC.*
10.13 -- Assignment and Assumption Agreement dated February
27, 1997, between Triad Systems Corporation and Triad
Park, LLC.*
10.14+ -- Warrant of Cooperative Computing Holding Company,
Inc. dated September 10, 1997 issued to A. Laurence
Jones.*
10.15 -- Monitoring and Oversight Agreement dated as of
February 27, 1997 between Cooperative Computing
Holding Company, Inc.; Cooperative Computing, Inc.
and Hicks, Muse & Co. Partners, L.P.*
10.16 -- Financial Advisory Agreement dated as of February
27, 1997 between Cooperative Computing Holding
Company, Inc., Cooperative Computing, Inc., and
Hicks, Muse & Co. Partners, L.P.*
10.17 -- Loan and Security Agreement dated as of September
25, 1997, between CCI/Triad Financial Holding
Corporation, as Borrower, and Mellon U.S. Leasing, a
Division of Mellon Leasing Corporation, as Lender.*
10.18 -- Asset Purchase Agreement between ADP Claims
Solutions Group, Inc., and Cooperative Computing,
Inc. dated as of November 20, 1997.*
10.19 -- Purchase Agreement dated as of February 5, 1998,
among Chase Securities Inc., NationsBanc Montgomery
Securities LLC and Cooperative Computing, Inc.*
10.20 -- First Amendment to Credit Agreement dated as of
June 30, 1998, among Cooperative Computing, Inc.,
Cooperative Computing Holding Company, Inc., the
several banks and other financial institutions
parties thereto and The Chase Manhattan Bank, as
administrative agent.*
10.21+ -- Cooperative Computing Holding Company, Inc. 1998
Stock Option Plan.
10.22+ -- Form of Non-Qualified Stock Option Agreement for
Eligible Non-Employees.
21.1 -- List of Subsidiaries.*
27.1 -- Financial Data Schedule
</TABLE>
- ---------------------
* Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Registrant's Registration
Statement on Form S-1 filed on April 3, 1998 (File No.
333-49389).
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K -- none.
46
<PAGE> 49
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, on the 29th day of
December, 1998.
COOPERATIVE COMPUTING, INC.
By: /s/ MATTHEW HALE
--------------------------------
Matthew Hale
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GLENN E. STAATS
---------------------------- President and Chief December 29, 1998
Glenn E. Staats Executive Officer and a
Director (Principal
Executive Officer)
/s/ PRESTON W. STAATS
----------------------------
Preston W. Staats Executive Vice President, December 29, 1998
Chief Operating Officer and a
Director
/s/ MATTHEW HALE
---------------------------- Vice President of Finance December 29, 1998
Matthew Hale and Chief Financial Officer
(Principal Accounting and
Financial Officer)
/s/ THOMAS O. HICKS
---------------------------- Director December 29, 1998
Thomas O. Hicks
/s/ JACK D. FURST
---------------------------- Director December 29, 1998
Jack D. Furst
/s/ A. LAURENCE JONES
---------------------------- Director December 29, 1998
A. Laurence Jones
/s/ JAMES R. PORTER
---------------------------- Director December 29, 1998
James R. Porter
</TABLE>
47
<PAGE> 50
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
YEAR ENDED NOVEMBER 30, 1996:
Allowance for doubtful accounts and
system returns............................ $ 1,817 $ 132 $ - $ 1,949
Inventory valuation......................... 68 80 - 148
Allowance for losses in investment in
leases.................................... - - - -
TEN MONTHS ENDED SEPTEMBER 30, 1997:
Allowance for doubtful accounts and
system returns............................ 1,949 4,309(A) 790 5,468
Inventory valuation......................... 148 1,970(B) 48 2,070
Allowance for losses in investment in leases - 3,089(C) 2,359 730
YEAR ENDED SEPTEMBER 30, 1998:
Allowance for doubtful accounts and
system returns............................ 5,468 6,599 5,966 6,101
Inventory valuation......................... 2,070 561 647 1,984
Allowance for losses in investment in
leases.................................... 730 3,355 3,365 720
</TABLE>
- ----------
(A) Includes $1,875 balance transferred from the acquisition of Triad
Systems Corporation.
(B) Includes $856 balance transferred from the acquisition of Triad Systems
Corporation.
(C) Includes $222 balance transferred from the acquisition of Triad Systems
Corporation.
48
<PAGE> 51
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
2.1 -- Agreement and Plan of Merger among Cooperative
Computing, Inc., CCI Acquisition Corp. and Triad
Systems Corporation dated October 17, 1996.*
2.2 -- First Amendment to Agreement and Plan of Merger
dated as of January 15, 1997.*
2.3 -- Second Amendment to Agreement and Plan of Merger
dated as of February 19, 1997.*
3.1 -- Restated Certificate of Incorporation of
Cooperative Computing, Inc. (formerly known as Triad
Systems Corporation).*
3.2 -- Certificate of Amendment of Certificate of
Incorporation of Cooperative Computing, Inc.
(formerly known as Triad Systems Corporation).*
3.3 -- Amended and Restated Bylaws of Cooperative
Computing, Inc. (formerly known as Triad Systems
Corporation).
4.1 -- Indenture dated as of February 10, 1998 between
Cooperative Computing, Inc., as Issuer, and Norwest
Bank Minnesota, National Association, as Trustee.*
4.2 -- Form of Note.*
4.3 -- Exchange and Registration Rights Agreement dated
February 10, 1998 among Cooperative Computing, Inc.,
Chase Securities Inc. and NationsBanc Montgomery
Securities LLC.*
10.1 -- Project Lease Agreement between 3055 Triad Dr.
Corp. and Triad Systems Corporation (now known as
Cooperative Computing, Inc.) dated as of August 1,
1988.*
10.2 -- First Amendment to Project Lease Agreement between
Triad Park, LLC successor in interest to 3055 Triad
Dr. Corp., and Triad Systems Corporation (now known
as Cooperative Computing, Inc.) effective as of
February 26, 1997.*
10.3 -- Lease dated as of January 11, 1992 by and between
Computerized Properties, Inc. and Cooperative
Computing, Inc.*
10.4 -- Credit Agreement among Cooperative Computing, Inc.
(formerly named Triad Systems Corporation), as
Borrower; Cooperative Computing Holding Company, Inc.
(formerly named Cooperative Computing, Inc.), as
Guarantor; and The Chase Manhattan Bank, as
Administrative Agent, dated as of February 27, 1997,
as amended and restated as of February 10, 1998.*
10.5 -- Guarantee and Collateral Agreement made by
Cooperative Computing, Inc. (formerly named Triad
Systems Cooperation); Cooperative Computing Holding
Company, Inc. (formerly named Cooperative Computing,
Inc.); and certain of their subsidiaries in favor of
the Chase Manhattan Bank dated as of February 27,
1997, as amended and restated as of February 6,
1998.*
10.6 -- Loan and Security Agreement dated as of January 1,
1997, between CCI/Triad Financial Holding
Corporation, as Borrower, and Heller Financial, Inc.
as Lender.*
10.7 -- Loan and Security Agreement dated as of January 1,
1997, between CCI/Triad Financial Holding
Corporation, as Borrower, and Metlife Capital
Corporation, as Lender.*
10.8 -- Loan and Security Agreement dated as of March 1,
1997, between CCI/Triad Financial Holding
Corporation, as Borrower, and Sanwa Business Credit
Corporation, as Lender.*
10.9 -- Agreement between the Industrial Development
Authority and Triad Systems Ireland Limited, Triad
Systems Corporation and Tridex Systems Limited.*
10.10 -- Supplemental Agreement between the Industrial
Development Authority and Triad Systems Ireland
Limited, Triad Systems Corporation and Tridex Systems
Limited.*
10.11 -- Real Estate Distribution Agreement dated February
26, 1997, among Triad Systems Corporation (now known
as Cooperative Computing, Inc.), 3055 Triad Dr.
Corp., 3055 Management Corp., and Triad Park, LLC.*
10.12 -- Assignment and Assumption Agreement dated February
27, 1997, between Triad Systems Corporation and Triad
Park, LLC.*
10.13 -- Assignment and Assumption Agreement dated February
27, 1997, between Triad Systems Corporation and Triad
Park, LLC.*
10.14+ -- Warrant of Cooperative Computing Holding Company,
Inc. dated September 10, 1997 issued to A. Laurence
Jones.*
10.15 -- Monitoring and Oversight Agreement dated as of
February 27, 1997 between Cooperative Computing
Holding Company, Inc.; Cooperative Computing, Inc.
and Hicks, Muse & Co. Partners, L.P.*
10.16 -- Financial Advisory Agreement dated as of February
27, 1997 between Cooperative Computing Holding
Company, Inc., Cooperative Computing, Inc., and
Hicks, Muse & Co. Partners, L.P.*
10.17 -- Loan and Security Agreement dated as of September
25, 1997, between CCI/Triad Financial Holding
Corporation, as Borrower, and Mellon U.S. Leasing, a
Division of Mellon Leasing Corporation, as Lender.*
10.18 -- Asset Purchase Agreement between ADP Claims
Solutions Group, Inc., and Cooperative Computing,
Inc. dated as of November 20, 1997.*
10.19 -- Purchase Agreement dated as of February 5, 1998,
among Chase Securities Inc., NationsBanc Montgomery
Securities LLC and Cooperative Computing, Inc.*
10.20 -- First Amendment to Credit Agreement dated as of
June 30, 1998, among Cooperative Computing, Inc.,
Cooperative Computing Holding Company, Inc., the
several banks and other financial institutions
parties thereto and The Chase Manhattan Bank, as
administrative agent.*
10.21+ -- Cooperative Computing Holding Company, Inc. 1998
Stock Option Plan.
10.22+ -- Form of Non-Qualified Stock Option Agreement for
Eligible Non-Employees.
21.1 -- List of Subsidiaries.*
27.1 -- Financial Data Schedule
</TABLE>
- ---------------------
* Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Registrant's Registration
Statement on Form S-1 filed on April 3, 1998 (file No.
333-49389).
+ Management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 3.3
BYLAWS
OF
COOPERATIVE COMPUTING, INC.
A Delaware Corporation
<PAGE> 2
<TABLE>
<S> <C> <C>
ARTICLE ONE: OFFICES
1.1 Registered Office and Agent.......................................... 1
1.2 Other Offices........................................................ 1
ARTICLE TWO: MEETINGS OF STOCKHOLDERS
2.1 Annual Meeting....................................................... 1
2.2 Special Meeting...................................................... 2
2.3 Place of Meetings.................................................... 2
2.4 Notice............................................................... 2
2.5 Voting List.......................................................... 2
2.6 Quorum............................................................... 3
2.7 Required Vote; Withdrawal of Quorum.................................. 3
2.8 Method of Voting; Proxies............................................ 3
2.9 Record Date.......................................................... 4
2.10 Conduct of Meeting................................................... 5
2.11 Inspectors........................................................... 5
ARTICLE THREE: DIRECTORS
3.1 Management........................................................... 6
3.2 Number; Qualification; Election; Term................................ 6
3.3 Change in Number..................................................... 6
3.4 Removal.............................................................. 6
3.5 Vacancies............................................................ 7
3.6 Meetings of Directors................................................ 7
3.7 First Meeting........................................................ 7
3.8 Election of Officers................................................. 7
3.9 Regular Meetings..................................................... 7
3.10 Special Meetings..................................................... 8
3.11 Notice............................................................... 8
3.12 Quorum; Majority Vote................................................ 8
3.13 Procedure............................................................ 8
3.14 Presumption of Assent................................................ 8
3.15 Compensation......................................................... 9
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE FOUR: COMMITTEES
4.1 Designation.......................................................... 9
4.2 Number; Qualification; Term.......................................... 9
4.3 Authority............................................................ 9
4.4 Committee Changes.................................................... 9
4.5 Alternate Members of Committees...................................... 9
4.6 Regular Meetings..................................................... 10
4.7 Special Meetings..................................................... 10
4.8 Quorum; Majority Vote................................................ 10
4.9 Minutes.............................................................. 10
4.10 Compensation......................................................... 10
4.11 Responsibility....................................................... 10
ARTICLE FIVE: NOTICE
5.1 Method............................................................... 11
5.2 Waiver............................................................... 11
ARTICLE SIX: OFFICERS
6.1 Number; Titles; Term of Office....................................... 11
6.2 Removal.............................................................. 12
6.3 Vacancies............................................................ 12
6.4 Authority............................................................ 12
6.5 Compensation......................................................... 12
6.6 Chairman of the Board................................................ 12
6.7 President............................................................ 12
6.8 Vice Presidents...................................................... 12
6.9 Treasurer............................................................ 13
6.10 Assistant Treasurers................................................. 13
6.11 Secretary............................................................ 13
6.12 Assistant Secretaries................................................ 13
ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS
7.1 Certificates for Shares.............................................. 14
7.2 Replacement of Lost or Destroyed Certificates........................ 14
7.3 Transfer of Shares................................................... 14
7.4 Registered Stockholders.............................................. 14
7.5 Regulations.......................................................... 15
7.6 Legends.............................................................. 15
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE EIGHT: MISCELLANEOUS PROVISIONS
8.1 Dividends............................................................ 15
8.2 Reserves............................................................. 15
8.3 Books and Records.................................................... 15
8.4 Fiscal Year.......................................................... 15
8.5 Seal................................................................. 16
8.6 Resignations......................................................... 16
8.7 Securities of Other Corporations..................................... 16
8.8 Telephone Meetings................................................... 16
8.9 Action Without a Meeting............................................. 16
8.10 Invalid Provisions................................................... 17
8.11 Mortgages, etc....................................................... 17
8.12 Headings............................................................. 18
8.13 References........................................................... 18
8.14 Amendments........................................................... 18
</TABLE>
iii
<PAGE> 5
BYLAWS
OF
COOPERATIVE COMPUTING, INC.
A Delaware Corporation
PREAMBLE
These bylaws are subject to, and governed by, the General Corporation
Law of the State of Delaware (the "Delaware General Corporation Law") and the
certificate of incorporation (as amended to the date hereof, the "Certificate of
Incorporation") of Cooperative Computing, Inc., a Delaware corporation (the
"Corporation"). In the event of a direct conflict between the provisions of
these bylaws and the mandatory provisions of the Delaware General Corporation
Law or the provisions of the Certificate of Incorporation of the Corporation,
such provisions of the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation, as the case may be, will be controlling.
ARTICLE ONE: OFFICES
1.1 Registered Office and Agent. The registered office and registered
agent of the Corporation shall be as designated from time to time by the
appropriate filing by the Corporation in the office of the Secretary of State of
the State of Delaware.
1.2 Other Offices. The Corporation may also have offices at such other
places, both within and without the State of Delaware, as the board of directors
may from time to time determine or as the business of the Corporation may
require.
ARTICLE TWO: MEETINGS OF STOCKHOLDERS
2.1 Annual Meeting. An annual meeting of stockholders of the
Corporation shall be held each calendar year on such date and at such time as
shall be designated from time to time by the board of directors and stated in
the notice of the meeting or in a duly executed waiver
<PAGE> 6
of notice of such meeting. At such meeting, the stockholders shall elect
directors and transact such other business as may properly be brought before the
meeting.
2.2 Special Meeting. A special meeting of the stockholders may be
called at any time by the Chairman of the Board, the President, the board of
directors, and shall be called by the President or the Secretary at the request
in writing of the stockholders of record of not less than ten percent of all
shares entitled to vote at such meeting or as otherwise provided by the
certificate of incorporation of the Corporation. A special meeting shall be held
on such date and at such time as shall be designated by the person(s) calling
the meeting and stated in the notice of the meeting or in a duly executed waiver
of notice of such meeting. Only such business shall be transacted at a special
meeting as may be stated or indicated in the notice of such meeting or in a duly
executed waiver of notice of such meeting.
2.3 Place of Meetings. An annual meeting of stockholders may be held at
any place within or without the State of Delaware designated by the board of
directors. A special meeting of stockholders may be held at any place within or
without the State of Delaware designated in the notice of the meeting or a duly
executed waiver of notice of such meeting. Meetings of stockholders shall be
held at the principal office of the Corporation unless another place is
designated for meetings in the manner provided herein.
2.4 Notice. Written or printed notice stating the place, day, and time
of each meeting of the stockholders and, in case of a special meeting, the
purpose or purposes for which the meeting is called shall be delivered not less
than ten nor more than 60 days before the date of the meeting, either personally
or by mail, by or at the direction of the President, the Secretary, or the
officer or person(s) calling the meeting, to each stockholder of record entitled
to vote at such meeting. If such notice is to be sent by mail, it shall be
directed to such stockholder at his address as it appears on the records of the
Corporation, unless he shall have filed with the Secretary of the Corporation a
written request that notices to him be mailed to some other address, in which
case it shall be directed to him at such other address. Notice of any meeting of
stockholders shall not be required to be given to any stockholder who shall
attend such meeting in person or by proxy and shall not, at the beginning of
such meeting, object to the transaction of any business because the meeting is
not lawfully called or convened, or who shall, either before or after the
meeting, submit a signed waiver of notice, in person or by proxy.
2.5 Voting List. At least ten days before each meeting of stockholders,
the Secretary or other officer of the Corporation who has charge of the
Corporation's stock ledger, either directly or through another officer appointed
by him or through a transfer agent appointed by the board of directors, shall
prepare a complete list of stockholders entitled to
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vote thereat, arranged in alphabetical order and showing the address of each
stockholder and number of shares registered in the name of each stockholder. For
a period of ten days prior to such meeting, such list shall be kept on file at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of meeting or a duly executed waiver of notice of such
meeting or, if not so specified, at the place where the meeting is to be held
and shall be open to examination by any stockholder during ordinary business
hours. Such list shall be produced at such meeting and kept at the meeting at
all times during such meeting and may be inspected by any stockholder who is
present.
2.6 Quorum. The holders of a majority of the outstanding shares
entitled to vote on a matter, present in person or by proxy, shall constitute a
quorum at any meeting of stockholders, except as otherwise provided by law, the
certificate of incorporation of the Corporation, or these bylaws. If a quorum
shall not be present, in person or by proxy, at any meeting of stockholders, the
stockholders entitled to vote thereat who are present, in person or by proxy,
or, if no stockholder entitled to vote is present, any officer of the
Corporation may adjourn the meeting from time to time, without notice other than
announcement at the meeting (unless the board of directors, after such
adjournment, fixes a new record date for the adjourned meeting), until a quorum
shall be present, in person or by proxy. At any adjourned meeting at which a
quorum shall be present, in person or by proxy, any business may be transacted
which may have been transacted at the original meeting had a quorum been
present; provided that, if the adjournment is for more than 30 days or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the adjourned meeting.
2.7 Required Vote; Withdrawal of Quorum. When a quorum is present at
any meeting, the vote of the holders of at least a majority of the outstanding
shares entitled to vote who are present, in person or by proxy, shall decide any
question brought before such meeting, unless the question is one on which, by
express provision of statute, the certificate of incorporation of the
Corporation, or these bylaws, a different vote is required, in which case such
express provision shall govern and control the decision of such question. The
stockholders present at a duly constituted meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
2.8 Method of Voting; Proxies. Except as otherwise provided in the
certificate of incorporation of the Corporation or by law, each outstanding
share, regardless of class, shall be entitled to one vote on each matter
submitted to a vote at a meeting of stockholders. Elections of directors need
not be by written ballot. At any meeting of stockholders, every stockholder
having the right to vote may vote either in person or by a proxy executed in
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<PAGE> 8
writing by the stockholder or by his duly authorized attorney-in-fact. Each such
proxy shall be filed with the Secretary of the Corporation before or at the time
of the meeting. No proxy shall be valid after three years from the date of its
execution, unless otherwise provided in the proxy. If no date is stated in a
proxy, such proxy shall be presumed to have been executed on the date of the
meeting at which it is to be voted. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and coupled with an interest
sufficient in law to support an irrevocable power or unless otherwise made
irrevocable by law.
2.9 Record Date. (a) For the purpose of determining stockholders
entitled to notice of or to vote at any meeting of stockholders, or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion, or exchange of stock or for the purpose of
any other lawful action, the board of directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors, for any such determination of
stockholders, such date in any case to be not more than 60 days and not less
than ten days prior to such meeting nor more than 60 days prior to any other
action. If no record date is fixed:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the day on which notice is given
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.
(ii) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the
board of directors adopts the resolution relating thereto.
(iii) A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the board of
directors may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the board
of directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the board of
directors, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the board of
directors. If no record date has been fixed by the board of directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior
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action by the board of directors is required by law or these bylaws, shall be
the first date on which a signed written consent setting forth the action taken
or proposed to be taken is delivered to the Corporation by delivery to its
registered office in the State of Delaware, its principal place of business, or
an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Corporation's registered office in the State of Delaware, principal place of
business, or such officer or agent shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the board of directors and prior action by the board of directors is required by
law or these bylaws, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the board of directors adopts the resolution
taking such prior action.
2.10 Conduct of Meeting. The Chairman of the Board, if such office has
been filled, and, if not or if the Chairman of the Board is absent or otherwise
unable to act, the President shall preside at all meetings of stockholders. The
Secretary shall keep the records of each meeting of stockholders. In the absence
or inability to act of any such officer, such officer's duties shall be
performed by the officer given the authority to act for such absent or
non-acting officer under these bylaws or by some person appointed by the
meeting.
2.11 Inspectors. The board of directors may, in advance of any meeting
of stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If any of the inspectors so appointed shall fail to appear
or act, the chairman of the meeting shall, or if inspectors shall not have been
appointed, the chairman of the meeting may, appoint one or more inspectors. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector at such meeting with
strict impartiality and according to the best of his ability. The inspectors
shall determine the number of shares of capital stock of the Corporation
outstanding and the voting power of each, the number of shares represented at
the meeting, the existence of a quorum, and the validity and effect of proxies
and shall receive votes, ballots, or consents, hear and determine all challenges
and questions arising in connection with the right to vote, count and tabulate
all votes, ballots, or consents, determine the results, and do such acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the chairman of the meeting, the inspectors shall make a report in
writing of any challenge, request, or matter determined by them and shall
execute a certificate of any fact found by them. No director or candidate for
the office of director shall act as an inspector of an election of directors.
Inspectors need not be stockholders.
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ARTICLE THREE: DIRECTORS
3.1 Management. The business and property of the Corporation shall be
managed by the board of directors. Subject to the restrictions imposed by law,
the certificate of incorporation of the Corporation, or these bylaws, the board
of directors may exercise all the powers of the Corporation.
3.2 Number; Qualification; Election; Term. The number of directors
which shall constitute the entire board of directors shall be not less than one.
The first board of directors shall consist of the number of directors named in
the certificate of incorporation of the Corporation or, if no directors are so
named, shall consist of the number of directors elected by the incorporator(s)
at an organizational meeting or by unanimous written consent in lieu thereof.
Thereafter, within the limits above specified, the number of directors which
shall constitute the entire board of directors shall be determined by resolution
of the board of directors or by resolution of the stockholders at the annual
meeting thereof or at a special meeting thereof called for that purpose. Except
as otherwise required by law, the certificate of incorporation of the
Corporation, or these bylaws, the directors shall be elected at an annual
meeting of stockholders at which a quorum is present. Directors shall be elected
by a plurality of the votes of the shares present in person or represented by
proxy and entitled to vote on the election of directors. Each director so chosen
shall hold office until the first annual meeting of stockholders held after his
election and until his successor is elected and qualified or, if earlier, until
his death, resignation, or removal from office. None of the directors need be a
stockholder of the Corporation or a resident of the State of Delaware. Each
director must have attained the age of majority.
3.3 Change in Number. No decrease in the number of directors
constituting the entire board of directors shall have the effect of shortening
the term of any incumbent director.
3.4 Removal. Except as otherwise provided in the certificate of
incorporation of the Corporation or these by-laws, at any meeting of
stockholders called expressly for that purpose, any director or the entire board
of directors may be removed, with or without cause, by a vote of the holders of
a majority of the shares then entitled to vote on the election of directors;
provided, however, that so long as stockholders have the right to cumulate votes
in the election of directors pursuant to the certificate of incorporation of the
Corporation, if less than the entire board of directors is to be removed, no one
of the directors may be removed if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
board of directors.
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3.5 Vacancies. Vacancies and newly-created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by the sole
remaining director, and each director so chosen shall hold office until the
first annual meeting of stockholders held after his election and until his
successor is elected and qualified or, if earlier, until his death, resignation,
or removal from office. If there are no directors in office, an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly-created directorship, the directors then in
office shall constitute less than a majority of the whole board of directors (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders holding at least 10% of the
total number of the shares at the time outstanding having the right to vote for
such directors, summarily order an election to be held to fill any such
vacancies or newly-created directorships or to replace the directors chosen by
the directors then in office. Except as otherwise provided in these bylaws, when
one or more directors shall resign from the board of directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have the power to fill such vacancy or vacancies, the
vote thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in these
bylaws with respect to the filling of other vacancies.
3.6 Meetings of Directors. The directors may hold their meetings and
may have an office and keep the books of the Corporation, except as otherwise
provided by statute, in such place or places within or without the State of
Delaware as the board of directors may from time to time determine or as shall
be specified in the notice of such meeting or duly executed waiver of notice of
such meeting.
3.7 First Meeting. Each newly elected board of directors may hold its
first meeting for the purpose of organization and the transaction of business,
if a quorum is present, immediately after and at the same place as the annual
meeting of stockholders, and no notice of such meeting shall be necessary.
3.8 Election of Officers. At the first meeting of the board of
directors after each annual meeting of stockholders at which a quorum shall be
present, the board of directors shall elect the officers of the Corporation.
3.9 Regular Meetings. Regular meetings of the board of directors shall
be held at such times and places as shall be designated from time to time by
resolution of the board of directors. Notice of such regular meetings shall not
be required.
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3.10 Special Meetings. Special meetings of the board of directors shall
be held whenever called by the Chairman of the Board, the President, or any
director.
3.11 Notice. The Secretary shall give notice of each special meeting to
each director at least 24 hours before the meeting. Notice of any such meeting
need not be given to any director who shall, either before or after the meeting,
submit a signed waiver of notice or who shall attend such meeting without
protesting, prior to or at its commencement, the lack of notice to him. Neither
the business to be transacted at, nor the purpose of, any regular or special
meeting of the board of directors need be specified in the notice or waiver of
notice of such meeting.
3.12 Quorum; Majority Vote. At all meetings of the board of directors,
a majority of the directors fixed in the manner provided in these bylaws shall
constitute a quorum for the transaction of business. If at any meeting of the
board of directors there be less than a quorum present, a majority of those
present or any director solely present may adjourn the meeting from time to time
without further notice. Unless the act of a greater number is required by law,
the certificate of incorporation of the Corporation, or these bylaws, the act of
a majority of the directors present at a meeting at which a quorum is in
attendance shall be the act of the board of directors. At any time that the
certificate of incorporation of the Corporation provides that directors elected
by the holders of a class or series of stock shall have more or less than one
vote per director on any matter, every reference in these bylaws to a majority
or other proportion of directors shall refer to a majority or other proportion
of the votes of such directors.
3.13 Procedure. At meetings of the board of directors, business shall
be transacted in such order as from time to time the board of directors may
determine. The Chairman of the Board, if such office has been filled, and, if
not or if the Chairman of the Board is absent or otherwise unable to act, the
President shall preside at all meetings of the board of directors. In the
absence or inability to act of either such officer, a chairman shall be chosen
by the board of directors from among the directors present. The Secretary of the
Corporation shall act as the secretary of each meeting of the board of directors
unless the board of directors appoints another person to act as secretary of the
meeting. The board of directors shall keep regular minutes of its proceedings
which shall be placed in the minute book of the Corporation.
3.14 Presumption of Assent. A director of the Corporation who is
present at the meeting of the board of directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
unless his dissent shall be entered in the minutes of the meeting or unless he
shall file his written dissent to such action with the person acting as
secretary of the meeting before the adjournment thereof or shall forward any
dissent by
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certified or registered mail to the Secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
3.15 Compensation. The board of directors shall have the authority to
fix the compensation, including fees and reimbursement of expenses, paid to
directors for attendance at regular or special meetings of the board of
directors or any committee thereof; provided, that nothing contained herein
shall be construed to preclude any director from serving the Corporation in any
other capacity or receiving compensation therefor.
ARTICLE FOUR: COMMITTEES
4.1 Designation. The board of directors may, by resolution adopted by a
majority of the entire board of directors, designate one or more committees.
4.2 Number; Qualification; Term. Each committee shall consist of one or
more directors appointed by resolution adopted by a majority of the entire board
of directors. The number of committee members may be increased or decreased from
time to time by resolution adopted by a majority of the entire board of
directors. Each committee member shall serve as such until the earliest of (i)
the expiration of his term as director, (ii) his resignation as a committee
member or as a director, or (iii) his removal as a committee member or as a
director.
4.3 Authority. Each committee, to the extent expressly provided in the
resolution establishing such committee, shall have and may exercise all of the
authority of the board of directors in the management of the business and
property of the Corporation except to the extent expressly restricted by law,
the certificate of incorporation of the Corporation, or these bylaws.
4.4 Committee Changes. The board of directors shall have the power at
any time to fill vacancies in, to change the membership of, and to discharge any
committee.
4.5 Alternate Members of Committees. The board of directors may
designate one or more directors as alternate members of any committee. Any such
alternate member may replace any absent or disqualified member at any meeting of
the committee. If no alternate committee members have been so appointed to a
committee or each such alternate committee member is absent or disqualified, the
member or members of such committee present at any meeting and not disqualified
from voting, whether or not he or they constitute a quorum, may
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unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member.
4.6 Regular Meetings. Regular meetings of any committee may be held
without notice at such time and place as may be designated from time to time by
the committee and communicated to all members thereof.
4.7 Special Meetings. Special meetings of any committee may be held
whenever called by any committee member. The committee member calling any
special meeting shall cause notice of such special meeting, including therein
the time and place of such special meeting, to be given to each committee member
at least two days before such special meeting. Neither the business to be
transacted at, nor the purpose of, any special meeting of any committee need be
specified in the notice or waiver of notice of any special meeting.
4.8 Quorum; Majority Vote. At meetings of any committee, a majority of
the number of members designated by the board of directors shall constitute a
quorum for the transaction of business. If a quorum is not present at a meeting
of any committee, a majority of the members present may adjourn the meeting from
time to time, without notice other than an announcement at the meeting, until a
quorum is present. The act of a majority of the members present at any meeting
at which a quorum is in attendance shall be the act of a committee, unless the
act of a greater number is required by law, the certificate of incorporation of
the Corporation, or these bylaws.
4.9 Minutes. Each committee shall cause minutes of its proceedings to
be prepared and shall report the same to the board of directors upon the request
of the board of directors. The minutes of the proceedings of each committee
shall be delivered to the Secretary of the Corporation for placement in the
minute books of the Corporation.
4.10 Compensation. Committee members may, by resolution of the board of
directors, be allowed a fixed sum and expenses of attendance, if any, for
attending any committee meetings or a stated salary.
4.11 Responsibility. The designation of any committee and the
delegation of authority to it shall not operate to relieve the board of
directors or any director of any responsibility imposed upon it or such director
by law.
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ARTICLE FIVE: NOTICE
5.1 Method. Whenever by statute, the certificate of incorporation of
the Corporation, or these bylaws, notice is required to be given to any
committee member, director, or stockholder and no provision is made as to how
such notice shall be given, personal notice shall not be required and any such
notice may be given (a) in writing, by mail, postage prepaid, addressed to such
committee member, director, or stockholder at his address as it appears on the
books or (in the case of a stockholder) the stock transfer records of the
Corporation, or (b) by any other method permitted by law (including but not
limited to overnight courier service, telegram, telex, or telefax). Any notice
required or permitted to be given by mail shall be deemed to be delivered and
given at the time when the same is deposited in the United States mail as
aforesaid. Any notice required or permitted to be given by overnight courier
service shall be deemed to be delivered and given at the time delivered to such
service with all charges prepaid and addressed as aforesaid. Any notice required
or permitted to be given by telegram, telex, or telefax shall be deemed to be
delivered and given at the time transmitted with all charges prepaid and
addressed as aforesaid.
5.2 Waiver. Whenever any notice is required to be given to any
stockholder, director, or committee member of the Corporation by statute, the
certificate of incorporation of the Corporation, or these bylaws, a waiver
thereof in writing signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be equivalent to the
giving of such notice. Attendance of a stockholder, director, or committee
member at a meeting shall constitute a waiver of notice of such meeting, except
where such person attends for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE SIX: OFFICERS
6.1 Number; Titles; Term of Office. The officers of the Corporation
shall be a President, a Secretary, and such other officers as the board of
directors may from time to time elect or appoint, including a Chairman of the
Board, one or more Vice Presidents (with each Vice President to have such
descriptive title, if any, as the board of directors shall determine), and a
Treasurer. Each officer shall hold office until his successor shall have been
duly elected and shall have qualified, until his death, or until he shall resign
or shall have been removed in the manner hereinafter provided. Any two or more
offices may be held by the same person. None of the officers need be a
stockholder or a director of the Corporation or a resident of the State of
Delaware.
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6.2 Removal. Any officer or agent elected or appointed by the board of
directors may be removed by the board of directors whenever in its judgment the
best interest of the Corporation will be served thereby, but such removal shall
be without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
6.3 Vacancies. Any vacancy occurring in any office of the Corporation
(by death, resignation, removal, or otherwise) may be filled by the board of
directors.
6.4 Authority. Officers shall have such authority and perform such
duties in the management of the Corporation as are provided in these bylaws or
as may be determined by resolution of the board of directors not inconsistent
with these bylaws.
6.5 Compensation. The compensation, if any, of officers and agents
shall be fixed from time to time by the board of directors; provided, however,
that the board of directors may delegate the power to determine the compensation
of any officer and agent (other than the officer to whom such power is
delegated) to the Chairman of the Board or the President.
6.6 Chairman of the Board. The Chairman of the Board, if elected by the
board of directors, shall have such powers and duties as may be prescribed by
the board of directors. Such officer shall preside at all meetings of the
stockholders and of the board of directors. Such officer may sign all
certificates for shares of stock of the Corporation.
6.7 President. The President shall be the chief executive officer of
the Corporation and, subject to the board of directors, he shall have general
executive charge, management, and control of the properties and operations of
the Corporation in the ordinary course of its business, with all such powers
with respect to such properties and operations as may be reasonably incident to
such responsibilities. If the board of directors has not elected a Chairman of
the Board or in the absence or inability to act of the Chairman of the Board,
the President shall exercise all of the powers and discharge all of the duties
of the Chairman of the Board. As between the Corporation and third parties, any
action taken by the President in the performance of the duties of the Chairman
of the Board shall be conclusive evidence that there is no Chairman of the Board
or that the Chairman of the Board is absent or unable to act.
6.8 Vice Presidents. Each Vice President shall have such powers and
duties as may be assigned to him by the board of directors, the Chairman of the
Board, or the President, and (in order of their seniority as determined by the
board of directors or, in the absence of such determination, as determined by
the length of time they have held the office of Vice President) shall exercise
the powers of the President during that officer's absence or inability to act.
As
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between the Corporation and third parties, any action taken by a Vice President
in the performance of the duties of the President shall be conclusive evidence
of the absence or inability to act of the President at the time such action was
taken.
6.9 Treasurer. The Treasurer shall have custody of the Corporation's
funds and securities, shall keep full and accurate account of receipts and
disbursements, shall deposit all monies and valuable effects in the name and to
the credit of the Corporation in such depository or depositories as may be
designated by the board of directors, and shall perform such other duties as may
be prescribed by the board of directors, the Chairman of the Board, or the
President.
6.10 Assistant Treasurers. Each Assistant Treasurer shall have such
powers and duties as may be assigned to him by the board of directors, the
Chairman of the Board, or the President. The Assistant Treasurers (in the order
of their seniority as determined by the board of directors or, in the absence of
such a determination, as determined by the length of time they have held the
office of Assistant Treasurer) shall exercise the powers of the Treasurer during
that officer's absence or inability to act.
6.11 Secretary. Except as otherwise provided in these bylaws, the
Secretary shall keep the minutes of all meetings of the board of directors and
of the stockholders in books provided for that purpose, and he shall attend to
the giving and service of all notices. He may sign with the Chairman of the
Board or the President, in the name of the Corporation, all contracts of the
Corporation and affix the seal of the Corporation thereto. He may sign with the
Chairman of the Board or the President all certificates for shares of stock of
the Corporation, and he shall have charge of the certificate books, transfer
books, and stock papers as the board of directors may direct, all of which shall
at all reasonable times be open to inspection by any director upon application
at the office of the Corporation during business hours. He shall in general
perform all duties incident to the office of the Secretary, subject to the
control of the board of directors, the Chairman of the Board, and the President.
6.12 Assistant Secretaries. Each Assistant Secretary shall have such
powers and duties as may be assigned to him by the board of directors, the
Chairman of the Board, or the President. The Assistant Secretaries (in the order
of their seniority as determined by the board of directors or, in the absence of
such a determination, as determined by the length of time they have held the
office of Assistant Secretary) shall exercise the powers of the Secretary during
that officer's absence or inability to act.
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ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS
7.1 Certificates for Shares. Certificates for shares of stock of the
Corporation shall be in such form as shall be approved by the board of
directors. The certificates shall be signed by the Chairman of the Board or the
President or a Vice President and also by the Secretary or an Assistant
Secretary or by the Treasurer or an Assistant Treasurer. Any and all signatures
on the certificate may be a facsimile and may be sealed with the seal of the
Corporation or a facsimile thereof. If any officer, transfer agent, or registrar
who has signed, or whose facsimile signature has been placed upon, a certificate
has ceased to be such officer, transfer agent, or registrar before such
certificate is issued, such certificate may be issued by the Corporation with
the same effect as if he were such officer, transfer agent, or registrar at the
date of issue. The certificates shall be consecutively numbered and shall be
entered in the books of the Corporation as they are issued and shall exhibit the
holder's name and the number of shares.
7.2 Replacement of Lost or Destroyed Certificates. The board of
directors may direct a new certificate or certificates to be issued in place of
a certificate or certificates theretofore issued by the Corporation and alleged
to have been lost or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate or certificates representing shares to be
lost or destroyed. When authorizing such issue of a new certificate or
certificates the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or to give the Corporation a bond with a
surety or sureties satisfactory to the Corporation in such sum as it may direct
as indemnity against any claim, or expense resulting from a claim, that may be
made against the Corporation with respect to the certificate or certificates
alleged to have been lost or destroyed.
7.3 Transfer of Shares. Shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof in
person or by their duly authorized attorneys or legal representatives. Upon
surrender to the Corporation or the transfer agent of the Corporation of a
certificate representing shares duly endorsed or accompanied by proper evidence
of succession, assignment, or authority to transfer, the Corporation or its
transfer agent shall issue a new certificate to the person entitled thereto,
cancel the old certificate, and record the transaction upon its books.
7.4 Registered Stockholders. The Corporation shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the
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<PAGE> 19
part of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by law.
7.5 Regulations. The board of directors shall have the power and
authority to make all such rules and regulations as they may deem expedient
concerning the issue, transfer, and registration or the replacement of
certificates for shares of stock of the Corporation.
7.6 Legends. The board of directors shall have the power and authority
to provide that certificates representing shares of stock bear such legends as
the board of directors deems appropriate to assure that the Corporation does not
become liable for violations of federal or state securities laws or other
applicable law.
ARTICLE EIGHT: MISCELLANEOUS PROVISIONS
8.1 Dividends. Subject to provisions of law and the certificate of
incorporation of the Corporation, dividends may be declared by the board of
directors at any regular or special meeting and may be paid in cash, in
property, or in shares of stock of the Corporation. Such declaration and payment
shall be at the discretion of the board of directors.
8.2 Reserves. There may be created by the board of directors out of
funds of the Corporation legally available therefor such reserve or reserves as
the directors from time to time, in their discretion, consider proper to provide
for contingencies, to equalize dividends, or to repair or maintain any property
of the Corporation, or for such other purpose as the board of directors shall
consider beneficial to the Corporation, and the board of directors may modify or
abolish any such reserve in the manner in which it was created.
8.3 Books and Records. The Corporation shall keep correct and complete
books and records of account, shall keep minutes of the proceedings of its
stockholders and board of directors and shall keep at its registered office or
principal place of business, or at the office of its transfer agent or
registrar, a record of its stockholders, giving the names and addresses of all
stockholders and the number and class of the shares held by each.
8.4 Fiscal Year. The fiscal year of the Corporation shall be fixed by
the board of directors; provided, that if such fiscal year is not fixed by the
board of directors and the selection of the fiscal year is not expressly
deferred by the board of directors, the fiscal year shall be the calendar year.
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<PAGE> 20
8.5 Seal. The seal of the Corporation shall be such as from time to
time may be approved by the board of directors.
8.6 Resignations. Any director, committee member, or officer may resign
by so stating at any meeting of the board of directors or by giving written
notice to the board of directors, the Chairman of the Board, the President, or
the Secretary. Such resignation shall take effect at the time specified therein
or, if no time is specified therein, immediately upon its receipt. Unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
8.7 Securities of Other Corporations. The Chairman of the Board, the
President, or any Vice President of the Corporation shall have the power and
authority to transfer, endorse for transfer, vote, consent, or take any other
action with respect to any securities of another issuer which may be held or
owned by the Corporation and to make, execute, and deliver any waiver, proxy, or
consent with respect to any such securities.
8.8 Telephone Meetings. Stockholders (acting for themselves or through
a proxy), members of the board of directors, and members of a committee of the
board of directors may participate in and hold a meeting of such stockholders,
board of directors, or committee by means of a conference telephone or similar
communications equipment by means of which persons participating in the meeting
can hear each other, and participation in a meeting pursuant to this section
shall constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
8.9 Action Without a Meeting. (a) Unless otherwise provided in the
certificate of incorporation of the Corporation, any action required by the
Delaware General Corporation Law to be taken at any annual or special meeting of
the stockholders, or any action which may be taken at any annual or special
meeting of the stockholders, may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holders (acting for themselves or
through a proxy) of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which the holders of all shares entitled to vote thereon were present and voted
and shall be delivered to the Corporation by delivery to its registered office
in the State of Delaware, its principal place of business, or an officer or
agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Every written consent of stockholders
shall bear the date of signature of each stockholder who signs the consent and
no written consent shall be effective to take the corporate action referred to
therein unless, within sixty days of the earliest dated
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<PAGE> 21
consent delivered in the manner required by this Section 8.9(a) to the
Corporation, written consents signed by a sufficient number of holders to take
action are delivered to the Corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer or agent
of the Corporation having custody of the book in which proceedings of meetings
of stockholders are recorded. Delivery made to the Corporation's registered
office, principal place of business, or such officer or agent shall be by hand
or by certified or registered mail, return receipt requested.
(b) Unless otherwise restricted by the certificate of incorporation of
the Corporation or by these bylaws, any action required or permitted to be taken
at a meeting of the board of directors, or of any committee of the board of
directors, may be taken without a meeting if a consent or consents in writing,
setting forth the action so taken, shall be signed by all the directors or all
the committee members, as the case may be, entitled to vote with respect to the
subject matter thereof, and such consent shall have the same force and effect as
a vote of such directors or committee members, as the case may be, and may be
stated as such in any certificate or document filed with the Secretary of State
of the State of Delaware or in any certificate delivered to any person. Such
consent or consents shall be filed with the minutes of proceedings of the board
or committee, as the case may be.
8.10 Invalid Provisions. If any part of these bylaws shall be held
invalid or inoperative for any reason, the remaining parts, so far as it is
possible and reasonable, shall remain valid and operative.
8.11 Mortgages, etc. With respect to any deed, deed of trust, mortgage,
or other instrument executed by the Corporation through its duly authorized
officer or officers, the attestation to such execution by the Secretary of the
Corporation shall not be necessary to constitute such deed, deed of trust,
mortgage, or other instrument a valid and binding obligation against the
Corporation unless the resolutions, if any, of the board of directors
authorizing such execution expressly state that such attestation is necessary.
17
<PAGE> 22
8.12 Headings. The headings used in these bylaws have been inserted for
administrative convenience only and do not constitute matter to be construed in
interpretation.
8.13 References. Whenever herein the singular number is used, the same
shall include the plural where appropriate, and words of any gender should
include each other gender where appropriate.
8.14 Amendments. These bylaws may be altered, amended, or repealed or
new bylaws may be adopted by the stockholders or by the board of directors at
any regular meeting of the stockholders or the board of directors or at any
special meeting of the stockholders or the board of directors if notice of such
alteration, amendment, repeal, or adoption of new bylaws be contained in the
notice of such special meeting.
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<PAGE> 1
EXHIBIT 10.21
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
1998 STOCK OPTION PLAN
1. Purpose.
Cooperative Computing Holding Company, Inc., a Texas corporation
(herein, together with its successors, referred to as the "Company"), by means
of this 1998 Stock Option Plan (the "Plan"), desires to afford certain
individuals and key employees of the Company and any subsidiary corporation
thereof now existing or hereafter formed or acquired (such subsidiary
corporations sometimes referred to herein as "Related Entities") who are
responsible for the continued growth of the Company an opportunity to acquire a
proprietary interest in the Company, and thus to create in such persons an
increased interest in and a greater concern for the welfare of the Company and
any Related Entities.
The stock options described in Sections 6 and 7 (the "Options"), and
the shares of Common Stock (as hereinafter defined) acquired pursuant to the
exercise of such Options are a matter of separate inducement and are not in lieu
of any salary or other compensation for services. As used in the Plan, the terms
"parent corporation" and "subsidiary corporation" shall mean, respectively, a
corporation within the definition of such terms contained in Sections 424(e) and
424(f), respectively, of the Internal Revenue Code of 1986, as amended (the
"Code").
2. Administration.
The Plan shall be administered by the Option Committee, or any
successor thereto, of the Board of Directors of the Company (the "Board of
Directors"), or by any other committee appointed by the Board of Directors to
administer this Plan (the "Committee"); provided, the entire Board of Directors
may act as the Committee if it chooses to do so. The number of individuals that
shall constitute the Committee shall be determined from time to time by a
majority of all the members of the Board of Directors, and, unless that majority
of the Board of Directors determines otherwise, shall be no less than two
individuals. A majority of the Committee shall constitute a quorum (or if the
Committee consists of only two members, then both members shall constitute a
quorum), and subject to the provisions of Section 5, the acts of a majority of
the members present at any meeting at
<PAGE> 2
which a quorum is present, or acts approved in writing by all members of the
Committee, shall be the acts of the Committee. Whenever the Company shall have a
class of equity securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), each member of the
Committee shall be required to be a "Non-Employee Director" within the meaning
of Rule 16b-3, as amended ("Rule 16b-3"), or other applicable rules under
Section 16(b) of the Exchange Act and the Committee shall administer the Plan so
as to comply at all times with the Exchange Act.
The members of the Committee shall serve at the pleasure of the Board
of Directors, which shall have the power, at any time and from time to time, to
remove members from or add members to the Committee. Removal from the Committee
may be with or without cause. Any individual serving as a member of the
Committee shall have the right to resign from membership in the Committee by
written notice to the Board of Directors. The Board of Directors, and not the
remaining members of the Committee, shall have the power and authority to fill
vacancies on the Committee, however caused. The Board of Directors shall
promptly fill any vacancy that causes the number of members of the Committee to
be less than two or, if the Company has a class of equity securities registered
pursuant to Section 12 of the Exchange Act, any other number that Rule 16b-3 may
require from time to time.
3. Shares Available.
Subject to the adjustments provided in Section 11, the maximum
aggregate number of shares of common stock, par value $.000125 per share, of the
Company ("Common Stock") in respect of which Options may be granted for all
purposes under the Plan shall be 4,800,000 shares. The maximum aggregate number
of shares that may be granted under the Plan to any Key Employee or Eligible
Non-Employee shall be 250,000 shares. If, for any reason, any shares as to which
Options have been granted cease to be subject to purchase thereunder, including
the expiration of such Option, the termination of such Option prior to exercise,
or the forfeiture of such Option, such shares shall thereafter be available for
grants under the Plan. Options granted under the Plan may be fulfilled in
accordance with the terms of the Plan with (i) authorized and unissued shares of
the Common Stock, (ii) issued shares of such Common Stock held in the Company's
treasury, or (iii) issued shares of Common Stock reacquired by the Company in
each situation as the Board of Directors or the Committee may determine from
time to time.
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<PAGE> 3
4. Eligibility and Bases of Participation.
Grants of Incentive Options (as hereinafter defined) and Non-Qualified
Options (as hereinafter defined) may be made under the Plan, subject to and in
accordance with Section 6, to Key Employees; provided, however, that no grants
may be made to any officer or employee who either directly or beneficially
received founders' shares and any officer or employee who is a member of the
Board of Directors. As used herein, the term "Key Employee" shall mean any
employee of the Company or any Related Entity, including officers and directors
of the Company or any Related Entity who are also employees of the Company or
any Related Entity, who are regularly employed on a salaried basis and who are
so employed on the date of such grant, whom the Committee identifies as having a
direct and significant effect on the performance of the Company or any Related
Entity.
Grants of Non-Qualified Options may be made, subject to and in
accordance with Section 7, to any Eligible Non-Employee. As used herein, the
term "Eligible Non-Employee" shall mean any person or entity of any nature
whatsoever, specifically including an individual, a firm, a company, a
corporation, a partnership, a trust, or other entity (collectively, a "Person"),
that the Committee designates as eligible for a grant of Options pursuant to
this Plan because such Person performs bona fide consulting, advisory, or other
services for the Company or any Related Entity (other than services in
connection with the offer or sale of securities in a capital-raising
transaction) and the Board of Directors or the Committee determines that the
Person has a direct and significant effect on the financial development of the
Company or any Related Entity.
The adoption of this Plan shall not be deemed to give any Person a
right to be granted any Options.
5. Authority of Committee.
Subject to and not inconsistent with the express provisions of the
Plan, the Code and, if applicable, Rule 16b-3, the Committee shall have plenary
authority to:
a. determine the Key Employees and Eligible Non-Employees to whom
Options shall be granted, the time when such Options shall be
granted, the number of Options, the purchase price or exercise
price of each Option, the period(s) during which such Options
shall be exercisable (whether in whole or in part, including
whether such Options shall become immediately exercisable upon
the consummation of a Change in Control), the restrictions to
be applicable to Options and all other terms and provisions
thereof (which need not be identical);
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<PAGE> 4
b. require, as a condition to the granting of any Option, that
the Person receiving such Option agree not to sell or
otherwise dispose of such Option, any Common Stock acquired
pursuant to such Option, or any other "derivative security"
(as defined by Rule 16a-1(c) under the Exchange Act) for a
period of six months following the later of (i) the date of
the grant of such Option or (ii) the date when the exercise
price of such Option is fixed if such exercise price is not
fixed at the date of grant of such Option, or for such other
period as the Committee may determine;
c. provide an arrangement through registered broker-dealers
whereby temporary financing may be made available to an
optionee by the broker-dealer, under the rules and regulations
of the Board of Governors of the Federal Reserve, for the
purpose of assisting the optionee in the exercise of an
Option, such authority to include the payment by the Company
of the commissions of the broker-dealer;
d. provide the establishment of procedures for an optionee (i)
to have withheld from the total number of shares of Common
Stock to be acquired upon the exercise of an Option (other
than an Incentive Option) that number of shares having a Fair
Market Value which, together with such cash as shall be paid
in respect of fractional shares, shall equal the aggregate
exercise price under such Option for the number of shares then
being acquired (including the shares to be so withheld), and
(ii) to exercise a portion of an Option by delivering that
number of shares of Common Stock already owned by such
optionee having an aggregate Fair Market Value which shall
equal the partial Option exercise price and to deliver the
shares thus acquired by such optionee in payment of shares to
be received pursuant to the exercise of additional portions of
such Option, the effect of which shall be that such optionee
can in sequence utilize such newly acquired shares in payment
of the exercise price of the entire Option, together with such
cash as shall be paid in respect of fractional shares;
provided, however, that in the case of an Incentive Option, no
shares shall be used to pay the exercise price unless such
shares were not acquired through the exercise of an Incentive
Option or, if so acquired, have been held for more than two
years since the grant of such Option and for more than one
year since the exercise of such Option;
e. provide (in accordance with Section 14 or otherwise) the
establishment of a procedure whereby a number of shares of
Common Stock or other securities may be
4
<PAGE> 5
withheld from the total number of shares of Common Stock or
other securities to be issued upon exercise of an Option
(other than an Incentive Option) to meet the obligation of
withholding for income, social security and other taxes
incurred by an optionee upon such exercise or required to be
withheld by the Company or a Related Entity in connection with
such exercise;
f. prescribe, amend, modify and rescind rules and regulations
relating to the Plan;
g. make all determinations permitted or deemed necessary,
appropriate or advisable for the administration of the Plan,
interpret any Plan or Option provision, perform all other
acts, exercise all other powers, and establish any other
procedures determined by the Committee to be necessary,
appropriate, or advisable in administering the Plan or for the
conduct of the Committee's business. Any act of the Committee,
including interpretations of the provisions of the Plan or any
Option and determinations under the Plan or any Option shall
be final, conclusive and binding on all parties.
The Committee may delegate to one or more of its members, or to one or
more agents, such administrative duties as it may deem advisable, and the
Committee or any Person to whom it has delegated duties as aforesaid may employ
one or more Persons to render advice with respect to any responsibility the
Committee or such Person may have under the Plan; provided, however, that
whenever the Company has a class of equity securities registered under Section
12 of the Exchange Act, the Committee may not delegate any duties to a member of
the Board of Directors who, if elected to serve on the Committee, would not
qualify as a "Non-Employee Director" to administer the Plan as contemplated by
Rule 16b-3, as amended, or other applicable rules under the Exchange Act. The
Committee may employ attorneys, consultants, accountants, or other Persons and
the Committee, the Company, and its officers and directors shall be entitled to
rely upon the advice, opinions, or valuations of any such Persons. No member or
agent of the Committee shall be personally liable for any action, determination
or interpretation made in good faith with respect to the Plan and all members
and agents of the Committee shall be fully protected by the Company in respect
of any such action, determination or interpretation.
6. Stock Options for Key Employees.
Subject to the express provisions of this Plan, the Committee shall
have the authority to grant incentive stock options pursuant to Section 422 of
the Code ("Incentive Options"), to grant non-qualified stock options (options
which do not qualify under Section 422 of the Code) ("Non-Qualified
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<PAGE> 6
Options"), and to grant both types of Options to Key Employees. No Incentive
Option shall be granted pursuant to this Plan after the earlier of ten years
from the date of adoption of the Plan or ten years from the date of approval of
the Plan by the stockholders of the Company. Incentive Options may be granted
only to Key Employees. The terms and conditions of the Options granted under
this Section 6 shall be determined from time to time by the Committee;
provided, however, that the Options granted under this Section 6 shall be
subject to all terms and provisions of the Plan (other than Section 7),
including the following:
a. Option Exercise Price. Subject to Section 4, the Committee
shall establish the Option exercise price at the time any
Option is granted at such amount as the Committee shall
determine; provided, that, in the case of an Incentive Option,
such price shall not be less than the Fair Market Value per
share of Common Stock at the date the Option is granted; and
provided, further, that in the case of an Incentive Option
granted to a person who, at the time such Incentive Option is
granted, owns shares of the Company or any Related Entity
which possess more than 10% of the total combined voting power
of all classes of shares of the Company or of any Related
Entity, the option exercise price shall not be less than 110%
of the Fair Market Value per share of Common Stock at the date
the Option is granted. The Option exercise price shall be
subject to adjustment in accordance with the provisions of
Section 11 of the Plan.
b. Payment. The price per share of Common Stock with respect to
each Option exercise shall be payable at the time of such
exercise. Such price shall be payable in cash or by any other
means acceptable to the Committee, including delivery to the
Company of shares of Common Stock owned by the optionee or by
the delivery or withholding of shares pursuant to a procedure
created pursuant to Section 5.d. of the Plan (but, with
respect to Incentive Options, subject to the limitations
described in such Section 5.d.). Shares delivered to or
withheld by the Company in payment of the Option exercise
price shall be valued at the Fair Market Value of the Common
Stock on the day preceding the date of the exercise of the
Option.
c. Exercisability of Stock Option. Unless otherwise determined by
the Committee at the time of grant, on September 30 of each
succeeding Plan Year, Options granted hereunder shall become
exercisable according to the vesting schedule set forth below:
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<PAGE> 7
(i) 10% of the Options shall have become exercisable
on the first anniversary of the last day of the Grant
Year and remain exercisable until the Options expire;
(ii) 20% of the Options shall have become exercisable
on the second anniversary of the last day of the
Grant Year and remain exercisable until the Options
expire;
(iii) 30% of the Options shall have become
exercisable on the third anniversary of the last day
of the Grant Year and remain exercisable until the
Options expire;
(iv) 65% of the Options shall have become exercisable
on the fourth anniversary of the last day of the
Grant Year and remain exercisable until the Options
expire; and
(v) 100% of the Options shall have become exercisable
on the fifth anniversary of the last day of the Grant
Year and remain exercisable until the Options expire.
Provided, however, that in the event of a Public Offering all
shares that were not exercisable at the time of the Public
Offering shall vest ratably over a period of years equal to
five (5) minus the number of complete years of vesting that
had occurred prior to the Public Offering.
No Option by its terms shall be exercisable after the
expiration of ten years from the date of grant of the Option,
unless, as to any Non-Qualified Option, otherwise expressly
provided in such Option; provided, however, that no Incentive
Option granted to a person who, at the time such Option is
granted, owns stock of the Company, or any Related Entity,
possessing more than 10% of the total combined voting power of
all classes of stock of the Company, or any Related Entity,
shall be exercisable after the expiration of five years from
the date such Option is granted.
d. Death. If any optionee's employment with the Company or a
Related Entity terminates due to the death of such optionee,
the estate of such optionee, or a Person who acquired the
right to exercise such Option by bequest or inheritance or by
reason of the death of the optionee, shall have the right to
exercise such Option in accordance with its terms at any time
and from time to time within 180 days after the date of death
unless a longer or shorter period is expressly provided in
such Option or established by the Committee pursuant to
Section 8 (but in no event after the expiration date of such
Option).
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<PAGE> 8
e. Disability. If the employment of any optionee terminates
because of such optionee's Disability (as defined in Section
19), such optionee or such optionee's legal representative
shall have the right to exercise the Option in accordance with
its terms at any time and from time to time within 180 days
after the date of such termination unless a longer or shorter
period is expressly provided in such Option or established by
the Committee pursuant to Section 8 (but not after the
expiration date of the Option); provided, however, that in the
case of an Incentive Option, the optionee or such optionee's
legal representative shall in any event be required to
exercise the Incentive Option within one year after
termination of the optionee's employment due to such
optionee's Disability.
f. Termination for Cause; Voluntary Termination. Unless an
optionee's Option expressly provides otherwise, such optionee
shall immediately forfeit all rights under his Option, except
as to the shares of stock already purchased thereunder, if the
employment of such optionee with the Company or a Related
Entity is terminated by the Company or any Related Entity for
Good Cause (as defined below) or if such optionee voluntarily
terminates employment without the consent of the Company or
any Related Entity. The determination that there exists Good
Cause for termination shall be made by the Option Committee
(unless otherwise agreed to in writing by the Company and the
optionee).
g. Other Termination of Employment. If the employment of an
optionee with the Company or a Related Entity terminates for
any reason other than those specified in subsections 6(d), (e)
or (f) above, such optionee shall have the right to exercise
his Option in accordance with its terms, within 30 days after
the date of such termination, unless a longer or shorter
period is expressly provided in such Option or established by
the Committee pursuant to Section 8 (but not after the
expiration date of the Option); provided, that no Incentive
Option shall be exercisable more than three months after such
termination.
h. Maximum Exercise. The aggregate Fair Market Value of stock
(determined at the time of the grant of the Option) with
respect to which Incentive Options are exercisable for the
first time by an optionee during any calendar year under all
plans of the Company and any Related Entity shall not exceed
$100,000.
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<PAGE> 9
i. Continuation of Employment. Each Incentive Option shall
require the optionee to remain in the continuous employ of the
Company or any Related Entity from the date of grant of the
Incentive Option until no more than three months prior to the
date of exercise of the Incentive Option.
7. Stock Option Grants to Eligible Non-Employees.
Subject to the express provisions of this Plan, the Committee shall
have the authority to grant Non-Qualified Options (and not Incentive Options) to
Eligible Non-Employees; provided, however, that whenever the Company has any
class of equity securities registered pursuant to Section 12 of the Exchange
Act, no Eligible Non-Employee then serving on the Committee (or such other
committee then administering the Plan) shall be granted Options hereunder if the
grant of such Options would cause such Eligible Non-Employee to no longer be a
"Non-Employee Director" as set forth in Section 2 hereof. The terms and
conditions of the Options granted under this Section 7 shall be determined from
time to time by the Committee; provided, however, that the Options granted under
this Section 7 shall be subject to all terms and provisions of the Plan (other
than Section 6), including the following:
a. Option Exercise Price. Subject to Section 4, the Committee
shall establish the Option exercise price at the time any
Non-Qualified Option is granted at such amount as the
Committee shall determine. The Option exercise price shall be
subject to adjustment in accordance with the provisions of
Section 11 of the Plan.
b. Payment. The price per share of Common Stock with respect to
each Option exercise shall be payable at the time of such
exercise. Such price shall be payable in cash or by any other
means acceptable to the Committee, including delivery to the
Company of shares of Common Stock owned by the optionee or by
the delivery or withholding of shares pursuant to a procedure
created pursuant to Section 5.d. of the Plan. Shares delivered
to or withheld by the Company in payment of the Option
exercise price shall be valued at the Fair Market Value of the
Common Stock on the day preceding the date of the exercise of
the Option.
c. Exercisability of Stock Option. Subject to Section 8, each
Option shall be exercisable in one or more installments as the
Committee may determine at the time of the grant. No Option
shall be exercisable after the expiration of ten years from
the date of grant of the Option, unless otherwise expressly
provided in such Option.
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<PAGE> 10
d. Death. If the retention by the Company or any Related Entity
of the services of any Eligible Non-Employee terminates
because of such Eligible Non-Employee's death, the estate of
such optionee, or a Person who acquired the right to exercise
such Option by bequest or inheritance or by reason of the
death of the optionee, shall have the right to exercise such
Option in accordance with its terms, at any time and from time
to time within 180 days after the date of death unless a
longer or shorter period is expressly provided in such Option
or established by the Committee pursuant to Section 8 (but in
no event after the expiration date of such Option).
e. Disability. If the retention by the Company or any Related
Entity of the services of any Eligible Non-Employee terminates
because of such Eligible Non-Employee's Disability, such
optionee or his legal representative shall have the right to
exercise the Option in accordance with its terms at any time
and from time to time within 180 days after the date of the
optionee's termination unless a longer or shorter period is
expressly provided in such Option or established by the
Committee pursuant to Section 8 (but not after the expiration
of the Option).
f. Termination for Cause; Voluntary Termination. If the
retention by the Company or any Related Entity of the services
of any Eligible Non-Employee is terminated (i) for Good Cause,
(ii) as a result of removal of the optionee from office as a
director of the Company or of any Related Entity for cause by
action of the stockholders of the Company or such Related
Entity in accordance with the by-laws of the Company or such
Related Entity, as applicable, and the corporate law of the
jurisdiction of incorporation of the Company or such Related
Entity, or (iii) as a result of the voluntarily termination by
optionee of optionee's service without the consent of the
Company or any Related Entity, then such optionee shall
immediately forfeit his rights under his Option except as to
the shares of stock already purchased. The determination that
there exists Good Cause for termination shall be made by the
Option Committee (unless otherwise agreed to in writing by the
Company and the optionee).
g. Other Termination of Relationship. If the retention by the
Company or any Related Entity of the services of any Eligible
Non-Employee terminates for any reason other than those
specified in subsections 7(d), (e) or
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<PAGE> 11
(f) above, such optionee shall have the right to exercise his
or its Option in accordance with its terms within 30 days
after the date of such termination, unless a longer or shorter
period is expressly provided in such Option or established by
the Committee pursuant to Section 8 (but not after the
expiration date of the Option).
h. Ineligibility for Other Grants. Any Eligible Non-Employee who
receives an Option pursuant to this Section 7 shall be
ineligible to receive any Options under any other Section of
the Plan.
8. Change of Control.
If (i) a Change of Control shall occur, (ii) the Company shall enter
into an agreement providing for a Change of Control, or (iii) any member of the
Shareholder Group shall enter into an agreement providing for a Change in
Control, then the Committee may declare any or all Options outstanding under the
Plan to be exercisable in full at such time or times as the Committee shall
determine, notwithstanding the express provisions of such Options. Each Option
accelerated by the Committee pursuant to the preceding sentence shall terminate,
notwithstanding any express provision thereof or any other provision of the
Plan, on such date (not later than the stated exercise date) as the Committee
shall determine.
9. Purchase Option.
a. Except as otherwise expressly provided in any particular
Option, if (i) any optionee's employment (or, in the case of
any Option granted under Section 7, the optionee's
relationship) with the Company or a Related Entity terminates
for any reason at any time, or (ii) a Change of Control occurs
or (iii) (A) the Company is engaged in or proposes to engage
in a transaction in which any shares, notes or other
securities will be issued to any optionee in a transaction
constituting a "sale" within the meaning of Section 2(3) of
the Securities Act, whether through a merger, consolidation,
exchange or purchase, (B) the optionee is not an "accredited
investor" as defined in Regulation D promulgated under the
Securities Act ("Regulation D") at the time of the respective
transaction and (C) the issuer of the shares, notes or other
securities involved in such transaction certifies in writing
to the Company that it has not prepared and is not expected to
prepare in connection with such transaction appropriate
disclosure documents that are sufficient to register such
shares, notes or other securities under the Securities Act or
to exempt such shares, notes or other securities from
registration
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<PAGE> 12
pursuant to Regulation D (each of the foregoing events being a
"Purchase Option Trigger Event"), the Company and/or its
designee(s) shall have the option (the "Purchase Option") to
purchase, and if the option is exercised, the optionee (or the
optionee's executor or the administrator of the optionee's
estate, in the event of the optionee's death, or the
optionee's legal representative in the event of the optionee's
incapacity (hereinafter, collectively with such optionee, the
"Grantor")) shall sell to the Company and/or its assignee(s),
all or any portion (at the Company's option) of the shares of
Common Stock and/or Options held by the Grantor (such shares
of Common Stock and Options collectively being referred to as
the "Purchasable Shares").
b. The Company shall give notice in writing to the Grantor of the
exercise of the Purchase Option within one year from the date
of the Purchase Option Trigger Event. Such notice shall state
the number of Purchasable Shares to be purchased and the
determination of the per share purchase price of such
Purchasable Shares. If no notice is given within the time
limit specified above, the Purchase Option shall terminate.
c. The purchase price to be paid for the Purchasable Shares
purchased pursuant to the Purchase Option shall be, in the
case of any Common Stock, the Fair Market Value per share as
of the date of the notice of exercise of the Purchase Option
times the number of shares being purchased, and in the case of
any Option, the Fair Market Value per share times the number
of vested shares subject to such Option which are being
purchased, less the applicable per share Option exercise
price; provided, however, that in the event that an optionee's
employment (or, in the case of any Option granted under
Section 7, the optionee's relationship) with the Company is
terminated in a manner contemplated by Section 6(f) (or, in
the case of any Option granted under Section 7, in the manner
contemplated by Section 7(f)), then the foregoing calculation
shall be made using the lower of (i) the Fair Market Value per
share and (ii) the exercise price per share in respect of the
Purchasable Shares. The purchase price shall be paid in cash.
The closing of such purchase shall take place at the Company's
principal executive offices within ten days after the purchase
price has been determined. At such closing, the Grantor shall
deliver to the purchaser(s) the certificates or instruments
evidencing the Purchasable Shares being purchased, duly
endorsed (or accompanied by duly executed stock powers) and
otherwise in good form for delivery, against payment of the
purchase
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<PAGE> 13
price by check of the purchaser(s). In the event that,
notwithstanding the foregoing, the Grantor shall have failed
to obtain the release of any pledge or other encumbrance on
any Purchasable Shares by the scheduled closing date, at the
option of the purchaser(s) the closing shall nevertheless
occur on such scheduled closing date, with the cash purchase
price being reduced to the extent of all unpaid indebtedness
for which such Purchasable Shares are then pledged or
encumbered.
d. To assure the enforceability of the Company's rights under
this Paragraph 9, each certificate or instrument representing
Common Stock or an Option held by him or it shall bear a
conspicuous legend in substantially the following form:
"THE SHARES [REPRESENTED BY THIS CERTIFICATE] [ISSUABLE
PURSUANT TO THIS AGREEMENT] ARE SUBJECT TO AN OPTION TO
REPURCHASE PROVIDED UNDER THE PROVISIONS OF THE COMPANY'S 1998
STOCK OPTION PLAN AND A STOCK OPTION AGREEMENT ENTERED INTO
PURSUANT THERETO. A COPY OF SUCH OPTION PLAN AND OPTION
AGREEMENT ARE AVAILABLE UPON WRITTEN REQUEST TO THE COMPANY AT
ITS PRINCIPAL EXECUTIVE OFFICES."
The Company's rights under this Section 9 shall terminate upon the
consummation of a Qualifying Public Offering.
10. Decedent's Put Option.
a. If any optionee's employment (or, in the case of any Option
granted under Section 7, the optionee's relationship) with the
Company terminates due to the death of such optionee, the
estate of such optionee, or a Person who acquired the right to
exercise such Option by bequest or inheritance or by reason of
death of the optionee, shall have the option (a "Decedent's
Put Option") to sell to the Company, and the Company shall
purchase from such estate or other Person, all or any portion
of the shares of Common Stock and/or Options acquired by such
estate or other Person upon or as a result of the optionee's
death (any such shares of Common Stock and Options
collectively being referred to herein as "Decedent's Shares").
b. The Person exercising a Decedent's Put Option shall give
notice in writing to the Company within one year from the date
of the optionee's death. Such notice shall state the number of
Decedent's Shares to be sold. If no notice is given within the
time limit specified above, the Decedent's Put Option shall
terminate.
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<PAGE> 14
c. The purchase price to be paid for the Decedent's Shares sold
pursuant to the Decedent's Put Option shall be, in the case of
any Common Stock, the Fair Market Value per share as of the
date of the notice of exercise of the Decedent's Put Option
times the number of shares being purchased, and in the case of
any Option, the Fair Market Value per share times the number
of vested shares subject to such Option which are being
purchased, less the applicable per share Option exercise
price. The purchase price shall be paid in cash. The closing
of such purchase shall take place at the Company's principal
executive offices within sixty days after the receipt by the
Company of the notice required pursuant to Section 10(b). At
such closing, the Person exercising the Decedent's Put Option
shall deliver to the Company the certificates or instruments
evidencing the Decedent's Shares being sold, duly endorsed (or
accompanied by duly executed stock powers) and otherwise in
good form for delivery and free and clear of all pledges and
other encumbrances, against payment of the purchase price
therefor by check.
11. Adjustment of Shares.
Unless otherwise expressly provided in a particular Option, in the
event that, by reason of any merger, consolidation, combination, liquidation,
reorganization, recapitalization, stock dividend, stock split, split-up,
split-off, spin-off, combination of shares, exchange of shares or other like
change in capital structure of the Company (collectively, a "Reorganization"),
the Common Stock is substituted, combined, or changed into any cash, property,
or other securities, or the shares of Common Stock are changed into a greater or
lesser number of shares of Common Stock, the number and/or kind of shares and/or
interests subject to an Option and the per share price or value thereof shall be
appropriately adjusted by the Committee to give appropriate effect to such
Reorganization. Any fractional shares or interests resulting from such
adjustment shall be eliminated. Notwithstanding the foregoing, (i) each such
adjustment with respect to an Incentive Option shall comply with the rules of
Section 424(a) of the Code, and (ii) in no event shall any adjustment be made
which would render any Incentive Option granted hereunder other than an
"incentive stock option" for purposes of Section 422 of the Code.
In the event the Company is not the surviving entity of a
Reorganization and, following such Reorganization, any optionee will hold
Options issued pursuant to this Plan which have not been exercised, cancelled,
or terminated in connection therewith, the Company shall cause such Options to
be assumed (or cancelled and replacement Options issued) by the surviving entity
or a Related Entity.
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<PAGE> 15
12. Assignment or Transfer.
Except as otherwise expressly provided in any Nonqualified Option, no
Option granted under the Plan or any rights or interests therein shall be
assignable or transferable by an optionee except by will or the laws of descent
and distribution, and during the lifetime of an optionee, Options granted to him
or her hereunder shall be exercisable only by the optionee or, in the event that
a legal representative has been appointed in connection with the Disability of
an optionee, such legal representative.
13. Compliance with Securities Laws.
The Company shall not in any event be obligated to file any
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") or any applicable state securities law to permit exercise of
any Option or to issue any Common Stock in violation of the Securities Act or
any applicable state securities law. Each optionee (or, in the event of his
death or, in the event a legal representative has been appointed in connection
with his Disability, the Person exercising the Option) shall, as a condition to
his right to exercise any Option, deliver to the Company an agreement or
certificate containing such representations, warranties and covenants as the
Company may deem necessary or appropriate to ensure that the issuance of shares
of Common Stock pursuant to such exercise is not required to be registered under
the Securities Act or any applicable state securities law.
Certificates for shares of Common Stock, when issued, may have
substantially the following legend, or statements of other applicable
restrictions, endorsed thereon, and may not be immediately transferable:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED
FOR SALE, SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF
UNTIL THE HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE
ISSUER (WHICH, IN THE DISCRETION OF THE ISSUER, MAY INCLUDE AN
OPINION OF COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH
OFFER, SALE, PLEDGE, TRANSFER OR OTHER DISPOSITION WILL NOT
VIOLATE APPLICABLE FEDERAL OR STATE LAWS.
This legend shall not be required for shares of Common Stock issued
pursuant to an effective registration statement under the Securities Act and in
accordance with applicable state securities laws.
15
<PAGE> 16
14. Withholding Taxes. By acceptance of the Option, the optionee
will be deemed to (i) agree to reimburse the Company or Related Entity
by which the optionee is employed for any federal, state, or local
taxes required by any government to be withheld or otherwise deducted
by such corporation in respect of the optionee's exercise of all or a
portion of the Option; (ii) authorize the Company or any Related Entity
by which the optionee is employed to withhold from any cash
compensation paid to the optionee or in the optionee's behalf, an
amount sufficient to discharge any federal, state, and local taxes
imposed on the Company, or the Related Entity by which the optionee is
employed, and which otherwise has not been reimbursed by the optionee,
in respect of the optionee's exercise of all or a portion of the
Option; and (iii) agree that the Company may, in its discretion, hold
the stock certificate to which the optionee is entitled upon exercise
of the Option as security for the payment of the aforementioned
withholding tax liability, until cash sufficient to pay that liability
has been accumulated, and may, in its discretion, effect such
withholding by retaining shares issuable upon the exercise of the
Option having a Fair Market Value on the date of exercise which is
equal to the amount to be withheld.
15. Costs and Expenses. The costs and expenses of administering the Plan
shall be borne by the Company and shall not be charged against any
Option nor to any employee receiving an Option.
16. Funding of Plan. The Plan shall be unfunded. The Company shall not be
required to make any segregation of assets to assure the payment of any
Option under the Plan.
17. Other Incentive Plans
The adoption of the Plan does not preclude the adoption by appropriate
means of any other incentive plan for employees.
18. Effect on Employment.
Nothing contained in the Plan or any agreement related hereto or
referred to herein shall affect, or be construed as affecting, the terms of
employment of any Key Employee except to the extent specifically provided herein
or therein. Nothing contained in the Plan or any agreement related hereto or
referred to herein shall impose, or be construed as imposing, an obligation on
(i) the Company or any Related Entity to continue the employment of any Key
Employee, and (ii) any Key Employee to remain in the employ of the Company or
any Related Entity.
19. Definitions.
In addition to the terms specifically defined elsewhere in the Plan, as
used in the Plan, the following terms shall have the respective meanings
indicated:
16
<PAGE> 17
"Affiliate" shall mean, as to any Person, a Person that directly, or
indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Person.
"Board of Directors" shall have the meaning set forth in Section 2
hereof.
"Change of Control" shall mean the first to occur of the following
events: (i) any sale, lease, exchange, or other transfer (in one
transaction or series of related transactions) of all or substantially
all of the assets of the Company to any Person or group of related
Persons for purposes of Section 13(d) of the Exchange Act, other than
one or more members of the Shareholder Group, (ii) a majority of the
Board of Directors of the Company shall consist of Persons who are not
Continuing Directors; or (iii) the acquisition by any Person or Group
(other than one or more members of the Shareholder Group) of the power,
directly or indirectly, to vote or direct the voting of securities
having more than 50% of the ordinary voting power for the election of
directors of the Company.
"Code" shall have the meaning set forth in Section 1 hereof.
"Committee" shall have the meaning set forth in Section 2 hereof.
"Common Stock" shall have the meaning set forth in Section 3 hereof.
"Company" shall have the meaning set forth in Section 1 hereof.
"Continuing Director" shall mean, as of the date of determination, any
Person who (i) was a member of the Board of Directors of the Company on
the date of adoption of this Plan, (ii) was nominated for election or
elected to the Board of Directors of the Company with the affirmative
vote of a majority of the Continuing Directors who were members of such
Board of Directors at the time of such nomination or election, or (iii)
is a member of the Shareholder Group.
"Disability" shall mean permanent disability as defined under the
appropriate provisions of the applicable long-term disability plan
maintained for the benefit of employees of the Company or any Related
Entity who are regularly employed on a salaried basis unless another
meaning shall be agreed to in writing by the Committee and the
optionee; provided, however, that in the case of an Incentive Option
"disability" shall have the meaning specified in Section 22(e)(3) of
the Code.
17
<PAGE> 18
"Eligible Non-Employee" shall have the meaning set forth in Section 4
hereof.
"Exchange Act" shall have the meaning set forth in Section 2 hereof.
"Fair Market Value" shall, as it relates to the Common Stock, mean the
average of the high and low prices of such Common Stock as reported on
the principal national securities exchange on which the shares of
Common Stock are then listed on the date specified herein, or if there
were no sales on such date, on the next preceding day on which there
were sales, or if such Common Stock is not listed on a national
securities exchange, the last reported bid price in the
over-the-counter market, or if such shares are not traded in the
over-the-counter market, the per share cash price for which all of the
outstanding Common Stock could be sold to a willing purchaser in an
arms length transaction (without regard to minority discount, absence
of liquidity, or transfer restrictions imposed by any applicable law or
agreement) at the date of the event giving rise to a need for a
determination. Except as may be otherwise expressly provided in a
particular Option, Fair Market Value shall be determined in good faith
by the Committee.
"Good Cause", with respect to any Key Employee, shall mean (unless
another definition is agreed to in writing by the Company and the
optionee) termination by action of the Board of Directors because of:
(A) the optionee's conviction of, or plea of nolo contendere to, a
felony or a crime involving moral turpitude; (B) the optionee's
personal dishonesty, incompetence, willful misconduct, willful
violation of any law, rule, or regulation (other than minor traffic
violations or similar offenses) or breach of fiduciary duty which
involves personal profit; (C) the optionee's commission of material
mismanagement in the conduct of his duties as assigned to him by the
Board of Directors or the optionee's supervising officer or officers of
the Company; (D) the optionee's willful failure to execute or comply
with the policies of the Company or his stated duties as established by
the Board of Directors or the optionee's supervising officer or
officers of the Company, or the optionee's intentional failure to
perform the optionee's stated duties; or (E) substance abuse or
addiction on the part of the optionee. "Good Cause", with respect to
any Eligible Non-Employee, shall mean (unless another definition is
agreed to in writing by the Company and the optionee) termination by
action of the Board of Directors because of: (A) the optionee's
conviction of, or plea of nolo contendere to, a felony or a crime
involving moral turpitude; (B) the optionee's personal dishonesty,
incompetence, willful misconduct, willful violation of any
18
<PAGE> 19
law, rule, or regulation (other than minor traffic violations or
similar offenses) or breach of fiduciary duty which involves personal
profit; (C) the optionee's commission of material mismanagement in
providing services to the Company or any Related Entity; (D) the
optionee's willful failure to comply with the policies of the Company
in providing services to the Company or any Related Entity, or the
optionee's intentional failure to perform the services for which the
optionee has been engaged; (E) substance abuse or addiction on the part
of the optionee; or (F) the optionee's willfully making any material
misrepresentation or willfully omitting to disclose any material fact
to the board of directors of the Company or any Related Entity with
respect to the business of the Company or any Related Entity.
"Grant Year" shall mean the Plan Year in which the Options are granted
and shall be deemed a full Plan Year.
"Grantor" has the meaning set forth in Section 9 hereof.
"Incentive Options" shall have the meaning set forth in Section 6
hereof.
The term "including" when used herein shall mean "including, but not
limited to".
"Key Employee" shall have the meaning set forth in Section 4 hereof.
"Marketable Securities" shall mean securities (i) of a class or series
listed or traded on the New York Stock Exchange, American Stock
Exchange, or NASDAQ National Market and (ii) which, as a matter of law,
shall at the time of acquisition be (or which at the date of
acquisition are legally committed to become within six months after the
date of acquisition) freely saleable in unlimited quantities by the
Shareholder Group to the public, either pursuant to an effective
registration statement under the Securities Act of 1933, as amended
(including a current prospectus which is available for delivery), or
without the necessity of such registration.
"Non-Qualified Options" shall have the meaning set forth in Section 6
hereof.
"Options" shall have the meaning set forth in Section 1 hereof.
"Person" shall have the meaning set forth in Section 4 hereof.
"Plan" shall have the meaning set forth in Section 1 hereof.
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<PAGE> 20
"Plan Year" shall mean the twelve month period ending on September
30th.
"Public Offering" shall mean the sale of shares of Common Stock through
one or more underwriters pursuant to a registration statement on Form
S-1, Form SB-1, or Form SB-2 (or any form subsequently promulgated by
the Securities and Exchange Commission that may be used for
substantially the same purposes as any of the forms just specified)
filed and declared effective under the Securities Act of 1933, as
amended, in which the aggregate net proceeds received from the sale of
such shares are at least $10,000,000.
"Purchasable Shares" shall have the meaning set forth in Section 9
hereof.
"Purchase Option" shall have the meaning set forth in Section 9 hereof.
"Qualifying Public Offering" shall mean a firm commitment underwritten
Public Offering of Common Stock the result of which is that the Persons
comprising the Shareholder Group shall own collectively less than 10%
of the fully diluted Common Stock.
"Related Entities" shall have the meaning set forth in Section 1
hereof.
"Reorganization" shall have the meaning set forth in Section 11 hereof.
"Rule 16b-3" shall have the meaning set forth in Section 2 hereof.
"Securities Act" shall have the meaning set forth in Section 13 hereof.
"Shareholder Group" shall mean (i) Hicks, Muse, Tate & Furst
Incorporated, its Affiliates and their respective employees, officers,
and directors (and members of their respective families and trusts for
the primary benefit of such family members) and (ii) Glenn E. Staats
and Preston W. Staats, Jr. (and members of their respective families
and trusts for the primary benefit of such family).
"Subsidiary" shall mean, with respect to any Person, any other Person
of which such first Person owns or has the power to vote, directly or
indirectly, securities representing a majority of the votes ordinarily
entitled to be cast for the election of directors or other governing
Persons.
20
<PAGE> 21
20. Amendment of Plan.
The Board of Directors shall have the right to amend, modify, suspend
or terminate the Plan at any time; provided, that no amendment shall be made
which shall increase the total number of shares of the Common Stock which may be
issued and sold pursuant to Options granted under the Plan or decrease the
minimum Option exercise price in the case of an Incentive Option, or modify the
provisions of the Plan relating to eligibility with respect to Incentive Options
unless such amendment is made by or with the approval of the stockholders. The
Board of Directors shall be authorized to amend the Plan and the Options granted
thereunder (i) to qualify as "incentive stock options" within the meaning of
Section 422 of the Code or (ii) to comply with Rule 16b-3 (or any successor
rule) under the Exchange Act (or any successor law) and the regulations
(including any temporary regulations) promulgated thereunder. No amendment,
modification, suspension or termination of the Plan shall alter or impair any
Options previously granted under the Plan, without the consent of the holder
thereof.
21. Effective Date.
The Plan shall be effective as of March 1, 1998, and shall be void
retroactively if not approved by the stockholders of the Company within twelve
months thereafter.
<PAGE> 1
EXHIBIT 10.22
THE SHARES ISSUABLE PURSUANT TO THIS AGREEMENT ARE SUBJECT TO AN OPTION
TO REPURCHASE PROVIDED UNDER THE PROVISIONS OF THE COMPANY'S 1998 STOCK
OPTION PLAN AND THIS AGREEMENT ENTERED INTO PURSUANT THERETO. A COPY OF
SUCH PLAN IS AVAILABLE UPON WRITTEN REQUEST TO THE COMPANY AT ITS
PRINCIPAL EXECUTIVE OFFICES.
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
1998 STOCK OPTION PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
FOR ELIGIBLE EMPLOYEES
INSERT DATE
INSERT NAME OF RECIPIENT
Re: Grant of Stock Option
Dear FIRST NAME:
The Board of Directors of Cooperative Computing Holding
Company, Inc. (the "Company") has adopted the Company's 1998 Stock Option Plan
(the "Plan") for certain individuals, directors and key employees of the Company
and its Related Entities and certain non-employees. A copy of the Plan is being
furnished to you concurrently with the execution of this Option Agreement and
shall be deemed a part of this Option Agreement as if fully set forth herein.
Unless the context otherwise requires, all terms defined in the Plan shall have
the same meaning when used herein.
I. The Grant.
(a) Subject to the conditions set forth below, the Company
hereby grants to you, effective as INSERT EFFECTIVE DATE(the "Grant Date"), as a
matter of separate inducement and not in lieu of any salary or other
compensation for your services, the right and option to purchase (the "Option"),
in accordance with the terms and conditions set forth herein and in the Plan, an
aggregate of INSERT NUMBER OF SHARES shares of Common Stock of the Company, (the
"Option Shares"), at the Exercise Price (as hereinafter defined). As used
herein, the term "Exercise
<PAGE> 2
Price" shall mean a price equal to $5.00 per share, subject to the adjustments
and limitations set forth herein and in the Plan. The Option granted hereunder
is intended to constitute a Non-Qualified Option within the meaning of the Plan;
however, you should consult with your tax advisor concerning the proper
reporting of any federal or state tax liability that may arise as a result of
the grant or exercise of the Option.
2. Exercise.
(a) For purposes of this Option Agreement, the Option Shares
shall be deemed "Nonvested Shares" unless and until they have become "Vested
Shares." The Option Shares shall become "Vested Shares" in accordance with the
vesting schedule set forth in Section 6 (c.) of the Plan.
(b) Subject to the relevant provisions and limitations
contained herein and in the Plan, you may exercise the Option to purchase all or
a portion of the applicable number of Vested Shares at any time prior to the
termination of the Option pursuant to this Option Agreement. In no event shall
you be entitled to exercise the Option for any Nonvested Shares or for a
fraction of a Vested Share.
(c) The unexercised portion of the Option, if any, will
automatically, and without notice, terminate and become null and void upon the
expiration of ten (10) years from the Grant Date.
(d) Any exercise by you of the Option shall be in writing
addressed to the Secretary of the Company at its principal place of business (a
copy of the form of exercise to be used will be available upon written request
to the Secretary), and shall be accompanied by a certified or bank check payable
to the order of the Company in the full amount of the Exercise Price of the
shares so purchased, or in such other manner as described in the Plan and
approved by the Committee.
2
<PAGE> 3
3. Termination of Employment.
Upon the termination of your employment with the Company and
any Related Entity, you may, until the earlier of (x) 30 days from the date of
such termination or (y) the expiration of the Option in accordance with its
terms, exercise the Option with respect to all or any part of the Vested Shares
which you were entitled to purchase immediately prior to such termination and,
thereafter, the Option shall, to the extent not previously exercised,
automatically terminate and become null and void, provided that:
(a) in the case of termination of your employment with
the Company or any Related Entity due to death, your
estate (or any Person who acquired the right to
exercise such Option by bequest or inheritance or
otherwise by reason of your death) may, until the
earlier of (x) the 181st day after the date of death
or (y) the expiration of the Option in accordance
with its terms, exercise the Option with respect to
all or any part of the Vested Shares which you were
entitled to purchase immediately prior to the time of
your death;
(b) in the case of termination of your employment with
the Company or any Related Entity due to Disability,
you or your legal representative may, until the
earlier of (x) the 181st day after the date your
employment was terminated or (y) the expiration of
the Option in accordance with its terms, exercise the
Option with respect to all or any part of the Vested
Shares which you were entitled to purchase
immediately prior to the time of such termination;
and
(c) in the case of termination of your employment with
the Company or any Related Entity (i) for Good Cause
(as determined by the Committee in its sole judgment
in accordance with the Plan), (ii) your removal from
office as a director of the Company or of any Related
Entity for cause by action of the stockholders of the
Company or such Related Entity in accordance with the
by-laws of the Company or such Related Entity, as
applicable, and the corporate law of the
3
<PAGE> 4
jurisdiction of incorporation of the Company or such
Related Entity or (iii) as a result of the voluntary
termination by you of your employment without the
consent of the Company or any Related Entity, then
you shall immediately forfeit your rights under the
Option except as to those Option Shares already
purchased.
4. Transferability.
Except as provided in Section 6 hereof, the Option and any
rights or interests therein are not assignable or transferable by you except by
will or the laws of descent and distribution, and during your lifetime, the
Option shall be exercisable only by you or, in the event that a legal
representative has been appointed in connection with your Disability, such legal
representative.
5. Registration.
The Company shall not in any event be obligated to file any
registration statement under the Securities Act or any applicable state
securities laws to permit exercise of the Option or to issue any Common Stock in
violation of the Securities Act or any applicable state securities laws. You (or
in the event of your death or, in the event a legal representative has been
appointed in connection with your Disability, the Person exercising the Option)
shall, as a condition to your right to exercise the Option, deliver to the
Company an agreement or certificate containing such representations, warranties
and covenants as the Company may deem necessary or appropriate to ensure that
the issuance of the Option Shares pursuant to such exercise is not required to
be registered under the Securities Act or any applicable state securities laws.
Certificates for Option Shares, when issued, shall have
substantially the following legend, or statements of other applicable
restrictions, endorsed thereon, and may not be immediately transferable:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED
FOR SALE, SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF
UNTIL THE HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE
ISSUER (WHICH, IN THE
4
<PAGE> 5
DISCRETION OF THE ISSUER, MAY INCLUDE AN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER) THAT SUCH OFFER, SALE, PLEDGE,
TRANSFER OR OTHER DISPOSITION WILL NOT VIOLATE APPLICABLE
FEDERAL OR STATE LAWS.
The foregoing legend may not be required for Option Shares
issued pursuant to an effective registration statement under the Securities Act
and in accordance with applicable state securities laws.
6. Purchase Option.
(a) If in accordance with the terms of the Plan, the Company
shall have the option (the "Purchase Option") to purchase, and, if the option is
exercised, you (or your executor or the administrator of your estate or the
Person who acquired the right to exercise the Option by bequest or inheritance
in the event of your death, or your legal representative in the event of your
incapacity (hereinafter, collectively with such optionee, the "Grantor")) shall
sell to the Company and/or its assignee(s), all or any portion (at the Company's
option) of the Option Shares and/or the Option held by the Grantor (such Option
Shares and Option collectively being referred to as the "Purchasable Shares").
(b) The Company shall give notice in writing to the Grantor of
the exercise of the Purchase Option within one (1) year from the date the
Purchase Option arises under the terms of the Plan. Such notice shall state the
number of Purchasable Shares to be purchased and the determination of the Board
of Directors of the per share purchase price of such Purchasable Shares. If no
notice is given within the time limit specified above, the Purchase Option shall
terminate.
(c) The purchase price to be paid for the Purchasable Shares
purchased pursuant to the Purchase Option shall be, in the case of any Option
Shares, the Fair Market Value per share as of the date of notice of exercise of
the Purchase Option times the number of shares being purchased, and in the case
of the Option, the Fair Market Value per share times the number of Vested Shares
subject to such Option which are being purchased, less the applicable per share
Exercise Price; provided, however, that in the event that your employment with
the Company is terminated in a manner contemplated by Section 3(c), then the
foregoing calculation shall be made using the lower of (i) the Fair Market Value
per share and (ii) the Exercise Price per share in respect of the Purchasable
Shares. The purchase price
5
<PAGE> 6
shall be paid in cash. The closing of such purchase shall take place at the
Company's principal executive offices within ten (10) days after the purchase
price has been determined. At such closing, the Grantor shall deliver to the
purchaser(s) the certificates or instruments evidencing the Purchasable Shares
being purchased, duly endorsed (or accompanied by duly executed stock powers)
and otherwise in good form for delivery, against payment of the purchase price
by check of the purchaser(s). In the event that, notwithstanding the foregoing,
the Grantor shall have failed to obtain the release of any pledge or other
encumbrance on any Purchasable Shares by the scheduled closing date, at the
option of the purchaser(s) the closing shall nevertheless occur on such
scheduled closing date, with the cash purchase price being reduced to the extent
of all unpaid indebtedness for which such Purchasable Shares are then pledged or
encumbered.
(d) To assure the enforceability of the Company's rights under
this Section 7, each certificate or instrument representing Option Shares
subject to this Option Agreement shall bear a conspicuous legend in
substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
OPTION TO REPURCHASE PROVIDED UNDER THE PROVISIONS OF THE
COMPANY'S 1998 STOCK OPTION PLAN AND A STOCK OPTION AGREEMENT
ENTERED INTO PURSUANT THERETO. A COPY OF SUCH OPTION PLAN AND
OPTION AGREEMENT ARE AVAILABLE UPON WRITTEN REQUEST TO THE
COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES."
7. Miscellaneous.
This Option Agreement is subject to all the terms, conditions,
limitations and restrictions contained in the Plan. In the event of any conflict
or inconsistency between the terms hereof and the terms of the Plan, the terms
of the Plan shall be controlling.
6
<PAGE> 7
Please indicate your acceptance of all the terms and
conditions of the Option and the Plan by signing and returning a copy of this
Option Agreement.
Very truly yours,
COOPERATIVE COMPUTING
HOLDING COMPANY, INC.
By:
---------------------------------
Its:
--------------------------------
ACCEPTED:
- ----------------------------------
Signature of Optionee
- ----------------------------------
INSERT NAME OF RECEPIENT
Date:
------------------------------
7
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<S> <C>
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<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
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0
0
<COMMON> 4
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</TABLE>
