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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1998
REGISTRATION NO. 333-49389
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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COOPERATIVE COMPUTING, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 94-2160013
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
GLENN E. STAATS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
6207 BEE CAVE ROAD
AUSTIN, TEXAS 78746
(512) 328-2300
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
GLENN D. WEST
WEIL, GOTSHAL & MANGES LLP
100 CRESCENT COURT, SUITE 1300
DALLAS, TEXAS 75201
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED AUGUST 4, 1998
PROSPECTUS
OFFER FOR ALL OUTSTANDING
9% SENIOR SUBORDINATED NOTES DUE 2008
IN EXCHANGE FOR
9% SENIOR SUBORDINATED NOTES DUE 2008
OF
COOPERATIVE COMPUTING, INC.
Cooperative Computing, Inc. ("CCI" or the "Company") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange $1,000 principal amount of registered 9% Senior
Subordinated Notes due 2008 (the "New Notes") issued by the Company for each
$1,000 principal amount of unregistered 9% Senior Subordinated Notes due 2008
(the "Old Notes") issued by the Company, of which an aggregate principal amount
of $100,000,000 is outstanding. The form and terms of the New Notes are
identical to the form and terms of the Old Notes except that the New Notes have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), and will not bear any legends restricting their transfer. The New Notes
will evidence the same debt as the Old Notes and will be issued pursuant to, and
entitled to the benefits of, the Indenture (as defined) governing the Old Notes.
The Exchange Offer is being made in order to satisfy certain contractual
obligations of the Company. See "The Exchange Offer" and "Description of New
Notes." The New Notes and the Old Notes are sometimes collectively referred to
herein as the "Notes."
Interest on the New Notes will be payable semiannually on February 1 and August
1 of each year, commencing on August 1, 1998. The New Notes will mature on
February 1, 2008. Except as described below, the Company may not redeem the New
Notes prior to February 1, 2003. On and after such date, the Company may redeem
the New Notes, in whole or in part, at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to the redemption date. In
addition, at any time and from time to time on or prior to February 1, 2002, the
Company may, subject to certain requirements, redeem up to 35% of the aggregate
principal amount of the New Notes with the Net Cash Proceeds (as defined)
received from one or more private or public equity offerings at a 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
aggregate principal amount of the New Notes remain outstanding immediately after
each such redemption. The New Notes will not be subject to any sinking fund
requirements. Upon a Change of Control (as defined), the Company will be
required to make an offer to repurchase the New Notes at a price equal to 101%
of the principal amount thereof, together with accrued and unpaid interest, if
any, to the date of repurchase and, 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 the Applicable Premium (as
defined). See "Description of New Notes."
The New Notes will be unsecured and will be subordinated in right of payment to
all existing and future Senior Indebtedness (as defined) of the Company. The New
Notes will rank pari passu with any future Senior Subordinated Indebtedness (as
defined) of the Company and will rank senior to all other subordinated
indebtedness of the Company. The New Notes will be effectively subordinated to
all liabilities of the Company's Subsidiaries (as defined). Borrowings under the
Restated Senior Credit Facilities (as defined) are secured by substantially all
of the assets of the Company and its Subsidiaries. The Indenture under which the
New Notes will be issued (the "Indenture") will permit the Company and its
Subsidiaries incur additional indebtedness, including Senior Indebtedness,
subject to certain limitations. See "Description of New Notes." The net proceeds
from the sale of the Old Notes were used by the Company to repay certain
indebtedness under the Old Senior Credit Facilities (as defined). See "Use of
Proceeds." As of March 31, 1998, there was $71.7 million of Senior Indebtedness
outstanding (excluding unused commitments), principally under the Restated
Senior Credit Facilities, the liabilities of the Company's Subsidiaries totaled
approximately $57.8 million and the Company had no Senior Subordinated
Indebtedness outstanding other than the Old Notes. See "Description of New
Notes -- Ranking and Subordination."
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SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES.
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The Company will accept for exchange any and all Old Notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on , 1998,
unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes
may be withdrawn at any time prior to the Expiration Date. The Exchange Offer is
subject to certain customary conditions. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The letter of transmittal accompanying this
Prospectus (the "Letter of Transmittal") states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has agreed,
for a period of 90 days after the Expiration Date, to make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
No public market existed for the Old Notes before the Exchange Offer. The
Company currently does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system, and no active public market for the New Notes is currently anticipated.
The Company will pay all the expenses incident to the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange pursuant to the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998.
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AVAILABLE INFORMATION
As a result of the filing under the Securities Act of the Registration
Statement on Form S-1 with respect to the New Notes (the "Registration
Statement"), of which this Prospectus is a part, the Company will become subject
to the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith will file reports and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information may be inspected and copied at
the public reference facilities of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60611, and 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material can
also be obtained at prescribed rates by writing to the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is hereby made to such exhibit for a more complete description of the
matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. Copies of the Registration Statement and the
exhibits thereto are on file with the Commission and may be examined without
charge at the public reference facilities of the Commission described above.
Copies of such materials can also be obtained at prescribed rates by writing to
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The reports, proxy statements and other
information filed by the Company with the Commission may also be obtained from
the web site that the Commission maintains at http://www.sec.gov.
The Company is required by the Indenture to furnish the holders of the New
Notes with copies of the annual reports and of the information, documents and
other reports specified in Sections 13 and 15(d) of the Exchange Act, so long as
any New Notes are outstanding.
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FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION" AND "BUSINESS." ALL OF THESE 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 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. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE
FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK
FACTORS."
MARKET AND INDUSTRY DATA
Unless otherwise indicated, market data contained herein with respect to
the automotive parts aftermarket industry is based upon reports issued by Lang
Marketing Resources in March 1997 and January 1998 and the 1997 Aftermarket Fact
Book published by the Automotive Aftermarket Parts and Accessories Association.
Market data contained herein with respect to the hardlines and lumber industry
is based upon The National Homecenter News, Volume 23, Numbers 10 and 12 (1997).
USE OF TRADEMARKS AND TRADENAMES
Several trademarks and tradenames appear in this Prospectus. CCI, Triad,
Automotive Aftermarket Information Highway, ServiceExpert, Series 11, Series 12,
Series 14, Eagle, Eagle LS, LaserStation, Ultimate, MarketPace, AdviceLine,
RepairSource, ServiceExpert, Prism, Telepart, ServiceCat and VISTA are federally
registered trademarks of the Company. The Company has federal trademark
applications pending with respect to CCI AutoBahn, J-CON and A-DIS. Shop Key is
a federal trademark of Snap-on Technologies, Inc. Other trademarks and
tradenames are used in this Prospectus 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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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, risk factors and historical
and pro forma combined financial data, including the related notes, appearing
elsewhere in this Prospectus. As used in this Prospectus, unless the context
otherwise requires, (i) "Holding" means Cooperative Computing Holding Company,
Inc., (ii) the "Company" or "CCI" means Cooperative Computing, Inc., a
wholly-owned subsidiary of Holding, after giving effect to the Triad Acquisition
(as defined), (iii) "Old CCI" means Cooperative Computing, Inc. prior to the
Triad Acquisition and (iv) "Triad" means Triad Systems Corporation and its
subsidiaries prior to the Triad Acquisition.
THE COMPANY
OVERVIEW
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, lawn and garden and agribusiness. The Company's system
products 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 system offerings are
enhanced by extensive information services featuring highly specialized database
products and by customer support and maintenance services. The revenues
associated with these services are of a recurring nature and represented
approximately 55% of total revenues in fiscal 1997 on a pro forma basis. The
Company's pro forma revenues and Adjusted EBITDA (as defined) for the twelve
months ended September 30, 1997 were $213.5 million and $33.3 million,
respectively.
The Company's products are designed to improve the operating efficiency and
profitability of suppliers and retailers by reducing the time required to fill
customer orders. 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.
Management believes that the Company's extensive databases represent the
most sophisticated and extensive industry-specific management information
systems offerings available to the automotive parts aftermarket industry. 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. Management believes that it would be extremely
difficult and costly for others to match the quality, size, coverage and
frequency of updates of the Company's databases due to the extensive quantity of
data available, the variety of sources and the frequency with which relevant
information changes.
The automotive parts aftermarket industry is estimated to have generated
approximately $196 billion in revenues for goods and services delivered to the
United States motoring public in 1996. Industry revenues are divided between the
sale of auto parts (approximately 51%) and labor (approximately 49%). Management
believes that growth in the automotive parts aftermarket
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industry will occur due to several favorable trends, including (i) growth in the
aggregate number of vehicles in use, (ii) an increase in the average age of
vehicles in operation and (iii) growth in the number of total miles driven per
vehicle each year. Management believes that these factors, when combined with
competitive pressures to decrease costs and increase operating efficiencies and
the historically low profit margin nature of the automotive parts aftermarket
industry, will increase demand for the Company's management information systems
and solutions.
The hardlines and lumber industry, comprised primarily of hardware
retailers, home centers, lumber and building materials suppliers and
manufacturers, agribusiness retailers, lawn and garden retailers and paint
retailers, generated approximately $142 billion in revenues in 1996. Management
believes that revenue growth in the hardlines and lumber industry will occur due
to several favorable trends, including (i) the expansion of the industry's top
500 retailers, (ii) favorable demographic trends, such as an increase in dual
income families, and (iii) continued expansion of new home construction and
sales and remodeling of existing homes.
COMPETITIVE STRENGTHS
The Company attributes its market leadership and its attractive
opportunities for continued growth and increased profitability to the following
competitive strengths:
- COVERAGE OF ALL LEVELS OF THE AUTOMOTIVE PARTS AFTERMARKET
DISTRIBUTION CHANNEL. The Company has developed products for a substantial
base of customers within each level of the automotive parts aftermarket
industry wholesale distribution channel. The Company's systems are
installed at approximately 400 warehouse distributors (representing
approximately 19% of the estimated warehouse distributors in the United
States) and approximately 12,000 PSOs (representing approximately 22% of
the estimated PSOs in the United States). The Company's customers have
relationships with a substantial portion of the estimated 340,000 service
dealers in the United States, of which management believes less than 20%
currently have management information systems. The Company expects to
capitalize on these relationships to further penetrate the service dealer
level of the wholesale distribution channel. As consumers have come to
expect same day repair service, service dealers are moving towards
computerization to access information concerning availability of parts and
to ensure prompt delivery of specific parts from other distribution
channels. The Company believes that its demonstrated ability to offer
information services and interconnectivity throughout the distribution
channel will enable it to successfully penetrate the service dealer market.
- EXTENSIVE DATABASES. Management believes that the Company maintains
the most extensive databases in the automotive parts aftermarket industry,
which, when used with the Company's systems, are designed to increase
efficiency and accuracy in the selection, pricing and sale of parts. With
over two million different auto parts available to consumers, up to nine
manufacturers for each product line, approximately 100,000 new parts
introduced each year, and over 75,000 parts discontinued each year, the
Company's electronic catalog databases are the most cost effective and
efficient way to access both historical and current parts information. To
duplicate the parts information contained in the Company's databases, a
customer or competitor would require over 1,700 separate parts catalogs and
the ability to periodically update such information. In addition to the
Company's electronic catalogs, the Company provides parts interchange and
parts locator databases which facilitate the identification, location and
selection of automotive parts. The Company also collects product sales
information and sells this information to manufacturers, distributors and
operators in the automotive parts aftermarket and hardlines and lumber
industries. On a pro forma basis the Company spent approximately $23
million for the year ended September 30, 1997 to develop and maintain its
extensive information products.
- MARKET LEADER IN THE GROWING HARDLINES AND LUMBER INDUSTRY. The
hardlines and lumber industry has been slower to invest in management
information systems than the automotive
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parts aftermarket industry. Of the estimated 60,000 stores in this industry
that are potential users of a management information system, management
estimates that approximately 40% are not computerized. The Company has
successfully developed a strong presence in the hardlines and lumber
industry and has achieved a compound annual growth rate of revenue of
approximately 13.5% between 1992 and 1997. The Company intends to
capitalize on its existing base of approximately 7,800 customer locations,
including its accounts with three major hardlines cooperatives, Hardware
Wholesalers Inc., Ace Hardware and TruServ, and two major wholesale
marketing groups, PRO Group and Distribution America, to market its
products and services to the noncomputerized retail stores. Currently, the
Company commands the leading market share of sales of management
information systems and solutions in the independent hardware and home
center businesses within the hardlines and lumber industry. In fiscal 1997,
on a pro forma basis, the hardlines and lumber business represented
approximately 37% of the Company's total revenues.
- SUBSTANTIAL INSTALLED BASE. With over 27,000 customer locations, the
Company has the largest installed base in each of the two industries it
serves. The accuracy and efficiency of the Company's products and services
are integral to its customers' operations. In fact, several major
customers, including General Parts Inc. in the automotive parts aftermarket
industry and TruServ in the hardlines and lumber industry, have chosen to
outsource portions of their management information systems needs to the
Company. Management believes that its strong customer relationships,
together with the superior performance of the Company's systems and the
significant risks and costs associated with changing to a competitor's
system, provide the Company with a stable customer base and a receptive
market for new product offerings.
- STRONG BASE OF RECURRING REVENUES. Approximately 55% of the
Company's revenues are generated from periodic updates to database
information and software support and maintenance services. These revenues
and the associated profit margins have historically exhibited consistency
and are expected to continue to increase as the Company's installed base
grows. For example, in the automotive parts aftermarket industry, due to
the large number of parts introduced each year and the frequency of catalog
and price list changes, customers rely upon the Company's periodic
information updates. Due to minimal costs associated with adding customers,
incremental recurring revenue typically generates margins that are higher
than those associated with the Company's other sources of revenues.
- BREADTH OF PRODUCT OFFERINGS. Management believes that the Company
possesses the broadest selection of management information systems and
solutions offered in the industries it serves. In the automotive parts
aftermarket industry, the Company currently markets three warehouse
distributor systems, three PSO systems and six service dealer systems, each
targeting a specific level of the distribution channel. The Company's
service dealer solutions, which are integrated with the Company's parts and
repair databases and can be connected to the Company's extensive network of
warehouse distributor and PSO systems, position the Company to capture a
significant share of the emerging service dealer market. In the hardlines
and lumber industry, the Company offers specialized point-of-sale systems
through four product lines which are marketed to (i) hardware stores and
smaller lumber and building materials dealers, many of which are presently
not computerized, (ii) larger lumber and building materials dealers
currently using outdated systems and (iii) agribusiness retailers. With
custom configuration capability within each system, the Company can target
the appropriate solution to the needs of each customer.
BUSINESS STRATEGY
The Company's ongoing business strategy focuses on strengthening its
leadership position in the automotive parts aftermarket and hardlines and lumber
industries. The Company has retained existing customers and developed new
customers by continually offering system enhancements, new product offerings and
the most comprehensive and sophisticated information tools available in
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the marketplace. The Company capitalizes on its relationships with its customer
base, allowing it to adapt to changes within the industries it serves, provide
both quality and value in its products and integrate enabling technologies. In
addition to this core strategy, the Company is pursuing the following key
initiatives:
- INCREASE PENETRATION OF AUTOMOTIVE SERVICE DEALER MARKET. The
automotive service dealer market, with approximately 340,000 dealers,
offers significant growth opportunities for the Company. This segment has
recently begun to recognize the operating efficiencies computerization
offers primarily due to the following factors: (i) service dealers'
increased focus on operating efficiencies and profitability, (ii) parts
suppliers' recognition of the importance of fully integrated parts
distribution and willingness to partially fund service dealers' investment
in computerization, (iii) consumer expectations for a more professional and
efficient repair experience and (iv) service dealers' desire to automate
the estimate and repair process. Management believes that the Company's
service dealer product offerings are the most comprehensive in the
industry. With integrated parts, labor and repair databases and the ability
to connect to approximately 12,000 PSOs, management believes that the
Company's service dealer systems are uniquely positioned to meet the needs
of the professional service dealer. The Company has dedicated over 60 sales
and marketing professionals to further penetrate the service dealer market.
- EXPAND HARDLINES REVENUE BASE. The Company intends to continue to
aggressively expand its hardlines and lumber business by focusing on larger
retailers, many of which are outsourcing their point-of-sale systems and
upgrading their existing systems, as well as smaller retailers, many of
which are not computerized. The Company has a strong presence in the
hardlines and lumber industry, with its customer base of over 5,700
accounts with over 7,800 store locations, including members of three major
hardlines cooperatives, Hardware Wholesalers Inc., Ace Hardware and
TruServ, and has exclusive endorsements from two major wholesale marketing
groups, PRO Group and Distribution America. These relationships position
the Company to pursue market share growth within the noncomputerized retail
stores that represent approximately 40% of the estimated 60,000 hardlines
and lumber stores in the United States. The Company also intends to
increase its customer support and maintenance services revenues by offering
a wider range of products and services to its installed base of customers.
- CAPITALIZE ON SYNERGIES TO ENHANCE OPERATING EFFICIENCIES. Following
the acquisition of Triad on February 27, 1997 (the "Triad Acquisition"),
the Company has focused on four major sources of synergies. First, the
Company benefits from a well-balanced corporate platform with Old CCI's
strength in research and development and Triad's strength in sales and
marketing. Second, the Company strengthened its presence in the wholesale
and retail distribution channels of the automotive parts aftermarket
industry. Old CCI's established relationships with national warehouse
distributors and those PSOs in their distribution channel, together with
Triad's strength in the independent warehouse distributors and independent
PSOs, created an enhanced market position thereby strengthening the
Company's ability to further penetrate the service dealer market. Third,
the integration of Old CCI's well developed systems with Triad's extensive
information services creates the opportunity for improved product
offerings. Lastly, since the Triad Acquisition, management estimates that
the Company has achieved annualized cost savings of approximately $4.6
million, principally from the elimination of redundant personnel and
expenses, such as data entry, manufacturing, sales and marketing and
general and administrative overhead, and will generate additional cost
savings of approximately $1.8 million over the next year.
- PURSUE SELECTIVE STRATEGIC ACQUISITION AND ALLIANCE
OPPORTUNITIES. The Company continuously evaluates opportunities to make
acquisitions and establish strategic alliances which complement and expand
its customer base and technology and database content to better serve the
automotive parts aftermarket and hardlines and lumber industries. See
"-- Recent Transactions."
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RECENT TRANSACTIONS
In November 1997, the Company entered into a cross licensing agreement and
a strategic joint marketing agreement with Snap-on Tools ("Snap-on"), a leading
supplier of tools, equipment and computerized systems to the service dealer
market. Under the terms of the cross licensing agreement, Snap-on will integrate
the Company's electronic catalog product into Shop Key, Snap-on's service dealer
management system. Additionally, the Company will make available to end users of
Shop Key systems licensed software that will allow the Shop Key system to have
limited communication capability with PSOs that have a Company system.
Additionally, Snap-on has agreed to market the Company's electronic catalog
product on the Shop Key system through Snap-on's direct sales force of over 300
technical sales representatives and 4,200 sales agents. Under the joint
marketing agreement, Snap-on will integrate the Company's electronic catalog
with Snap-on's CAS System, a service dealer system targeted at retail service
dealer chains. This integrated solution will be jointly marketed to selected
national retail service dealer chains. The Company will be responsible for
billing and collecting monthly catalog fees and will retain all revenue for
sales of its electronic catalog products to Snap-on customers.
On February 10, 1998, the Company consummated the sale of the Old Notes in
a private placement to Chase Securities Inc. and NationsBanc Montgomery
Securities LLC (the "Offering"), and such initial purchasers immediately resold
the Old Notes pursuant to Rule 144A promulgated under the Securities Act.
Concurrently with the consummation of the Offering, the Company (i) amended and
restated its $170.0 million credit facility (the "Old Senior Credit Facilities")
by entering into a new $50.0 million term loan facility (the "New Term Loan
Facility") and a new $50.0 million revolving credit facility (the "New Revolving
Credit Facility," and together with the New Term Loan Facility, the "Restated
Senior Credit Facilities") as more fully described in "Description of the
Restated Senior Credit Facilities" (collectively, the "Refinancing") and (ii)
used the net proceeds from the Offering and the proceeds from the Restated
Senior Credit Facilities to repay the Old Senior Credit Facilities
(collectively, with the Refinancing, the "Transaction").
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.
Management believes that the ARISB Acquisition will increase the Company's
capacity to better serve its customer base and expand into related markets.
COMPANY HISTORY AND OWNERSHIP
The Company represents the combined businesses of Old CCI and 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 towards 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, Ireland 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 consummated the Triad Acquisition. Prior to
the Triad Acquisition, Old CCI maintained a strong presence with warehouse
distributors and a growing presence with PSOs and service dealers. The Triad
Acquisition was consummated to broaden Old CCI's presence with PSOs in order to
further penetrate the service dealer market and to establish a
5
<PAGE> 10
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.
In connection with the Triad Acquisition, affiliates of Hicks, Muse, Tate &
Furst Incorporated ("Hicks Muse") acquired approximately 54.5% of the Common
Stock, par value $0.000125 per share, of Holding ("Holding Common Stock"). Glenn
E. Staats and Preston W. Staats together own approximately 45.4% of the
outstanding Holding Common Stock. Holding owns all of the outstanding common
stock of the Company. See "Stock Ownership and Certain Transactions."
Hicks Muse is a private investment firm with offices in Dallas, New York,
St. Louis, London and Mexico City that specializes in leveraged acquisitions,
recapitalizations and other principal investing activities. Since its inception
in 1989, Hicks Muse has completed or currently has pending more than 200
transactions having a total transaction value in excess of $26 billion.
6
<PAGE> 11
THE EXCHANGE OFFER
The Exchange Offer......... $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. As
of the date hereof, Old Notes representing $100
million aggregate principal amount are outstanding.
The terms of the New Notes and the Old Notes are
substantially identical in all material respects,
except that the New Notes will be freely
transferable by the holders thereof except as
otherwise provided herein. See "Description of New
Notes."
Based on an interpretation by the Commission's
staff set forth in no-action letters issued to
third parties unrelated to the Company, the Company
believes that New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be
offered for resale, sold and otherwise transferred
by any person receiving the New Notes, whether or
not that person is the registered holder (other
than any such holder or such other person that is
an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act), without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that (i) the New Notes are acquired in the ordinary
course of business of that holder or such other
person, (ii) neither the holder nor such other
person is engaging in or intends to engage in a
distribution of the New Notes, and (iii) neither
the holder nor such other person has an arrangement
or understanding with any person to participate in
the distribution of the New Notes. See "The
Exchange Offer -- Purpose and Effect." Each
broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where those Old
Notes were acquired by the broker-dealer as a
result of its market-making activities or other
trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale
of these New Notes. See "Plan of Distribution."
Registration Rights
Agreement................ The Old Notes were sold by the Company on February
10, 1998, in the Offering. In connection with the
Offering, the Company entered into an Exchange and
Registration Rights Agreement with the initial
purchasers of the Old Notes (the "Registration
Rights Agreement") requiring the Company to make
the Exchange Offer. See "The Exchange
Offer -- Purpose and Effect."
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, , 1998, or such later
date and time to which it is extended by the
Company (the "Expiration Date").
Withdrawal................. The tender of the Old Notes pursuant to the
Exchange Offer may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration
Date. Any Old Notes not accepted for exchange for
any reason will be returned without expense to the
tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange
Offer.
Interest on the New
Notes and Old Notes...... Interest on each New Note will accrue from the date
of issuance of the Old Note for which the New Note
is exchanged or from the
7
<PAGE> 12
date of the last periodic payment of interest on
such Old Note, whichever is later. No additional
interest will be paid on Old Notes tendered and
accepted for exchange.
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to certain customary
conditions, certain of which may be waived by the
Company. See "The Exchange Offer -- Conditions to
the Exchange Offer."
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a copy thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver the
Letter of Transmittal, or the copy, together with
the Old Notes and any other required documentation,
to the Exchange Agent (as defined) at the address
set forth herein. Persons holding the Old Notes
through The Depository Trust Company ("DTC") and
wishing to accept the Exchange Offer must do so
pursuant to the DTC's Automated Tender Offer
Program, by which each tendering participant will
agree to be bound by the Letter of Transmittal. By
executing or agreeing to be bound by the Letter of
Transmittal, each holder will represent to the
Company that, among other things, (i) the New Notes
acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the
person receiving such New Notes, whether or not
such person is the registered holder of the Old
Notes, (ii) neither the holder nor any such other
person is engaging in or intends to engage in a
distribution of such New Notes, (iii) neither the
holder nor any such other person has an arrangement
or understanding with any person to participate in
the distribution of such New Notes, and (iv)
neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 promulgated
under the Securities Act, of the Company. Pursuant
to the Registration Rights Agreement, the Company
is required to file a "shelf" registration
statement for a continuous offering pursuant to
Rule 415 under the Securities Act in respect of the
Old Notes if (i) because of any change in law or
applicable interpretations of the staff of the
Commission, the Company is not permitted to effect
the Exchange Offer, (ii) the Exchange Offer is not
consummated within 225 days of the Offering, (iii)
any holder of Private Exchange Securities (as
defined) requests within 60 days after the Exchange
Offer, (iv) any applicable law or interpretations
do not permit any holder of Old Notes to
participate in the Exchange Offer, (v) any holder
of Old Notes participates in the Exchange Offer and
does not receive freely transferrable New Notes in
exchange for Old Notes or (vi) the Company so
elects.
Acceptance of Old Notes and
Delivery of New Notes.... The Company will accept for exchange any and all
Old Notes which are properly tendered (and not
withdrawn) in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer
will be delivered promptly following the Expiration
Date. See "The Exchange Offer -- Terms of the
Exchange Offer."
8
<PAGE> 13
Exchange Agent............. Norwest Bank Minnesota, National Association, is
serving as Exchange Agent (the "Exchange Agent") in
connection with the Exchange Offer.
Federal Income Tax
Considerations........... The exchange pursuant to the Exchange Offer will
not be a taxable event for federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
Effect of Not Tendering.... Old Notes that are not tendered or that are
improperly tendered and not accepted will,
following the completion of the Exchange Offer,
continue to be subject to the existing restrictions
upon transfer thereof. The Company will have no
further obligation to provide for the registration
under the Securities Act of such Old Notes.
9
<PAGE> 14
THE NEW NOTES
Issuer....................... Cooperative Computing, Inc.
Securities Offered........... $100,000,000 aggregate principal amount of 9%
Senior Subordinated Notes due 2008.
Maturity..................... February 1, 2008.
Interest Payment Dates....... February 1 and August 1 of each year, commencing
August 1, 1998.
Sinking Fund................. None.
Optional Redemption.......... Except as described below, the Company may not
redeem the New Notes prior to February 1, 2003.
On and after such date, the Company may redeem
the New Notes, in whole or in part, at the
redemption prices set forth herein, together with
accrued and unpaid interest, if any, to the date
of redemption. In addition, at any time and from
time to time on or prior to February 1, 2002, the
Company may redeem up to 35% of the aggregate
principal amount of the New 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 New Notes remains
outstanding after each such redemption. See
"Description of New Notes -- Optional
Redemption."
Change of Control............ Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
repurchase the New Notes at a price equal to 101%
of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date
of purchase. In addition, if the Change of
Control occurs prior to February 1, 2003, the
Company will have the right to redeem the New
Notes at a price equal to 100% of the principal
amount thereof plus the Applicable Premium. The
"Change of Control" covenant will not apply in
the event of (a) changes in a majority of the
board of directors of the Company so long as a
majority of the board of directors continues to
consist of Continuing Directors (as defined) and
(b) certain transactions with Permitted Holders
(as defined). In addition, the "Change of
Control" covenant is not intended to, and does
not, afford holders of New Notes protection in
the event of certain highly leveraged
transactions, reorganizations, restructurings,
mergers and other similar transactions that might
adversely affect the holders of New Notes, but
would not constitute a Change of Control. The
Company could enter into certain transactions,
including certain recapitalizations of the
Company, that would not constitute a Change of
Control with respect to the Change of Control
purchase feature of the New Notes, but would
increase the amount of Indebtedness (as defined)
outstanding at such time. See "Description of New
Notes -- Change of Control" and "-- Certain
Definitions."
The occurrence of certain events that would
constitute a Change of Control with respect to
the New Notes would constitute a default under
the Restated Senior Credit Facilities. If such an
event should occur, the lenders under the
Restated Senior Credit Facilities could
accelerate the payment of all amounts
10
<PAGE> 15
due thereunder. As of March 31, 1998, there was
$71.7 million outstanding (excluding unused
commitments) under the Restated Senior Credit
Facilities. All amounts borrowed under the
Restated Senior Credit Facilities constitute
Senior Indebtedness. Consequently, the Company's
ability to satisfy its obligations to the holders
of New Notes upon a Change of Control may be
substantially impaired by its obligations to the
lenders under the Restated Senior Credit
Facilities. See "Description of the Restated
Senior Credit Facilities."
Ranking...................... The New Notes will be unsecured and will be
subordinated in right of payment to all existing
and future Senior Indebtedness of the Company.
The New Notes will rank pari passu with any
future Senior Subordinated Indebtedness of the
Company and will rank senior to all Indebtedness
of the Company that is neither Senior
Indebtedness nor Senior Subordinated
Indebtedness. The New Notes will be effectively
subordinated to all liabilities of the Company's
Subsidiaries. Borrowings under the Restated
Senior Credit Facilities are secured by
substantially all of the assets of the Company
and its Subsidiaries. As of March 31, 1998, the
aggregate principal amount of the Company's
outstanding Senior Indebtedness was $71.7 million
(excluding unused commitments), the liabilities
of the Company's Subsidiaries totaled
approximately $57.8 million and the Company had
no Senior Subordinated Indebtedness outstanding
other than the Notes. See "Description of New
Notes -- Ranking and Subordination."
Restrictive Covenants........ The Indenture limits, among other things, (i) the
incurrence of additional indebtedness by the
Company and its Subsidiaries (as defined), (ii)
the issuance of Disqualified Capital Stock (as
defined) by the Company and preferred stock by
the Company's Subsidiaries, (iii) the payment of
dividends on, and redemption of, capital stock of
the Company, (iv) investments, (v) sales or swaps
of assets, (vi) transactions with affiliates and
(vii) consolidations, mergers and transfers of
all or substantially all of the Company's assets.
The Indenture also prohibits certain restrictions
on distributions from Subsidiaries. However, all
of these limitations and prohibitions are subject
to a number of important qualifications and
exceptions that are to be contained in the
Indenture. See "Description of New
Notes -- Certain Covenants."
USE OF PROCEEDS
There will be no cash proceeds to the Company from the exchange pursuant to
the Exchange Offer. The Company used the net proceeds from the Offering to repay
approximately $95 million of borrowings outstanding under the Old Senior Credit
Facilities.
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific risk
factors set forth under "Risk Factors" for risks involved with an investment in
the New Notes.
---------------------
The Company is a Delaware corporation. Its principal executive offices are
located at 6207 Bee Cave Road, Austin, Texas 78746, and its telephone number is
(512) 328-2300.
11
<PAGE> 16
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
THE COMPANY
The following table sets forth certain summary unaudited pro forma financial
data of the Company for the periods ended and as of the dates indicated as
further described in the Unaudited Pro Forma Financial Information included
elsewhere herein. The unaudited summary pro forma statement of operations data
gives effect to the Triad Acquisition and the Transaction as if they had
occurred at the beginning of the fiscal year ended September 30, 1997. The
unaudited summary pro forma balance sheet data give effect to the Transaction as
if it had occurred at the balance sheet date. "Other Data" below, not directly
derived from the Unaudited Pro Forma Financial Information or the audited
consolidated financial statements of Old CCI or Triad, have been presented to
provide additional analysis. The Summary Unaudited Pro Forma Financial Data do
not purport to represent what the Company's results of operations or financial
condition would have actually been had the Triad Acquisition and the Transaction
been consummated as of such date or to project the Company's results of
operations or financial condition for any future period. The Summary Unaudited
Pro Forma Financial Data have been derived from, and should be read in
conjunction with, the Unaudited Pro Forma Financial Information and the notes
thereto, the unaudited interim consolidated financial statements of the Company
and the respective notes thereto, the audited consolidated financial statements
of Old CCI, Triad and the Company and the respective notes thereto and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," each included elsewhere herein.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1997 MARCH 31, 1998
------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $213,513 $104,414
Cost of revenues.......................................... 131,301 66,581
-------- --------
Gross profit.............................................. 82,212 37,833
Operating expenses........................................ 118,573(1) 49,513
-------- --------
Operating loss............................................ (36,361) (11,680)
Interest expense.......................................... 14,163 7,557
Other income, net......................................... 1,485 254
-------- --------
Loss before income taxes.................................. (49,039) (18,983)
Income tax benefit........................................ 6,263 5,741
-------- --------
Net loss before extraordinary charge...................... (42,776) (13,242)
Extraordinary charge...................................... -- 3,017
-------- --------
Net loss.................................................. $(42,776) $(16,259)
======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital........................................... $ 7,703 $ 12,671
Total assets.............................................. 308,354 312,432
Total debt, including current maturities(2)............... 150,817 172,321
Stockholders' equity...................................... 48,263 37,485
OTHER DATA:
EBITDA(3)................................................. $ 10,071 $ 10,542
Adjusted EBITDA(4)........................................ 33,335(1) 13,559
EBITDA margin(5).......................................... 4.7% 10.1%
Adjusted EBITDA margin(6)................................. 15.6% 13.0%
Capital expenditures(7)................................... $ 20,653 $ 10,518
Cash flows from (used by) operating activities............ 11,948 (2,671)
Cash flows from (used by) investing activities............ (201,363) (20,408)
Cash flows from (used by) financing activities............ 183,830 21,448
Ratio of total debt to EBITDA............................. 15.0x 16.3x
Ratio of total debt to Adjusted EBITDA.................... 4.5x 12.7x
Ratio of EBITDA to interest expense....................... 0.7x 1.4x
Ratio of Adjusted EBITDA to interest expense.............. 2.4x 1.8x
</TABLE>
- ---------------
(1) Included in operating expenses and excluded from Adjusted EBITDA is $23.1
million of in-process research and development acquired and written off in
connection with the Triad Acquisition.
(2) Total debt does not include any amounts relating to lease receivables that
have been sold by the Company. See Notes 1 and 7 to the audited consolidated
financial statements of the Company included elsewhere herein.
(3) EBITDA is defined as net income (loss) before interest, income taxes,
depreciation and amortization. The Company has included information
concerning EBITDA because it believes that EBITDA is commonly used by
certain investors and analysts as one measure to analyze and compare
companies on the basis of operating performance and to determine a company's
ability to service and incur debt. EBITDA should not be considered as an
alternative to, or more meaningful than, net income, cash flows from
operating activities or other consolidated income or cash flow statement
data prepared in accordance with generally accepted accounting principles or
as a measure of profitability or liquidity. EBITDA may not be comparable to
similarly titled measures reported by other companies.
(4) Adjusted EBITDA presents EBITDA as defined by the Restated Senior Credit
Facilities and is computed as EBITDA adjusted for extraordinary items and
certain non-cash charges or credits described therein.
(5) EBITDA margin is defined as EBITDA divided by revenues expressed as a
percentage.
(6) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by revenues
expressed as a percentage.
(7) Includes investments in property, plant and equipment, expenditures for
service parts and investments in software and databases.
12
<PAGE> 17
SUMMARY HISTORICAL FINANCIAL DATA
OLD CCI AND CCI
The following table sets forth summary financial data of Old CCI for the
years ended November 30, 1995 and 1996 and the six months ended March 31, 1997
and of the Company for the ten months ended September 30, 1997 and the six
months ended March 31, 1998. The statement of operations data as of November 30,
1995 and 1996 and September 30, 1997 and the balance sheet data as of November
30, 1996 and September 30, 1997 set forth below are derived from the audited
consolidated financial statements of Old CCI and the Company, included elsewhere
herein. The statement of operations data as of March 31, 1997 and the statement
of operations data and the balance sheet data as of March 31, 1998 set forth
below are derived from the unaudited interim consolidated financial statements
of Old CCI and the Company included elsewhere herein. The balance sheet data as
of November 30, 1995 and March 31, 1997 are derived from unaudited consolidated
financial statements of Old CCI not included herein. 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. Operating results for the six months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ending September 30, 1998. The summary financial data below should be read in
conjunction with "Management's Discussion and Analysis of Results of Operations
and Financial Condition," "Selected Historical and Pro Forma Financial Data,"
the unaudited interim consolidated financial statements of Old CCI and the
Company and the respective notes thereto and the audited consolidated financial
statements of Old CCI and the Company and the respective notes thereto, each
included elsewhere herein.
<TABLE>
<CAPTION>
OLD CCI CCI OLD CCI CCI
----------------- ------------------ -------------- --------------
YEAR ENDED SIX MONTHS SIX MONTHS
NOVEMBER 30, TEN MONTHS ENDED ENDED
----------------- ENDED -------------- --------------
1995 1996 SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1998
---- ---- ------------------ -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $29,245 $36,734 $ 140,316 $ 37,258 $104,414
Cost of revenues......................... 16,733 21,857 84,464 18,901 66,581
------- ------- --------- --------- --------
Gross profit............................. 12,512 14,877 55,852 18,357 37,833
Operating expenses....................... 12,221 13,377 83,080(1) 36,972 49,513
------- ------- --------- --------- --------
Operating income (loss).................. 291 1,500 (27,228) (18,615) (11,680)
Interest expense......................... -- -- 8,403 1,355 7,350
Other income (expense), net.............. 414 4,231(2) 443 1,083 254
------- ------- --------- --------- --------
Income (loss) before income taxes........ 705 5,731 (35,188) (18,887) (18,776)
Income tax (provision) benefit:
Nonrecurring charge for termination of
Subchapter S election................ -- -- (2,382) -- --
C Corporation benefit.................. -- -- 3,383 2,277 5,659
------- ------- --------- --------- --------
Income (loss) before extraordinary
charge................................. (705) (5,731) (34,187) (21,164) (13,117)
Extraordinary charge, net of tax of
$1,969................................. -- -- -- -- 3,017
Net income (loss)........................ $ 705 $ 5,731 $ (34,187) $ (21,164) $(16,134)
======= ======= ========= ========= ========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit)................ $(2,231) $(3,490) $ 603 $ (9,415) $ 12,671
Total assets............................. 16,115 18,763 307,940 314,149 312,432
Total debt, including current
maturities............................. 5,089(3) 5,089(3) 144,967(4) 144,629(3) 172,321(4)
Stockholders' equity..................... 5,273 5,227 53,699 64,273 37,485
OTHER DATA:
EBITDA(5)................................ $ 6,113 $12,125 $ 1,558 $ (10,892) $ 10,542
Adjusted EBITDA(6)....................... 6,113 8,774(2) 24,822(1) 12,208 13,559
EBITDA margin(7)......................... 20.9% 33.0% 1.1% (29.2)% 10.1%
Adjusted EBITDA margin(8)................ 20.9% 23.9% 17.7% 32.8% 13.0%
Capital expenditures(9).................. $ 6,527 $ 7,141 $ 15,980 $ 7,243 $ 10,518
Cash flows from (used by) operating
activities............................. 4,877 15,251 25,033 25,197 (2,671)
Cash flows from (used by) investing
activities............................. (6,322) (6,885) (195,652) (187,197) (20,408)
Cash flows from (used by) financing
activities............................. 144 (5,777) 168,248 165,947 21,448
</TABLE>
- ---------------
(1) Included in operating expenses and excluded from Adjusted EBITDA is $23.1
million of in-process research and development acquired and written off in
connection with the Triad Acquisition.
(2) Included in other income, net, and excluded from Adjusted EBITDA are gains
of $3.4 million related to settlement of two breach of contract lawsuits
recognized by Old CCI.
(3) Consists of advances from stockholders repaid during fiscal 1997.
(4) Total debt does not include obligations of the Company resulting from the
sale of lease receivables. See Notes 1 and 7 to the audited consolidated
financial statements of the Company included elsewhere herein.
(5) EBITDA is defined as net income (loss) before interest, income taxes,
depreciation and amortization. The Company has included information
concerning EBITDA because it believes that EBITDA is commonly used by
certain investors and analysts as one measure to analyze and compare
companies on the basis of operating performance and to determine a company's
ability to service and incur debt. EBITDA should not be considered as an
alternative to, or more meaningful than, net income, cash flows from
operating activities or other consolidated income or cash flow statement
data prepared in accordance with generally accepted accounting principles or
as a measure of profitability or liquidity. EBITDA may not be comparable to
similarly titled measures reported by other companies.
(6) Adjusted EBITDA presents EBITDA as defined by the Restated Senior Credit
Facilities and is computed as EBITDA adjusted for extraordinary items and
certain non-cash charges or credits described therein.
(7) EBITDA margin is defined as EBITDA divided by revenues expressed as a
percentage.
(8) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by revenues
expressed as a percentage.
(9) Includes investments in property, plant and equipment, expenditures for
service parts and investments in software and databases.
13
<PAGE> 18
SUMMARY HISTORICAL FINANCIAL DATA
TRIAD
The following table sets forth summary financial data of Triad for the
years ended September 30, 1995 and 1996 and for the five months ended February
27, 1997. The statement of operations data set forth below are derived from the
audited consolidated financial statements included elsewhere herein. The summary
financial data below should be read in conjunction with "Management's Discussion
and Analysis of Results of Operations and Financial Condition," "Selected
Historical Financial Data" and the audited financial statements of Triad and the
notes thereto, each included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, FIVE MONTHS
-------------------- ENDED
1995 1996 FEBRUARY 27, 1997
---- ---- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $175,077 $175,676 $ 66,432
Cost of revenues.......................................... 88,509 93,808 38,316
-------- -------- --------
Gross profit.............................................. 86,568 81,868 28,116
Operating expenses........................................ 66,036 76,335(1) 27,690
-------- -------- --------
Operating income.......................................... 20,532 5,533 426
Interest and other expenses............................... 6,941 5,944 2,405
Other income, net......................................... -- 2,926 94
-------- -------- --------
Income (loss) before taxes and extraordinary item......... 13,591 2,515 (1,885)
Income tax (provision) benefit............................ (5,165) (956) 290
-------- -------- --------
Income (loss) before extraordinary item................... 8,426 1,559 (1,595)
Extraordinary item........................................ (396) (377) --
-------- -------- --------
Net income (loss)......................................... $ 8,030 $ 1,182 $ (1,595)
======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit)................................. $ 1,431 $(17,141) $(31,726)
Total assets.............................................. 132,709 139,753 149,844
Total debt, including current maturities(2)............... 55,609 55,913 66,202
Stockholders' equity...................................... 14,221 16,787 22,688
OTHER DATA:
EBITDA(3)................................................. $ 28,929 $ 16,786 $ 4,738
Adjusted EBITDA(4)........................................ 29,263 26,592 4,738
EBITDA margin(5).......................................... 16.5% 9.6% 7.1%
Adjusted EBITDA margin(6)................................. 16.7% 15.1% 7.1%
Capital expenditures(7)................................... $ 11,749 $ 12,424 $ 4,673
Cash flows from (used by) operating activities............ 30,119 15,444 (18,482)
Cash flows from (used by) investing activities............ (12,865) (11,699) (4,371)
Cash flows from (used by) financing activities............ (17,954) (3,356) 18,023
</TABLE>
- ---------------
(1) Included in operating expenses and excluded from Adjusted EBITDA is a
restructuring charge of $9.0 million recognized in the historical financial
statements of Triad related to the write-off of capitalized software
development costs, provisions for product issues and costs associated with
reductions in aftermarket sales and support personnel.
(2) Total debt does not include obligations of Triad resulting from the sale of
lease receivables.
(3) EBITDA is defined as net income (loss) before interest, income taxes,
depreciation and amortization. The Company has included information
concerning EBITDA because it believes that EBITDA is commonly used by
certain investors and analysts as one measure to analyze and compare
companies on the basis of operating performance and to determine a company's
ability to service and incur debt. EBITDA should not be considered as an
alternative to, or more meaningful than, net income, cash flows from
operating activities or other consolidated income or cash flow statement
data prepared in accordance with generally accepted accounting principles or
as a measure of profitability or liquidity. EBITDA may not be comparable to
similarly titled measures reported by other companies.
(4) Adjusted EBITDA presents EBITDA as defined by the Restated Senior Credit
Facilities and is computed as EBITDA adjusted for extraordinary items and
certain non-cash charges or credits described therein.
(5) EBITDA margin is defined as EBITDA divided by revenues expressed as a
percentage.
(6) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by revenues
expressed as a percentage.
(7) Includes investments in property, plant and equipment, expenditures for
service parts and investments in software and databases.
14
<PAGE> 19
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following risk factors
before purchasing the New Notes offered hereby. This Prospectus contains
forward-looking statements. These statements are subject to a number of risks
and uncertainties, including the factors set forth below, many of which are
beyond the Company's control.
SUBSTANTIAL LEVERAGE
In connection with the Triad Acquisition the Company incurred substantial
indebtedness, resulting in its leveraged capital structure. As of March 31,
1998, the Company had approximately $172.3 million of indebtedness outstanding,
and approximately $28.4 million available for future borrowings under the
Restated Senior Credit Facilities. See "Capitalization" and "Description of the
Restated Senior Credit Facilities." On a pro forma basis after giving effect to
the Transaction, the Company's earnings would have been insufficient to cover
fixed charges by approximately $19.0 million for the six months ended March 31,
1998. The Company may incur additional indebtedness in the future, subject to
certain limitations to be contained in the Indenture and the Restated Senior
Credit Facilities. See "Description of the Restated Senior Credit Facilities"
and "Description of New Notes."
The Company's ability to pay interest and principal upon the Restated
Senior Credit Facilities and the New Notes and to satisfy its other debt
obligations will depend upon its future operating performance, including its
ability to realize its goal of significant penetration of the service dealer
market, which will be affected by prevailing economic conditions and financial,
business and other factors, certain of which are beyond its control. There can
be no assurance that the Company's business will generate cash flow at or above
projected levels or that anticipated future growth can be achieved. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
The Company's leverage position could have several important consequences
to the holders of the New Notes, including, but not limited to, the following:
(i) the Company will have significant cash requirements to service debt,
reducing funds available for operations and future business opportunities and
increasing the Company's vulnerability to adverse general economic and industry
conditions and competition; (ii) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate or other purposes may be limited; (iii) the Company's
leveraged position and the covenants that are contained in the Indenture and the
Restated Senior Credit Facilities could limit the Company's ability to compete,
as well as its ability to expand, including through acquisitions, and to make
capital improvements; (iv) the Company may be more leveraged than certain of its
competitors, which may place the Company at a competitive disadvantage; and (v)
the Company's ability to refinance the New Notes in order to pay the principal
of the New Notes at maturity or upon a Change of Control may be adversely
affected.
A portion of the consolidated debt of the Company bears interest at a
floating rate; therefore, the financial results of the Company are and will
continue to be affected by changes in prevailing interest rates.
ABILITY TO SERVICE DEBT
The Company's ability to pay interest and principal upon the Restated
Senior Credit Facilities, to pay interest on the New Notes and to satisfy its
other debt obligations will depend upon its future operating performance, which
will be affected by prevailing economic conditions and financial, business and
other factors, certain of which will be beyond its control. In addition, amounts
owing under the Restated Senior Credit Facilities will become due prior to the
maturity of the New Notes and such amounts may need to be refinanced. There can
be no assurance that future borrowings or equity refinancing will be available
for the payment or refinancing of the Company's indebtedness. If
15
<PAGE> 20
the Company is unable to service its indebtedness, whether in the ordinary
course of business or upon acceleration of such indebtedness, the Company will
be forced to pursue one or more alternative strategies, such as restructuring or
refinancing its indebtedness, selling assets, reducing or delaying capital
expenditures or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on satisfactory terms, if at all.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources" and "Description of the Restated
Senior Credit Facilities."
On February 10, 1998, the Company refinanced all of the indebtedness under
the Old Senior Credit Facilities (which was approximately $150.0 million)
through the issuance of the New Notes in the original principal amount of $100
million and borrowings under the Restated Senior Credit Facilities. The Old
Senior Credit Facilities, which were established to fund part of the Triad
Acquisition, assumed a significant cash flow growth for the Company after the
Triad Acquisition. Consequently, the financial covenants contained in the Old
Senior Credit Facilities required a rapid de-leveraging of the Company. During
the third and fourth quarters of 1997, the Company fell out of compliance with
certain of these financial covenants and obtained waivers from the lenders with
respect to each of these defaults. The Restructuring was consummated to take
advantage of the attractive long-term interest rate environment that existed at
that time and to establish the financial covenants of the Restated Senior Credit
Facilities to be more in line with current and expected financial performance.
See "Description of the Restated Senior Credit Facilities."
RESTRICTIVE DEBT COVENANTS
The Indenture and the Restated Senior Credit Facilities contain certain
covenants that restrict, among other things, the Company's ability to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, make investments, consummate certain asset sales, enter
into certain transactions with affiliates, impose restrictions on the ability of
a subsidiary to pay dividends or make certain payments to the Company, merge or
consolidate with any other person or sell, assign, transfer, lease, convey, or
otherwise dispose of all or substantially all of the assets of the Company. In
addition, the Restated Senior Credit Facilities contain certain other and more
restrictive covenants including restrictions on prepaying indebtedness, such as
the New Notes, and will also require the Company to maintain specified financial
ratios and to satisfy certain financial condition tests. The Company's ability
to meet these financial ratio and financial condition tests can be affected by
events beyond its control and there can be no assurance that the Company will
meet those tests. A breach of any of these covenants could result in a default
under the Restated Senior Credit Facilities or the Indenture.
On August 15 and December 4, 1997, the Company obtained waivers from the
lenders under the Company's Old Senior Credit Facilities in connection with the
breach by the Company of certain financial ratio covenants which the Company
attributes principally to a result of delays in obtaining the approval of the
United States Federal Trade Commission for the Triad Acquisition and the impact
of such delays on the sales of Triad. Certain of the financial ratio and
financial condition covenants have been modified in the Restated Senior Credit
Facilities. See "Description of the Restated Senior Credit Facilities." While
the Company believes that the new financial ratio and financial condition
covenants contained in the Restated Senior Credit Facilities will be met by the
Company, there can be no assurances that the Company will be able to maintain
the financial performance necessary to prevent any future breach of such
covenants.
Upon the occurrence of an event of default under the Restated Senior Credit
Facilities, the lenders thereunder could elect to declare all amounts
outstanding thereunder, together with accrued interest, to be immediately due
and payable. If the Company were unable to pay those amounts, the lenders
thereunder could proceed against the collateral granted to them to secure that
indebtedness. Substantially all of the assets of the Company and its
subsidiaries, including the stock of most of its subsidiaries, have been pledged
as collateral to secure the Company's obligations under the
16
<PAGE> 21
Restated Senior Credit Facilities and guarantees thereof. If the indebtedness
under the Restated Senior Credit Facilities were to be accelerated, there can be
no assurance that the assets of the Company would be sufficient to repay in full
that indebtedness and the other indebtedness of the Company, including the New
Notes. In addition, if a default occurs with respect to Senior Indebtedness,
such as the Restated Senior Credit Facilities, the subordination provisions of
such Senior Indebtedness would restrict payments to holders of the New Notes.
See "Description of the Restated Senior Credit Facilities" and "Description of
New Notes -- Certain Covenants."
SUBORDINATION OF NEW NOTES
The payment of principal, premium, if any, and interest on, and any other
amounts owing in respect of, the New Notes will be subordinated to the prior
payment in full in cash or cash equivalents of all existing and future Senior
Indebtedness of the Company. In the event of the bankruptcy, liquidation,
dissolution, reorganization or other winding-up of the Company, the assets and
securities of the Company will be available to pay obligations on the New Notes
only after all Senior Indebtedness has been so paid in full; accordingly, there
may not be sufficient assets remaining to pay amounts due on any or all of the
New Notes then outstanding. In addition, under certain circumstances, the
Company may not pay principal of, premium, if any, or interest on, or any other
amounts owing in respect of, the New Notes, or purchase, redeem or otherwise
retire the New Notes, in the event of certain defaults with respect to Senior
Indebtedness, including Senior Indebtedness under the Restated Senior Credit
Facilities.
As of March 31, 1998, there was approximately $71.7 million of Senior
Indebtedness (excluding unused commitments) outstanding (principally related to
direct borrowings by the Company under the Restated Senior Credit Facilities).
Additional Senior Indebtedness may be incurred by the Company from time to time,
subject to certain restrictions. See "Description of the Restated Senior Credit
Facilities," "Description of New Notes -- Ranking and Subordination" and
"-- Certain Covenants."
In addition to being subordinated to all existing and future Senior
Indebtedness of the Company, the New Notes will not be secured by any assets of
the Company or its subsidiaries. Obligations under the Restated Senior Credit
Facilities and guarantees thereof are secured by substantially all the assets of
the Company and its direct and indirect subsidiaries. If the Company becomes
insolvent or is liquidated, or if payment under the Restated Senior Credit
Facilities is accelerated, the lenders under the Restated Senior Credit
Facilities will be entitled to exercise the remedies available to a secured
lender under applicable law pursuant to the Restated Senior Credit Facilities.
Accordingly, such lenders will have a prior claim with respect to such assets.
See "Description of the Restated Senior Credit Facilities."
Additionally, as a result of the Company's holding company structure the
New Notes will be effectively subordinated to all liabilities of the Company's
Subsidiaries. As of March 31, 1998, the liabilities of the Company's
Subsidiaries totaled approximately $57.8 million.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; ACQUISITION OF DATA
The Company's success and ability to compete depend in part upon its
proprietary technology. The Company attempts to protect its proprietary
technology through trademarks, copyrights, trade secrets and confidentiality
agreements with all of its employees. There can be no assurance that the Company
will be able to adequately protect its technology or that competitors will not
develop similar technology independently. No assurance can be given that the
claims allowed on any copyrights held by the Company will be sufficiently broad
to protect the Company's technology or that the Company's copyrights will not be
challenged.
In addition, the Company is subject to the risk of adverse claims and
litigation alleging that it is infringing the proprietary rights of third
parties. Although the Company is not aware that its technology infringes on the
proprietary rights of others and management has not received notice of any
claimed infringements, there can be no assurance that the Company will not be
subject to such
17
<PAGE> 22
third party claims or litigation and that such claims will not be successful.
Any such claim could result in costly litigation or product shipment delays or
force the Company to enter into royalty or license agreements, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RAPID TECHNOLOGICAL CHANGE
The technology underlying the Company's products and services is
characterized by rapid technological advances, evolving industry standards and
frequent new product introductions. The future success of the Company's business
will depend upon its ability to maintain and enhance its technological
capabilities, develop and market products and services that meet changing
customer needs and successfully anticipate or respond to technological changes,
on a cost-effective and timely basis. There can be no assurance that the Company
will effectively respond to the technological requirements of the changing
market. To the extent the Company determines that new technologies and equipment
are required to remain competitive, the development, acquisition and
implementation of such technologies and equipment are likely to continue to
require significant capital investment by the Company. There can be no assurance
that capital will be available for these purposes in the future or that
investments in new technologies will result in commercially viable products. See
"Business -- Business Strategy," "-- Industry Overview" and "-- Products and
Services."
RISK OF SOFTWARE DEFECTS
The Company's products are highly complex and sophisticated and could, from
time to time, contain design or manufacturing defects or software errors. There
can be no assurance that such defects or errors will not delay the release or
shipment of products or, if the defect or error is discovered only after
customers have received the products, that such defect or errors will not result
in increased costs or reduced market acceptance of the Company's products, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
INTEGRATION OF ACQUISITIONS
No assurance can be given that the integration of Old CCI and Triad or of
future acquisitions will be successful or that the anticipated strategic
benefits of the Triad Acquisition or future acquisitions will be realized.
Acquisitions involve a number of special risks, including, but not limited to,
adverse short-term effects on the Company's reported operating results,
diversion of management's attention, standardization of accounting systems,
dependence on retaining, hiring and training key personnel, and unanticipated
problems or legal liabilities. If the Company is unable to successfully
integrate Old CCI and Triad or future acquisitions for these or other reasons,
the Company's business, financial condition and results of operations may be
adversely affected. See "Prospectus Summary -- Recent Transactions" and
"-- Company History and Ownership."
CUSTOMER LEASING
The Company offers its customers lease financing which it believes provides
a competitive advantage in marketing and promoting the Company's products. The
Company has, through lease financing subsidiaries, financed its lease
receivables through a series of arrangements that it believes qualify for
treatment as sales under applicable accounting rules including Financial
Accounting Standard 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities ("FAS 125"). As of March 31, 1998, the
Company maintained arrangements available for the sale of such lease agreements
aggregating approximately $65.6 million. Under the Company's current
arrangements, the Company sells the receivables relating to certain customer
leases to banks and lending institutions. The Company retains certain
liabilities relating to the transferred lease receivables, principally relating
to representations and warranties as to the quality and other characteristics of
the receivables, ongoing maintenance and servicing obligations, as well as
retaining liability for losses in the event of lessee nonpayment up to stated
recourse limits (up to
18
<PAGE> 23
10% of the aggregate initial proceeds adjusted for certain expenses and payments
remitted on the leases) and at full recourse on lease receivables that did not
meet the credit worthiness tests of the banks or lending institutions. The
Company retains a liability on its balance sheet relating to its estimated
exposure under these recourse provisions and for its servicing obligations. The
lease financing arrangements 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 transactions under the available credit facilities. A change in the
manner in which such leases are transferred, including whether such transfer
constitutes a sale, and other matters, could adversely affect the accounting and
financial reporting manner in which the Company may report its customer leasing
operations. Such changes could result in a different accounting treatment or in
the Company altering the financing arrangements (subject to the lender's
consent).
COMPETITION
The application software and database markets are highly fragmented and
served by multifarious competitors. Competitors range from small, independent
application software producers to large alliances of software producers and
computer systems manufacturers. In addition, the Company faces competition from
distributors and cooperatives that directly market computer systems and database
information to their members and from potential customers that develop systems
and compile and maintain data internally. Many of the Company's competitors have
greater financial and other resources than does the Company. Consequently, the
Company may encounter additional competitive pressures if increased spending is
required to maintain market share or rapid technological change in the industry
occurs. See "-- Rapid Technological Change."
DEPENDENCE UPON KEY PERSONNEL
The Company believes that its success will continue to be dependent upon
its ability to attract and retain skilled managers, technical employees and
other personnel, including its present officers and directors. The loss of
certain key personnel, including Glenn E. Staats, the President and Chief
Executive Officer of the Company, and Preston W. Staats, the Executive Vice
President and Chief Operating Officer of the Company, could have a material
adverse effect on the Company's business, financial condition and results of
operations. To date, the Company has not experienced significant difficulties in
attracting or retaining such personnel. Although the Company is not aware that
any of its key personnel currently intend to terminate their employment, their
future services cannot be assured. None of the Company's key personnel, other
than Messrs. Glenn and Preston Staats, has a written employment agreement or
other written employment arrangement with the Company and all such persons,
other than Messrs. Glenn and Preston Staats, are employed by the Company on an
"at-will" basis. See "Management -- Employment Agreements; Change of Control
Arrangements."
CONTROLLING STOCKHOLDERS
All of the common stock of the Company is owned by Holding, which in turn
is controlled by an affiliate of Hicks Muse and Messrs. Glenn E. Staats and
Preston W. Staats. As a result, Hicks Muse and Messrs. Glenn and Preston Staats
will be able to elect all the members of the Board of Directors of Holding and
therefore direct the management and policies of the Company. The interests of
Hicks Muse and its affiliates and Messrs. Glenn and Preston Staats may differ
from the interests of holders of the New Notes. See "Stock Ownership and Certain
Transactions."
LIMITATION ON CHANGE OF CONTROL
Upon a Change of Control, the Company may be required to offer to purchase
all of the New Notes then outstanding at 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date of purchase. If a Change
of Control were to occur, there can be no assurance that
19
<PAGE> 24
the Company would have sufficient funds to pay the purchase price for all of the
New Notes that the Company might be required to purchase. In the event that the
Company were required to purchase New Notes pursuant to a Change of Control
Offer (as defined), the Company expects that it would require third party
financing; however, there can be no assurance that the Company would be able to
obtain such financing on favorable terms, if at all. In addition, the Restated
Senior Credit Facilities restrict the Company's ability to repurchase the New
Notes, including pursuant to a Change of Control Offer. A Change of Control will
result in an event of default under the Restated Senior Credit Facilities and
may cause the acceleration of other Senior Indebtedness, if any, in which case
the subordination and other provisions of the New Notes would require payment in
full of the Restated Senior Credit Facilities and any such Senior Indebtedness
before repurchase of the New Notes. See "Description of the Restated Senior
Credit Facilities," "Description of New Notes -- Change of Control" and
"-- Ranking and Subordination."
The "Change of Control" covenant in the Indenture will not apply in the
event of (a) changes in a majority of the board of directors of the Company so
long as a majority of the board of directors continues to consist of Continuing
Directors and (b) certain transactions with Permitted Holders. In addition, the
"Change of Control" covenant is not intended to, and does not, afford holders of
New Notes protection in the event of certain highly leveraged transactions,
reorganizations, restructurings, mergers and other similar transactions that
might adversely affect the holders of New Notes, but would not constitute a
Change of Control. The Company could enter into certain transactions, including
certain recapitalizations of the Company, that would not constitute a Change of
Control with respect to the Change of Control purchase feature of the New Notes,
but would increase the amount of Indebtedness outstanding at such time. See
"Description of New Notes -- Change of Control."
The occurrence of certain events that would constitute a Change of Control
with respect to the New Notes would constitute a default under the Restated
Senior Credit Facilities. If such an event should occur, the lenders under the
Restated Senior Credit Facilities could accelerate the payment of all amounts
due thereunder. As of March 31, 1998, there was $71.7 million outstanding
(excluding unused commitments) under the Restated Senior Credit Facilities. All
amounts borrowed under the Restated Senior Credit Facilities constitute Senior
Indebtedness. Consequently, the Company's ability to satisfy its obligations to
the holders of New Notes upon a Change of Control may be substantially impaired
by its obligations to the lenders under the Restated Senior Credit Facilities.
See "Description of the Restated Senior Credit Facilities."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The Old Notes were issued on February 10, 1998, and the Company is not
aware that any active trading market for the Old Notes has developed. The
Company does not intend to apply for a listing of the New Notes on a securities
exchange or on any automated dealer quotation system. There can be no assurance
as to the liquidity of markets that may develop for the New Notes, the ability
of the holders of the New Notes to sell their New Notes or the prices at which
such holders would be able to sell their New Notes. If such markets were to
exist, the New Notes could trade at prices that may be lower than the initial
market value thereof, depending upon many factors, including prevailing interest
rates and the markets for similar securities.
The liquidity of, and trading market for, the New Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
YEAR 2000 READINESS
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to
20
<PAGE> 25
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. Although the Company believes its software
products are or will be Year 2000 ready, there can be no assurance that the
Company's software products contain all necessary software routines and programs
necessary for the accurate calculation, display, storage and manipulation of
data involving dates. If any of the Company's customers experience Year 2000
problems, such customers could assert claims for damages against the Company
and/or discontinue purchasing recurring services. Any such litigation could
result in substantial costs and diversion of the Company's resources even if
ultimately decided in favor of the Company. The occurrence of any of the
foregoing could have a material adverse effect on the Company's business,
financial condition and results of operations.
USE OF PROCEEDS
There will be no cash proceeds to the Company from the exchange pursuant to
the Exchange Offer. The Company used the net proceeds from the Offering to repay
approximately $95 million of borrowings outstanding under the Old Senior Credit
Facilities.
CAPITALIZATION
As the New Notes have substantially the same terms as the Old Notes and are
being exchanged for the same amount of principal as is outstanding under the Old
Notes, the capitalization of the Company will be unchanged as a result of the
Exchange Offer.
21
<PAGE> 26
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
OLD CCI AND CCI
The following table sets forth selected financial data of Old CCI for the
years ended November 30, 1993, 1994, 1995 1996 and the six months ended March
31, 1997 and the Company for the ten months ended September 30, 1997 and the six
months ended March 31, 1998 as well as the unaudited pro forma financial data
for the periods ended and as of the dates indicated as further described in the
Unaudited Pro Forma Financial Information. The balance sheet data as of November
30, 1996 and September 30, 1997 and the statement of operations data as of
November 30, 1995 and 1996, and September 30, 1997 set forth below are derived
from the audited consolidated financial statements of Old CCI and the Company
included elsewhere herein. The statement of operations data as of March 31, 1997
and for the period then ended and the statement of operations data and the
balance sheet data as of March 31, 1998 and for the period then ended set forth
below are derived from the interim unaudited financial statements of Old CCI and
the Company included elsewhere herein. The selected financial data for the years
ended November 30, 1993 and 1994 and the balance sheet data as of November 30,
1995 and March 31, 1997 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. Operating results for the
six months ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the entire year ending September 30, 1998. The selected
financial data below should be read in conjunction with "Management's Discussion
and Analysis of Results of Operations and Financial Condition," the unaudited
interim consolidated financial statements and the respective notes thereto, the
audited consolidated financial statements of the Company and Old CCI and the
respective notes thereto and the Unaudited Pro Forma Financial Information, each
included elsewhere herein.
<TABLE>
<CAPTION>
OLD CCI CCI CCI CCI
----------------------------------------- ------------- ---------- ----------
TEN MONTHS SIX MONTHS SIX MONTHS
YEAR ENDED NOVEMBER 30, ENDED ENDED ENDED
----------------------------------------- SEPTEMBER 30, MARCH 31, MARCH 31,
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $21,818 $27,508 $29,245 $36,734 $ 140,316 $ 37,258 $104,414
Cost of revenues.................. 10,114 15,356 16,733 21,857 84,464 18,901 66,581
------- ------- ------- ------- ----------- --------- --------
Gross profit...................... 11,704 12,152 12,512 14,877 55,852 18,357 37,833
Sales and marketing............... 1,185 1,773 2,061 2,038 28,161 5,438 23,257
Product development............... 3,559 6,768 7,485 8,347 11,890 4,561 8,073
General and administrative........ 2,702 3,311 2,675 2,992 19,929 3,873 18,183
Write off of purchased in-process
research and development........ -- -- -- -- 23,100 23,100 --
------- ------- ------- ------- ----------- --------- --------
Total operating expenses.......... 7,446 11,852 12,221 13,377 83,080 36,972 49,513
Operating income (loss)........... 4,258 300 291 1,500 (27,228) (18,615) (11,680)
Interest expense.................. -- -- -- -- 8,403 1,355 7,350
Other income (expense), net....... -- -- 414 4,231(1) 443 1,083 254
------- ------- ------- ------- ----------- --------- --------
Income (loss) before income
taxes........................... 4,258 300 705 5,731 (35,188) (18,887) (18,776)
Income tax benefit................ -- -- -- -- 1,001 2,277 5,659
------- ------- ------- ------- ----------- --------- --------
Net income (loss) before
extraordinary charge............ 4,258 300 705 5,731 34,187 (21,164) (13,117)
Extraordinary charge.............. -- -- -- -- -- -- 3,017
------- ------- ------- ------- ----------- --------- --------
Net income (loss)................. $ 4,258 $ 300 $ 705 $ 5,731 $ (34,187) $ (21,164) $(16,134)
======= ======= ======= ======= =========== ========= ========
UNAUDITED PRO FORMA INFORMATION:(2)
Historical income (loss) before
provision for income taxes...... $ 4,258 $ 300 $ 705 $ 5,731 $ (35,188) $ (18,887) N/A
Pro forma income tax (provision)
benefit......................... (1,582) (73) (157) (1,931) 2,392 1,800 N/A
------- ------- ------- ------- ----------- ---------
Pro forma net income (loss)....... $ 2,676 $ 227 $ 548 $ 3,800 $ (32,796) $ (20,687) N/A
======= ======= ======= ======= =========== =========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents......... $ 2,730 $ 2,716 $ 1,415 $ 4,004 $ 1,633 $ 6,335 $ 2
Working capital (deficit)......... 5,447 (1,271) (2,231) (3,490) 603 9,415 12,671
Total assets...................... 10,300 13,807 16,115 18,763 307,940 314,149 312,432
Total debt, including current
maturities...................... -- 4,389(3) 5,089(3) 5,089(3) 144,967(4) 144,629(3) 172,321(4)
Stockholders' equity.............. 8,701 5,124 5,273 5,227 53,699 64,273 37,485
OTHER DATA:
EBITDA(5)......................... N/A N/A $ 6,113 $12,125(1) $ 1,558 $ (10,892) $ 10,542
Adjusted EBITDA(6)................ N/A N/A 6,113 8,774 24,822(7) 12,208 13,559
EBITDA margin(8).................. N/A N/A 20.9% 33.0% 1.1% 29.2% 10.1%
Adjusted EBITDA margin(9)......... N/A N/A 20.9% 23.9% 17.7% 32.8% 13.0%
Capital expenditures(10).......... $ 2,761 $ 6,219 $ 6,527 $ 7,141 $ 15,980 $ 7,243 $ 10,518
Cash flows from (used by)
operating activities............ N/A N/A 4,877 15,251 25,033 25,197 (2,671)
Cash flows from (used by)
investing activities............ N/A N/A (6,322) (6,885) (195,652) (187,197) (20,408)
Cash flows from (used by)
financing activities............ N/A N/A 144 (5,777) 168,248 165,947 21,448
Ratio of earnings to fixed charges
(deficit)(11)................... 15.2x 2.0x 3.1x 17.4x $ (35,188) $ (18,887) $(18,776)
<CAPTION>
CCI PRO FORMA CCI PRO FORMA
------------- -------------
TWELVE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ 213,513 $104,414
Cost of revenues.................. 131,301 66,581
--------- --------
Gross profit...................... 82,212 37,833
Sales and marketing............... 47,383 23,257
Product development............... 17,307 8,073
General and administrative........ 30,783 18,183
Write off of purchased in-process
research and development........ 23,100 --
--------- --------
Total operating expenses.......... 118,573 49,513
Operating income (loss)........... (36,361) (11,680)
Interest expense.................. 14,163 7,557
Other income (expense), net....... 1,485 254
--------- --------
Income (loss) before income
taxes........................... (49,039) (18,983)
Income tax benefit................ 6,263 5,741
--------- --------
Net income (loss) before
extraordinary charge............ (42,776) (13,242)
Extraordinary charge.............. -- 3,017
--------- --------
Net income (loss)................. $ (42,776) $(16,259)
========= ========
UNAUDITED PRO FORMA INFORMATION:(2)
Historical income (loss) before
provision for income taxes...... N/A N/A
Pro forma income tax (provision)
benefit......................... N/A N/A
Pro forma net income (loss)....... N/A N/A
BALANCE SHEET DATA (AT END OF PERIO
Cash and cash equivalents......... $ 2,483 $ 2
Working capital (deficit)......... 7,703 12,671
Total assets...................... 308,354 312,432
Total debt, including current
maturities...................... 150,817(4) 172,321(4)
Stockholders' equity.............. 48,263 37,485
OTHER DATA:
EBITDA(5)......................... $ 10,071 $ 10,542
Adjusted EBITDA(6)................ 33,335 13,559
EBITDA margin(8).................. 4.7% 10.1%
Adjusted EBITDA margin(9)......... 15.6% 13.0%
Capital expenditures(10).......... $ 20,653 $ 10,518
Cash flows from (used by)
operating activities............ 11,948 (2,671)
Cash flows from (used by)
investing activities............ (201,363) (20,408)
Cash flows from (used by)
financing activities............ 183,830 21,448
Ratio of earnings to fixed charges
(deficit)(11)................... $ (49,039) $(18,983)
</TABLE>
- ---------------
(1) Included in other income, net, and excluded from EBITDA 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. See Notes 1 and 7 to the audited
consolidated financial statements of the Company included elsewhere herein.
(5) EBITDA is defined as net income (loss) before interest, income taxes,
depreciation and amortization. The Company has included information
concerning EBITDA because it believes that EBITDA is commonly used by
certain investors and analysts as one measure to analyze and compare
companies on the basis of operating performance and to determine a
company's ability to service and incur debt. EBITDA should not be
considered as an alternative to, or more meaningful than, net income, cash
flows from operating activities or other consolidated income or cash flow
statement data prepared in accordance with generally accepted accounting
principles or as a measure of profitability or liquidity. EBITDA may not be
comparable to similarly titled measures reported by other companies.
(6) Adjusted EBITDA presents EBITDA as defined by the Restated Senior Credit
Facilities and is computed as EBITDA adjusted for extraordinary items and
certain non-cash charges or credits described therein.
(7) Included in operating expenses and excluded from Adjusted EBITDA is $23.1
million of in-process research and development acquired and written off in
connection with the Triad Acquisition.
(8) EBITDA margin is defined as EBITDA divided by revenue expressed as a
percentage.
(9) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by revenues
expressed as a percentage.
(10) Includes investments in property, plant and equipment, expenditures for
service parts and investments in software and databases.
(11) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before the provision for income taxes plus fixed
charges. Fixed charges consist of interest expense, amortization of
financing costs and the portion of rental expense on operating leases which
the Company estimates to be representative of the interest factor
attributable to rental expense. Where earnings were inadequate to cover
fixed charges, the deficiency is shown.
22
<PAGE> 27
SELECTED HISTORICAL FINANCIAL DATA
TRIAD
The following table sets forth selected financial data of Triad for the
years ended September 30, 1993, 1994, 1995 and 1996, and the five months ended
February 27, 1997. The statement of operations and balance sheet data set forth
below are derived from the audited consolidated financial statements of Triad
included elsewhere herein. The selected financial data below should be read in
conjunction with "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and the audited consolidated financial statements of
Triad and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
-------------------------------------------- FEBRUARY 27,
1993 1994 1995 1996 1997
-------- -------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues........................................ $152,818 $167,278 $175,077 $175,676 $ 66,432
Cost of revenues................................ 77,293 84,766 88,509 93,808 38,316
-------- -------- -------- -------- --------
Gross profit.................................... 75,525 82,512 86,568 81,868 28,116
Marketing....................................... 40,149 44,030 46,929 48,688 18,779
Product development............................. 8,118 8,022 8,136 8,414 4,119
General and administrative...................... 11,436 11,099 10,971 10,233 4,792
Restructuring charge............................ -- -- -- 9,000 --
-------- -------- -------- -------- --------
Operating expenses.............................. 59,703 63,151 66,036 76,335 27,690
-------- -------- -------- -------- --------
Operating income................................ 15,822 19,361 20,532 5,533 426
Interest and other expense...................... 7,676 7,459 6,941 5,944 2,405
Other income.................................... -- -- -- 2,926 94
-------- -------- -------- -------- --------
Income (loss) before taxes and extraordinary
item.......................................... 8,146 11,902 13,591 2,515 (1,885)
Income tax (provision) benefit.................. (3,081) (4,523) (5,165) (956) 290
-------- -------- -------- -------- --------
Income (loss) before extraordinary item......... 5,065 7,379 8,426 1,559 (1,595)
Extraordinary item.............................. -- (143) (396) (377) --
-------- -------- -------- -------- --------
Net income (loss)............................... $ 5,065 $ 7,236 $ 8,030 $ 1,182 $ (1,595)
======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit)....................... $ 2,298 $ 84 $ 1,431 $(17,141) $(31,726)
Total assets.................................... 131,379 136,363 132,709 139,753 149,844
Total debt, including current maturities(1)..... 72,352 63,406 55,609 55,913 66,202
Stockholders' equity............................ 3,114 12,141 14,221 16,787 22,688
OTHER DATA:
EBITDA(2)....................................... $ 24,245 $ 27,448 $ 28,929 $ 16,786 $ 4,738
Adjusted EBITDA(3).............................. 24,245 27,448 29,263 26,592(4) 4,738
EBITDA margin(5)................................ 15.9% 16.4% 16.5% 9.6% 7.1%
Adjusted EBITDA margin(6)....................... 15.9% 16.4% 16.7% 15.1% 7.1%
Capital expenditures(7)......................... 3,029 3,416 $ 11,749 $ 12,424 $ 4,673
Cash flows from (used by) operating
activities.................................... 13,185 20,448 30,119 15,444 (18,482)
Cash flows from (used by) investing
activities.................................... (8,104) (12,059) (12,865) (11,699) (4,371)
Cash flows from (used by) financing
activities.................................... (2,313) (8,676) (17,954) (3,356) 18,023
Ratio of earnings to fixed charges(8)........... 1.9x 2.4x 2.5x 1.3x 0.3x
</TABLE>
- ---------------
(1) Total debt does not include obligations of Triad resulting from the sale of
lease receivables.
(2) EBITDA is defined as net income (loss) before interest, income taxes,
depreciation and amortization. The Company has included information
concerning EBITDA because it believes that EBITDA is commonly used by
certain investors and analysts as one measure to analyze and compare
companies on the basis of operating performance and to determine a company's
ability to service and incur debt. EBITDA should not be considered as an
alternative to, or more meaningful than, net income, cash flows from
operating activities or other consolidated income or cash flow statement
data prepared in accordance with generally accepted accounting principles or
as a measure of profitability or liquidity. EBITDA may not be comparable to
similarly titled measures reported by other companies.
(3) Adjusted EBITDA presents EBITDA as defined in the Company's Restated Senior
Credit Facilities and is computed as EBITDA adjusted for extraordinary items
and certain non-cash charges or credits described therein.
(4) Included in operating expenses and excluded from Adjusted EBITDA is a
restructuring charge of $9.0 million recognized in the historical financial
statements of Triad related to the write-off of capitalized software
development costs, provisions for product returns and costs associated with
reductions in aftermarket sales and support personnel.
(5) EBITDA margin is defined as EBITDA divided by revenue expressed as a
percentage.
(6) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by revenue
expressed as a percentage.
(7) Includes investments in property, plant and equipment, expenditures for
service parts and investments in software and databases.
(8) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income before the provision for income taxes plus fixed charges.
Fixed charges consist of interest expense, amortization of financing costs
and the portion of rental expense on operating leases which the Company
estimates to be representative of the interest factor attributable to rental
expense. Where earnings were inadequate to cover fixed charges, the
deficiency is shown.
23
<PAGE> 28
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information of the Company is
based on the audited and unaudited financial statements of the Company, Old CCI
and Triad, included elsewhere herein. The unaudited pro forma adjustments are
based upon available information and certain assumptions that the Company
believes are reasonable. The Unaudited Pro Forma Financial Information and
accompanying notes should be read in conjunction with the historical financial
statements of the Company, Old CCI, Triad and the respective notes thereto and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" appearing elsewhere herein.
The Unaudited Pro Forma Statements of Operations for the twelve months
ended September 30, 1997 and for the six months ended March 31, 1998 have been
prepared to give effect to both, the Transaction and the Triad Acquisition as
though they had occurred at the beginning of the fiscal year ended September 30,
1997. The Unaudited Pro Forma Statement of Operations for the twelve months
ended September 30, 1997 combines the historical consolidated statement of
operations of CCI for the ten months ended September 30, 1997, the historical
consolidated statement of operations of Triad for the five months prior to its
acquisition on February 27, 1997 and the unaudited historical consolidated
statement of operations of Old CCI for the two months ended November 30, 1996.
The Triad Acquisition is accounted for under the purchase method of accounting.
The aggregate purchase price for the Triad Acquisition has been allocated to the
tangible and identifiable intangible assets of the acquired business based upon
an independent appraisal of their fair value.
The Unaudited Pro Forma Financial Information does not purport to be
indicative of the results that would have been obtained had such transactions
been completed as of the assumed dates and for the periods presented or that may
be obtained in the future. Among the reasons for such possible differences are
factors resulting from the fact that prior to the Triad Acquisition Old CCI and
Triad were not operating under the same management, they did not have the same
or overlapping sales forces and products, nor did they have the same cost
structures. As a result, their revenues, expenses and costs of debt and equity
capital would have been different if such businesses had been operating as one
entity. Such Unaudited Pro Forma Financial Information is included herein for
informational purposes, and while management believes that it may be helpful in
understanding the combined operations of the Company for the periods indicated,
undue reliance should not be placed thereon.
24
<PAGE> 29
COOPERATIVE COMPUTING, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
TRIAD CCI
CCI FIVE TWO
TEN MONTHS MONTHS MONTHS CCI PRO FORMA
ENDED ENDED ENDED TWELVE MONTHS
SEPTEMBER 30, FEBRUARY 27, NOVEMBER 30, PRO FORMA ENDED
1997 1997 1996 ADJUSTMENTS SEPTEMBER 30, 1997
------------- ------------ ------------ ----------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................. $140,316 $66,432 $6,765 $ -- $213,513
Cost of revenues......... 84,464 38,316 2,512 6,009(1) 131,301
-------- ------- ------ -------- --------
Gross profit............. 55,852 28,116 4,253 (6,009) 82,212
Operating expenses....... 83,080 27,690 2,489 5,314(1) 118,573
-------- ------- ------ -------- --------
Operating income (loss).. (27,228) 426 1,764 (11,323) (36,361)
Interest expense......... 8,403 2,405 -- 3,507(2) 14,315
Other expenses
(income)............... (443) (94) (948) -- (1,485)
-------- ------- ------ -------- --------
Income (loss) before
income taxes........... (35,188) (1,885) 2,712 (14,830) (49,191)
Income tax benefit....... 1,001 290 -- 5,032(3) 6,323
-------- ------- ------ -------- --------
Net income (loss)........ $(34,187) $(1,595) $2,712 $ (9,798) $(42,868)
======== ======= ====== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Statements of Operations.
25
<PAGE> 30
COOPERATIVE COMPUTING, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
CCI PRO
CCI FORMA
SIX MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, PRO FORMA MARCH 31
1998 ADJUSTMENTS 1998
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................... $104,414 $ -- $104,414
Cost of revenues....................................... 66,581 -- 66,581
-------- ----- --------
Gross profit........................................... 37,833 -- 37,833
Operating expenses..................................... 49,513 -- 49,513
-------- ----- --------
Operating loss......................................... (11,680) -- (11,680)
Interest expense....................................... 7,350 207(2) 7,557
Other expenses (income)................................ (254) -- (254)
-------- ----- --------
Loss before income taxes............................... (18,776) (207) (18,983)
Income tax benefit..................................... 5,659 82(3) 5,741
-------- ----- --------
Net loss before extraordinary charge................... (13,117) (125) (13,242)
Extraordinary charge................................... 3,017 -- 3,017
-------- ----- --------
Net loss............................................... $(16,134) $(125) $(16,259)
======== ===== ========
</TABLE>
See Notes to Unaudited Pro Forma Statements of Operations.
26
<PAGE> 31
COOPERATIVE COMPUTING, INC.
NOTES TO UNAUDITED PRO FORMA
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
The accompanying Unaudited Pro Forma Statements of Operations for the year
ended September 30, 1997 and for the six months ended March 31, 1998 reflect the
pro forma adjustments described below as if the Transaction and the Triad
Acquisition occurred at the beginning of the fiscal year ended September 30,
1997. The statements reflect the following adjustments:
(1) Represents certain pro forma adjustments for the fiscal year ended September
30, 1997 to amortization and operating expenses in connection with the Triad
Acquisition. The purchase price of the Triad Acquisition has been allocated
based on an independent appraisal. The amortization expense of intangible
assets acquired, net of the elimination of amortization expense on
historical intangible assets, is as follows:
<TABLE>
<S> <C>
Amortization expense of intangible assets
acquired......................................... $32,751
Elimination of historical amortization expense.... (21,428)
-------
Total adjustment to depreciation and
amortization........................... $11,323
=======
</TABLE>
The net effect on cost of revenues and operating expenses is presented on
the Unaudited Pro Forma Statements of Operations as follows:
<TABLE>
<S> <C>
Increase to cost of revenues...................... $ 6,009
Increase to operating expenses.................... 5,314
-------
Total increase to cost of revenues and
operating expenses..................... $11,323
=======
</TABLE>
The intangible assets acquired in connection with the Triad Acquisition are
noted below:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
(YEARS)
------------
<S> <C> <C>
Capitalized software.............................. $ 38,700 3
Databases......................................... 15,900 3
Goodwill.......................................... 132,093 15
Trademarks and tradenames......................... 22,100 15
Assembled work force.............................. 11,700 5
Favorable lease................................... 3,864 2
--------
Total intangible assets................. $224,357
========
</TABLE>
(2) Represents the (i) interest expense on the Notes at 9.0% per annum, (ii)
interest expense on the Restated Senior Credit Facilities at 8.5% per annum,
(iii) amortization expense of deferred financing fees related to the
Transaction and (iv) interest expense eliminated from the
27
<PAGE> 32
COOPERATIVE COMPUTING, INC.
NOTES TO UNAUDITED PRO FORMA
STATEMENTS OF OPERATIONS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
repayment of the Old Senior Credit Facilities with proceeds from the
Transaction and elimination of the related amortization of deferred
financing costs, as follows:
<TABLE>
<CAPTION>
TWELVE SIX
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, MARCH 31,
1997 1998
------------- ------------
<S> <C> <C>
Interest expense on the Notes and Restated
Senior Credit Facilities................... $ 13,250 $ 6,625
Amortization expense of deferred financing
fees related to the Transaction............ 768 380
Elimination of historical interest expense on
the Old Senior Credit Facilities and
related amortization of deferred financing
costs...................................... (10,511) (6,798)
-------- -------
Total adjustment to interest
expense.......................... $ 3,507 $ 207
======== =======
</TABLE>
(3) Represents the (i) elimination of a nonrecurring charge for termination of
Subchapter S status, (ii) provision for taxes on CCI income for the periods
in which CCI was a Subchapter S corporation as if CCI had been subject to
corporate income tax for these periods and (iii) tax effect of pro forma
adjustments (at an assumed effective tax rate of 39.5%), excluding the
amortization of goodwill which is not deductible for tax purposes, as
follows:
<TABLE>
<CAPTION>
TWELVE SIX
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, MARCH 31,
1997 1998
------------- ------------
<S> <C> <C>
Elimination of the nonrecurring charge for
termination of Subchapter S status......... $ 2,382 $--
Provision for taxes on Subchapter S status
periods.................................... (2,020) --
Tax effect of pro forma adjustments.......... 4,670 82
------- ---
Total adjustment to income tax
benefit.......................... $ 5,032 $82
======= ===
</TABLE>
28
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion of the results of operations and financial
condition of the Company, Old CCI and Triad should be read in conjunction with
the audited historical consolidated financial statements and notes thereto of
each, 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 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. See Note 1 to the Unaudited Pro Forma Statements of Operations. As
a result of the significant impact on operations of the Triad 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 the six months ended March 31, 1998 are not directly
comparable to corresponding prior periods.
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 the 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 line of credit. In addition, 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, which are immaterial from the ARISB Acquisition are
included from the date of the acquisition.
As a result of the significant impact on operations of the Triad
Acquisition and the ARISB Acquisition, the Refinancing 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 the
six months ended March 31, 1998 are not directly comparable to corresponding
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 55% of total revenues in fiscal 1997 on a pro forma
basis. The Company's pro forma revenues and Adjusted EBITDA for the twelve
months ended September 30, 1997 were $213.5 million and $33.3 million,
respectively.
See Notes 1 and 7 to the Notes to the audited consolidated financial
statements of the Company included elsewhere herein for a description of certain
accounting policies of the Company, including its investments in, and sales of,
leases and the capitalization of certain computer software and database costs.
29
<PAGE> 34
HISTORICAL RESULTS OF OPERATIONS -- CCI AND OLD CCI
Six Months Ended March 31, 1998 Compared to Six Months Ended March 31, 1997
Revenues for the six months ended March 31, 1998 were $104.4 million, $67.2
million greater than the six month period ended March 31, 1997. The majority of
this increase was due to the effects of the Triad Acquisition. Triad had total
revenues of $66.4 million for the five month period prior to the Triad
Acquisition. Systems revenues for the six months ended March 31, 1998, were
$34.5 million, $16.9 million greater than the six month period ended March 31,
1997. The majority of this increase was due to the effects of the Triad
Acquisition, which had system revenues of $21.1 million during the five months
prior to the acquisition. The Company experienced a decline in automotive
systems revenues (computed on a pro forma combined basis) due to factors arising
from the Company's change in fiscal years and lower head count in the sales
organization. The Company closed a substantial amount of automotive warehouse
systems sales in October and November 1996 during a year-end push in what
historically was the Company's fiscal fourth quarter which, during 1996, also
followed the completion of negotiations on the Triad Acquisition. Due to the
change in fiscal years, these fourth quarter systems sales are now in the first
quarter of 1997 and the corresponding year-end push took place in August and
September 1997. The decline in systems revenue was offset by increases in
customer support services and information services revenue, both due to growth
in the automotive and hardlines installed base of customers.
Cost of revenues increased $47.7 million from $18.9 million in the six
month period ended March 31, 1997 to $66.6 million in the six month period ended
March 31, 1998. The majority of this increase was due to the Triad Acquisition.
Triad had cost of revenues of $38.3 million for the five month period prior to
the Triad Acquisition. Additionally, cost of revenues for the period ending
March 31, 1998 increased $6.3 million due to the amortization of certain
intangible assets acquired in the Triad Acquisition and revalued through
purchase accounting adjustments. See Note 1 to Unaudited Pro Forma Statements of
Operations. In addition to increases related to the Triad Acquisition, the
Company experienced an increase in cost of revenues as a percentage of revenue
for automotive systems due to product mix. During the six month period ended
March 31, 1997, the Company sold an unusually high amount of automotive
warehouse systems which carry a higher margin than other system products.
Customer support services cost of revenues increased due to increases in the
customer base, increased headcount in the hardlines customer support area, and
the under-utilization of implementation and installation resources due to the
low systems sales during the six month period. Cost of revenues from information
services increased due to the increases in the customer base and increased
amortization of information service products.
Operating expenses for the six month period ended March 31, 1998 were $49.5
million, a $12.5 million increase over the period ended March 31, 1997.
Operating expenses for the six months ended March 31, 1997 include a $23.1
million write-off of developed software acquired during the Triad Acquisition.
Excluding the write-off, operating expenses increased by $35.6 million, the
majority of which was due to the Triad Acquisition. Triad had operating expenses
of $27.7 million for the five month period prior to the Triad Acquisition.
Purchase accounting for the Triad Acquisition established or increased the
valuation of certain intangible assets which increased the depreciation expense
in general and administrative expenses by approximately $5.5 million. See Note 1
to the Unaudited Pro Forma Statements of Operations. Additionally, the annual
rent expense of approximately $2.5 million on the Livermore, California facility
acquired in the Triad Acquisition and annual wage increases have contributed to
an increase in operating expenses.
The Company's operating loss for the six month period ended March 31, 1998
was $11.7 million, compared to an operating loss of $18.6 million during the six
month period ended March 31, 1997.
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Net interest expense and other income for the six month period ended March
31, 1998 was $7.1 million, an increase of $6.8 million from net interest expense
and other income of $0.3 million over the period ended March 31, 1997. This
increase was the result of interest expense on the debt incurred as a result of
the Triad Acquisition.
The Company recorded an income tax benefit for the six months ended March
31, 1998 at an effective rate of 30% for a benefit of $5.7 million. The
effective rate used to record the income tax benefit in the six month period
ended March 31, 1998 is based on the Company's anticipated results for the year
and differs from the pro forma effective rate for the ten month period ended
September 30, 1997 of 7% due primarily to the impact of the write-off of
in-process research and development associated with the Triad Acquisition.
Additionally, the Company's effective rate for the six month period ended March
31, 1998 differs from the amount computed by applying the statutory rate to
income (loss) before taxes primarily because of permanent differences, state
taxes and research and development tax credits. The income tax provision of $2.3
million for the six months ending March 31, 1997 represents the income tax
liability for one month of operations and the liability associated with the
Company's decision to terminate the S Corporation status. Additionally, the
income tax liability for the period ending March 31, 1997 was impacted by the
$23.1 million write-off of in-process research and development associated with
the Triad Acquisition. See also Note 3 to the Company's unaudited financial
statements for the period ending March 31, 1998.
On February 10, 1998, the Company consummated the Refinancing. This
generated an extraordinary charge of $3.0 million, net of tax of $2.0 million,
due to the write-off of debt issuance costs associated with the Old Senior
Credit Facilities.
As a result of the above factors, the Company experienced a net loss of
$16.1 million in the six month period ended March 31, 1998 compared to a net
loss of $21.2 million for the six month period ended March 31, 1997. Triad had a
net loss of $1.6 million for the five months ended February 27, 1997. Excluding
the $23.1 million write-off in the six months ended March 31, 1997, the
extraordinary charge of $3.0 million in the six months ended March 31, 1998, and
the incremental amortization expense which resulted when intangible assets
acquired with Triad were revalued through purchase accounting, the Company would
have experienced a net loss of $3.6 million for the six months ended March 31,
1998 compared to net income of $3.7 million for the six months ended March 31,
1997.
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
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Acquisition. Operating expenses excluding the Triad Acquisition decreased $0.5
million to $12.9 million primarily due to the shorter period.
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 concurrent with the Triad Acquisition.
Year Ended November 30, 1996 Compared to Year Ended November 30, 1995
Revenues for the year ended November 30, 1996 were $36.7 million compared
to $29.2 million for the year ended November 30, 1995, an increase of $7.5
million or 26%. Approximately 15% of the increase was due to system sales to new
customers and the sale of system upgrades to the Company's installed base. The
remaining 11% of the increase primarily resulted from customer support and
information services provided to the incremental automotive systems customers.
Cost of revenues for the year ended November 30, 1996 was $21.9 million (or
60% of revenues) compared to $16.7 million (or 57% of revenues) for the year
ended November 30, 1995. The increase in cost of revenues as a percentage of
revenues is attributable to an increase in the amortization of capitalized
software development costs related to Old CCI's information service products.
Operating expenses for the year ended November 30, 1996 were $13.4 million
(or 36% of revenues) compared to $12.2 million (or 42% of revenues) for the year
ended November 30, 1995, an increase of $1.2 million or 10%. Operating expenses
as a percentage of revenues improved 5.4% as Old CCI managed to maintain sales
and marketing and general and administrative expenses at a relatively constant
level, while revenues increased.
Other income for the year ended November 30, 1996 increased to $4.2 million
from $0.4 million for the year ended November 30, 1995 or $3.8 million due
primarily to the favorable settlement of two breach of contract lawsuits in
1996.
Based on the items discussed above, net income for the year ended 1996
increased to $5.7 million from $0.7 million for the year ended 1995.
HISTORICAL RESULTS OF OPERATIONS -- TRIAD
References herein to years refer to the fiscal years ended September 30,
1996 and 1995 of Triad.
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Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
Revenues for fiscal 1996 of $175.7 million increased slightly over 1995
revenues of $175.1 million. Gross profit of $81.9 million declined 5% or $4.7
million from 1995.
A restructuring charge of $9.0 million, related to an automotive product
issue and realignment of automotive aftermarket operations, was included in the
1996 operating profit of $5.5 million compared to operating income of $20.5
million in 1995.
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.
Net income was $1.2 million in 1996 compared with $8.0 million in 1995. Net
income in 1996 reflected the $9.0 million restructuring charge, proceeds from
the sale of Triad's investment in AllData Corporation of $1.8 million, the sale
of four parcels of land in Triad Park for $1.1 million and a net charge of $0.4
million after taxes related to the refinancing of debt. Net income in 1995 also
reflected a net charge of $0.4 million after taxes, also related to the early
retirement of debt.
Automotive Aftermarket Revenues
Revenues are primarily derived from the sale and financing of systems and
information and support services related to automotive aftermarket systems.
Automotive aftermarket revenues of $101.2 million were 10% below 1995 revenues
of $112.2 million. Systems sales in 1996 decreased 22% to $31.6 million from
$40.7 million in 1995. In 1995, Triad's PSO system sales were affected by the
implementation of a controlled rollout of the second phase of the Triad Prism
product due to certain software-related problems. In the third quarter of 1996,
recognizing slower than anticipated aftermarket acceptance of the Triad Prism
system and its product performance issues, management: (i) reduced and
repositioned the automotive product line to more closely match the configuration
of the aftermarket while decreasing the complexity and costs associated with a
broader product line; (ii) resized the automotive sales force and management
structure to reflect aftermarket changes and current sales; and (iii) initiated
a review of the research and development spending process to ensure that ongoing
spending is a profitable investment for Triad stockholders. As a result, a
restructuring charge of $9.0 million was recorded for the third quarter of 1996.
As part of the restructuring, there was an increased focus on the large account
segment that resulted in record systems revenue of $9.5 million, an increase of
34% from $7.1 million in 1995.
Customer support revenues decreased by $2.5 million to $34.2 million in
1996 from $36.7 million in 1995. The 1996 decline was related to lower than
planned new automotive systems sales and a reduction of the customer base due to
continuing consolidation within the aftermarket.
Information services revenue grew 10% to $29.5 million in 1996. Customers
utilizing Triad's information products increased in 1996 and 1995. Triad Systems
Financial Corporation ("Triad Financial") revenues were $5.9 million in 1996,
down 27% or $2.1 million from 1995. The decline in 1996 was due mainly to a
lower-earning portfolio and lower discounting yields related to rising interest
rates.
Hardlines and Lumber Market Revenues
Revenues in the hardlines and lumber division increased by 24% or $13.5
million to $69.8 million from 1995 to 1996. Contributing to the overall increase
in revenues was Triad's acquisition of Computer System Dynamics, Inc. ("CSD") in
June 1996.
Systems revenues increased $7.2 million to $36.4 million for 1996. Triad
endeavored to become more closely affiliated with major cooperatives and
wholesale distributors and this activity is reflected in the revenue growth from
1995 to 1996.
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Customer support revenues increased 21% to $27.3 million in 1996 and 11% to
$22.6 million in 1995. This growth is a direct result of increases in the
customer base.
Information services revenues increased to $2.3 million in 1996 compared to
$1.3 million in 1995. Triad's VISTA point-of-sale services continue to
contribute to this growth as its customer base expands.
Triad Financial revenues related to hardlines and lumber market products
were fairly consistent from 1995 to 1996.
Gross Margin
Gross margins for the automotive aftermarket division of 46% declined 5%
from 1995. The 1996 decline was due primarily to higher Triad Prism system
returns and the cost of shifting customers to lower margin products. In
addition, a change in the product mix, along with a higher percentage of fixed
costs, contributed to the decrease. Gross margins for the hardlines and lumber
division have remained relatively consistent at 49% in 1996 and 51% in 1995.
Consolidated Expenses and Other Income
Marketing expense of $48.7 million increased slightly as a percentage of
revenue over the prior year due to an increase in lease loss reserves in the
automotive aftermarket division.
Product development expenses, after capitalization of software development,
were $8.4 million in 1996 and $8.1 million in 1995. As a percentage of revenue,
product development expense remained consistent at 5% over the two years.
General, administrative and other operating expenses decreased 6.7% to
$10.2 million in 1996. The 1996 cost reflects reduced litigation expenses,
initiated by Triad to protect its intellectual property rights, along with
containment of operating costs.
The restructuring charge of $9.0 million included a $7.5 million write-off
relating to the Triad Prism system software Triad had previously capitalized,
along with $1.0 million in reserves for related product issues. Also included
was $0.5 million in costs associated with the realignment of aftermarket sales
and support personnel to address increasing aftermarket consolidation.
Interest and other expense decreased by $1.0 million to $5.9 million in
1996. In the fourth quarter of 1995, Triad retired $3.8 million and refinanced
$11.8 million in floating rate notes at a lower interest cost, which is
reflected in the interest decrease in 1996.
Other income of $2.9 million in 1996 consisted of the sale of marketable
securities and land held for resale. Triad realized $1.8 million in income
related to the sale of its investment in AllData Corporation, an automotive
database marketer that was purchased by AutoZone in March 1996. In September
1996, Triad recognized a gain of $1.1 million in the sale of 25 acres of land
held for resale.
In July of 1996, $10.1 million of senior fixed-rate notes were retired
early. This generated an extraordinary charge of $377,000 that included a
premium of $379,000, unamortized debt costs of $229,000, less taxes of $231,000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had $172.3 million of indebtedness
outstanding, an increase of $27.4 million from September 30, 1997. Net cash used
in operating activities was $2.7 million for the six months ended March 31,
1998. For the ten months ended September 30, 1997, net cash provided by
operating activities was $25.0 million. This reduction in cash flow from
operations was due to lower operating income typical of the first fiscal quarter
and an increase in inventory acquired during the Company's consolidation of
manufacturing operations, which was
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completed in January 1998. For the six months ended March 31, 1998, the Company
had capital expenditures of $10.5 million.
On February 10, 1998, the Company refinanced the Old Senior Credit
Facilities through the issuance of the Old Notes and through the proceeds of the
Restated Senior Credit Facilities. In addition, on March 1, 1998, the Company
acquired certain assets of the ADP Claims Solution Group, Inc. for approximately
$9.3 million, including the assumption of certain liabilities, which was funded
through the New Revolving Credit Facility. The Notes require annual interest
payments of $9.0 million, and the Company estimates the Restated Senior Credit
Facilities will require annual interest payments of $6.3 million.
In addition to servicing its debt obligations, the Company requires
substantial liquidity for capital expenditures and working capital needs. For
the six months ended March 31, 1998, the Company's capital expenditures were
$10.5 million which includes $6.3 million for development and maintenance of the
Company's software and information service products. 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 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.
Pursuant to discounting agreements with banks and lending institutions, the
Company is contingently liable for losses in the event of lessee nonpayment up
to stated recourse limits. The Company estimated its exposure under these
recourse provisions to be approximately $8.6 million and has recorded this
amount in its consolidated financial statements for the three months ended March
31, 1998. See "Risk Factors -- Customer Leasing" and Note 7 to the audited
consolidated financial statements of the Company included elsewhere herein.
Pursuant to discounting agreements with banks and lending institutions, Triad
Financial is bound by the following restrictive covenants: (i) Triad Financial
must maintain a Tangible Net Worth (as defined) during the year of at least
$17,500,000; (ii) Triad Financial must maintain a ratio of total consolidated
debt to Tangible Net Worth of no greater than 3 to 1 during the year; and (iii)
the delinquency of the total outstanding lease portfolio cannot exceed 10%. In
the event of non-compliance with these restrictive covenants, 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, 1997, Triad Financial failed to
meet a profitability covenant of these agreements. Such agreements were
subsequently amended to, among other things, eliminate the profitability
covenant. The Company is in compliance with the remaining covenants, and
management believes that it will maintain compliance with such covenants in the
foreseeable future.
The Notes and the Restated Senior Credit Facilities impose certain
restrictions on the Company's ability to incur additional indebtedness. These
restrictions may limit the Company's ability to respond to changes in economic
conditions or unanticipated capital investment requirements. The covenants
contained in the Notes and Restated Senior Credit Facilities also, among other
things, limit the ability of the Company to dispose of assets, repay
indebtedness or amend debt instruments, create liens on assets, enter into sale
and leaseback transactions, make investments, loans or advances and make
acquisitions.
In May 1998, the Company completed an expense alignment project which is
expected to reduce annual operating expenses by approximately $12.0 million.
This adjusted expense run rate took effect June 1, 1998. The Company has accrued
costs of approximately $1 million at May 31, 1998 related to the implementation
of this effort. Capital expenditures for the last six months of 1998 are
expected to be in line with amounts reported for the six months ended March 31,
1998. The Company believes that cash flows from operations in conjunction with
available borrowings under the New Revolving Credit Facility will be sufficient
to fund its working capital and capital expenditure requirements. The New
Revolving Credit Facility allows the Company to borrow up to $50.0 million,
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of which, as of March 31, 1998, $21.7 million has been borrowed thereunder. All
borrowings under the New Revolving Credit Facility mature on March 31, 2003.
Repayment of the Company's $50.0 million New Term Loan Facility begins on March
31, 1999 at an initial amount of $2.0 million per quarter, increasing
periodically to $4.0 million per quarter. All borrowings under the New Term Loan
Facility 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. See "Risk Factors."
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.
Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems, the cost of
which is not expected to be material in relation to the Company's operations.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. However, there can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems. The Company has
determined it has minimal exposure to contingencies related to the Year 2000
Issue for the products it has sold.
The Company plans to utilize internal resources to reprogram or replace and
test the software for Year 2000 modifications. The Company anticipates
completing the Year 2000 project by December 31, 1998, 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, as many of its
internal systems have been recently replaced with an enterprise-wide information
system believed to be Year 2000 ready and the Company's own products are
scheduled to be made ready as part of its ordinary update cycle in a version of
products scheduled for release prior to the year 2000.
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BUSINESS
OVERVIEW
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, lawn and garden and agribusiness. The Company's system
products 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 system offerings are
enhanced by extensive information services featuring highly specialized database
products and by customer support and maintenance services. The revenues
associated with these services are of a recurring nature and represented
approximately 55% of total revenues in fiscal 1997 on a pro forma basis. The
Company's pro forma revenues and Adjusted EBITDA for the twelve months ended
September 30, 1997 were $213.5 million and $33.3 million, respectively.
The Company's products are designed to improve the operating efficiency and
profitability of suppliers and retailers by reducing the time required to fill
customer orders. 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.
Management believes that the Company's extensive databases represent the
most sophisticated and extensive industry-specific management information
systems offerings available to the automotive parts aftermarket industry. 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, 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.
Management believes that it would be extremely difficult and costly for others
to match the quality, size, coverage and frequency of updates of the Company's
databases due to the extensive quantity of data available, the variety of
sources and the frequency with which relevant information changes.
The automotive parts aftermarket industry is estimated to have generated
approximately $196 billion in revenues for goods and services delivered to the
United States motoring public in 1996. Industry revenues are divided between the
sale of auto parts (approximately 51%) and labor (approximately 49%). Management
believes that growth in the automotive parts aftermarket industry will occur due
to several favorable trends, including (i) growth in the aggregate number of
vehicles in use, (ii) an increase in the average age of vehicles in operation
and (iii) growth in the number of total miles driven per vehicle each year.
Management believes that these factors, when combined with competitive pressures
to decrease costs and increase operating efficiencies and the historically low
profit margin nature of the automotive parts aftermarket industry, will increase
demand for the Company's management information systems and solutions.
The hardlines and lumber industry, comprised primarily of hardware
retailers, home centers, lumber and building materials suppliers and
manufacturers, agribusiness retailers, lawn and garden retailers and paint
retailers, generated approximately $142 billion in revenues in 1996. Management
believes that revenue growth in the hardlines and lumber industry will occur due
to several favorable trends, including (i) the expansion of the industry's top
500 retailers, (ii) favorable demographic
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trends, such as an increase in dual income families and (iii) continued
expansion of new home construction and sales and remodeling of existing homes.
COMPETITIVE STRENGTHS
The Company attributes its market leadership and its attractive
opportunities for continued growth and increased profitability to the following
competitive strengths:
- COVERAGE OF ALL LEVELS OF THE AUTOMOTIVE PARTS AFTERMARKET
DISTRIBUTION CHANNEL. The Company has developed products for a substantial
base of customers within each level of the automotive parts aftermarket
industry wholesale distribution channel. The Company's systems are
installed at approximately 400 warehouse distributors (representing
approximately 19% of the estimated warehouse distributors in the United
States) and approximately 12,000 PSOs (representing approximately 22% of
the estimated PSOs in the United States). The Company's customers have
relationships with a substantial portion of the estimated 340,000 service
dealers in the United States, of which management believes less than 20%
currently have management information systems. The Company expects to
capitalize on these relationships to further penetrate the service dealer
level of the wholesale distribution channel. As consumers have come to
expect same day repair service, service dealers are moving towards
computerization to access information concerning availability of parts and
to ensure prompt delivery of specific parts from other distribution
channels. The Company believes that its demonstrated ability to offer
information services and interconnectivity throughout the distribution
channel will enable it to successfully penetrate the service dealer market.
- EXTENSIVE DATABASES. Management believes that the Company maintains
the most extensive databases in the automotive parts aftermarket industry,
which, when used with the Company's systems, are designed to increase
efficiency and accuracy in the selection, pricing and sale of parts. With
over two million different auto parts available to consumers, up to nine
manufacturers for each product line, approximately 100,000 new parts
introduced each year, and over 75,000 parts discontinued each year, the
Company's electronic catalog databases are the most cost effective and
efficient way to access both historical and current parts information. To
duplicate the parts information contained in the Company's databases, a
customer or competitor would require over 1,700 separate parts catalogs and
the ability to periodically update such information. In addition to the
Company's electronic catalogs, the Company provides parts interchange and
parts locator databases which facilitate the identification, location and
selection of automotive parts. The Company also collects product sales
information and sells this information to manufacturers, distributors and
operators in the automotive parts aftermarket and hardlines and lumber
industries. On a pro forma basis, the Company spent approximately $23
million for the year ended September 30, 1997 to develop and maintain its
extensive information products.
- MARKET LEADER IN THE GROWING HARDLINES AND LUMBER INDUSTRY. The
hardlines and lumber industry has been slower to invest in management
information systems than the automotive parts aftermarket industry. Of the
estimated 60,000 stores in this industry that are potential users of a
management information system, management estimates that approximately 40%
are not computerized. The Company has successfully developed a strong
presence in the hardlines and lumber industry and has achieved a compound
annual growth rate of revenue of approximately 13.5% between 1992 and 1997.
The Company intends to capitalize on its existing base of approximately
7,800 customer locations, including its accounts with three major hardlines
cooperatives, Hardware Wholesalers Inc., Ace Hardware and TruServ, and two
major wholesale marketing groups, PRO Group and Distribution America, to
market its products and services to the noncomputerized retail stores.
Currently, the Company commands the leading market share of sales of
management information systems and solutions in the independent hardware
and home center businesses within the hardlines and lumber industry. In
fiscal 1997,
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on a pro forma basis, the hardlines and lumber business represented
approximately 37% of the Company's total revenues.
- SUBSTANTIAL INSTALLED BASE. With over 27,000 customer locations, the
Company has the largest installed base in each of the two industries it
serves. The accuracy and efficiency of the Company's products and services
are integral to its customers' operations. In fact, several major
customers, including General Parts Inc. in the automotive parts aftermarket
industry and TruServ in the hardlines and lumber industry, have chosen to
outsource portions of their management information systems needs to the
Company. Management believes that its strong customer relationships,
together with the superior performance of the Company's systems and the
significant risks and costs associated with changing to a competitor's
system, provide the Company with a stable customer base and a receptive
market for new product offerings.
- STRONG BASE OF RECURRING REVENUES. Approximately 55% of the
Company's revenues are generated from periodic updates to database
information and software support and maintenance services. These revenues
and the associated profit margins have historically exhibited consistency
and are expected to continue to increase as the Company's installed base
grows. For example, in the automotive parts aftermarket industry, due to
the large number of parts introduced each year and the frequency of catalog
and price list changes, customers rely upon the Company's periodic
information updates. Due to minimal costs associated with adding customers,
incremental recurring revenue typically generates margins that are higher
than those associated with the Company's other sources of revenues.
- BREADTH OF PRODUCT OFFERINGS. Management believes that the Company
possesses the broadest selection of management information systems and
solutions offered in the industries it serves. In the automotive parts
aftermarket industry, the Company currently markets three warehouse
distributor systems, three PSO systems and six service dealer systems, each
targeting a specific level of the distribution channel. The Company's
service dealer solutions, which are integrated with the Company's parts and
repair databases and can be connected to the Company's extensive network of
warehouse distributor and PSO systems, position the Company to capture a
significant share of the emerging service dealer market. In the hardlines
and lumber industry, the Company offers specialized point-of-sale systems
through four product lines, which are marketed to (i) hardware stores and
smaller lumber and building materials dealers, many of which are presently
not computerized, (ii) larger lumber and building materials dealers
currently using outdated systems and (iii) agribusiness retailers. With
custom configuration capability within each system, the Company can target
the appropriate solution to the needs of each customer.
BUSINESS STRATEGY
The Company's ongoing business strategy focuses on strengthening its
leadership position in the automotive parts aftermarket and hardlines and lumber
industries. The Company has retained existing customers and developed new
customers by continually offering system enhancements, new product offerings,
and the most comprehensive and sophisticated information tools available in the
marketplace. The Company capitalizes on its relationships with its customer
base, allowing it to adapt to changes within the industries it serves, provide
both quality and value in its products and integrate enabling technologies. In
addition to this core strategy, the Company is pursuing the following key
initiatives:
- INCREASE PENETRATION OF AUTOMOTIVE SERVICE DEALER MARKET. The
automotive service dealer market, with approximately 340,000 dealers,
offers significant growth opportunities for the Company. This segment has
recently begun to recognize the operating efficiencies computerization
offers primarily due to the following factors: (i) service dealers'
increased focus on operating efficiencies and profitability, (ii) parts
suppliers' recognition of the importance of fully integrated parts
distribution and willingness to partially fund service dealers'
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investment in computerization, (iii) consumer expectations for a more
professional and efficient repair experience and (iv) service dealers'
desire to automate the estimate and repair process. Management believes
that the Company's service dealer product offerings are the most
comprehensive in the industry. With integrated parts, labor and repair
databases, and the ability to connect to approximately 12,000 PSOs,
management believes that the Company's service dealer systems are uniquely
positioned to meet the needs of the professional service dealer. The
Company has dedicated over 60 sales and marketing professionals to further
penetrate the service dealer market.
- EXPAND HARDLINES REVENUE BASE. The Company intends to continue to
aggressively expand its hardlines and lumber business by focusing on larger
retailers, many of which are outsourcing their point-of-sale systems and
upgrading their existing systems, as well as smaller retailers, many of
which are not computerized. The Company has a strong presence in the
hardlines and lumber industry, with its customer base of over 5,700
accounts with over 7,800 store locations, including members of three major
hardlines cooperatives, Hardware Wholesalers Inc., Ace Hardware and
TruServ, and has exclusive endorsements from two major wholesale marketing
groups, PRO Group and Distribution America. These relationships position
the Company to pursue market share growth within the noncomputerized retail
stores that represent approximately 40% of the estimated 60,000 hardlines
and lumber stores in the United States. The Company also intends to
increase its customer support and maintenance services revenues by offering
a wider range of products and services to its installed base of customers.
- CAPITALIZE ON SYNERGIES TO ENHANCE OPERATING EFFICIENCIES. Following
the Triad Acquisition, the Company has focused on four major sources of
synergies. First, the Company benefits from a well-balanced corporate
platform with Old CCI's strength in research and development and Triad's
strength in sales and marketing. Second, the Company strengthened its
presence in the wholesale and retail distribution channels of the
automotive parts aftermarket industry. Old CCI's established relationships
with national warehouse distributors and those PSOs in their distribution
channel, together with Triad's strength in the independent warehouse
distributors and independent PSOs, created an enhanced market position
thereby strengthening the Company's ability to further penetrate the
service dealer market. Third, the integration of Old CCI's well developed
systems with Triad's extensive information services creates the opportunity
for improved product offerings. Lastly, since the Triad Acquisition,
management estimates that the Company has achieved annualized cost savings
of approximately $4.6 million, principally from the elimination of
redundant personnel and expenses, such as data entry, manufacturing, sales
and marketing and general and administrative overhead, and will generate
additional cost savings of approximately $1.8 million over the next year.
- PURSUE SELECTIVE STRATEGIC ACQUISITION AND ALLIANCE
OPPORTUNITIES. The Company continuously evaluates opportunities to make
acquisitions and establish strategic alliances which complement and expand
its customer base and technology and database content to better serve the
automotive parts aftermarket and hardlines and lumber industries. See
"Prospectus Summary -- Recent and Pending Transactions."
INDUSTRY OVERVIEW
Automotive Parts Aftermarket Industry
The automotive parts aftermarket industry is estimated to have generated
approximately $196 billion in revenues for goods and services delivered to the
United States motoring public in 1996. Industry revenues are divided between the
sale of auto parts (approximately 51%) and labor (approximately 49%). Management
believes that growth in the automotive parts aftermarket industry will continue
to be driven by several favorable trends, including (i) growth in the aggregate
number of vehicles in use, (ii) an increase in the average age of vehicles in
operation and (iii) growth in the number of total miles driven per vehicle each
year. Management believes that
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these factors, when combined with competitive pressures to decrease costs and
increase operating efficiencies and the historically low profit margin nature of
the automotive parts aftermarket industry, will increase demand for the
Company's management information systems and solutions.
The total number of vehicles in use in the United States between 1987 and
1997 increased at a compound annual growth rate of 1.9%, from 169.3 million to
203.9 million. The average age of passenger cars and light trucks on the road in
1994 was 9.0 years and 8.8 years, respectively, up from 7.5 years for cars and
8.0 years for trucks in 1987. Of the entire population of registered vehicles in
the United States today, 72.0% are five years or older. Older vehicles are
generally serviced by independent service dealers while younger vehicles are
generally serviced by new car dealerships. Over the last ten years, the total
number of miles driven on United States roads has increased at an annualized
rate of approximately 2.9% due to an average increased usage of each vehicle and
an increase in the number of vehicles in operation.
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. Management estimates that on average, each warehouse distributor and
PSO carries 110,000 and 18,000 parts in inventory, respectively. 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.
The traditional distribution levels for the wholesale, retail and new car
manufacturer channels of the automotive parts aftermarket industry (and the
number of providers within each level in the United States) are as follows:
[FLOWCHART]
- Wholesale Channel. The wholesale channel is the predominant distribution
channel in the automotive parts aftermarket industry, generating approximately
$55.1 billion in parts and accessories revenue in 1996. Warehouse distributors
sell to service dealers through PSOs. PSOs, which are
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smaller than warehouse distributors and positioned geographically near the
service dealers it serves, are utilized due to the time-critical nature of the
repair business and the inability of the service dealer to afford 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.
- Retail Channel. Management estimates that the retail channel generated
approximately $15.1 billion in automotive parts aftermarket industry revenue in
1996. 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.
- New Car Manufacturer Channel. Management estimates the new car
manufacturer channel generated approximately $22.9 billion in automotive parts
aftermarket industry revenue in 1996. 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 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.
Drivers of Computerization. There are a variety of factors that drive the
need for computerization within the automotive parts aftermarket industry.
First, participants in the automotive parts aftermarket industry are required to
manage large quantities of data. There are on average nine manufacturers for
every type of auto part, over two million different parts available to
consumers, approximately 100,000 new parts introduced each year, and over 75,000
parts discontinued each year. The number of parts in the automotive parts
aftermarket industry rose by 21% between 1985 and 1990, and by an additional 30%
during the succeeding five years. Additionally, it is projected that by the year
2000 the number of available parts will increase by 35%. As a result, most
automotive parts aftermarket participants require a comprehensive inventory
management system to track this proliferation of new parts. Moreover,
manufacturers update catalogs and part prices frequently and service dealers
return many of the parts ordered, furthering the need for strong inventory
management.
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Second, distributors generally sell large volumes of products which have
thin margins due to the competitive and commodity nature of the business. As a
result, optimizing inventory management can translate into significant cost
savings. This need to decrease costs is particularly important at the PSO level,
where there is increased competition between the traditional wholesale and
retail channels to sell to the service dealer market.
Third, consumer demand for same day repair service and the service dealers'
incentive to turn repair bays encourage service dealers to require delivery of
specific parts from PSOs usually within 30 minutes or less. Therefore, the
ability of a warehouse distributor or PSO to access information about parts
availability and promptly supply the required product is critical to its success
as the preferred provider to the service dealers it serves. As a result, nearly
all warehouse distributors and PSOs are computerized to compete in the industry.
However, there is still a significant need for computerization at the service
dealer level, which has remained a largely unpenetrated market to date. The
integration of service dealers into the overall distribution channel is
necessary to ensure a smooth, continuous flow of parts and repair information
which will enable the wholesale distribution channel to remain competitive.
Hardlines and Lumber Industry
The hardlines and lumber industry, comprised primarily of hardware
retailers, home centers, lumber and building materials suppliers and
manufacturers, agribusiness retailers, lawn and garden retailers and paint
retailers, generated approximately $142 billion in revenues in 1996. Management
believes that revenue growth in the hardlines and lumber industry will continue
to be driven by several favorable trends, including (i) the expansion of the
industry's top 500 retailers, (ii) favorable demographic trends, such as an
increase in dual income families and (iii) continued expansion of new home
construction and sales and remodeling of existing homes.
- Top 10 Market. The ten largest retailers in the hardlines and lumber
industry (the "Top 10") represent approximately 2,300 stores and accounted for
approximately $44 billion of sales in 1996. 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 have generally 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.
- Top 500 Market. The 500 largest retailers in the hardlines and lumber
industry, excluding the Top 10 (the "Top 500"), generated $28 billion of sales
in 1996. There are approximately 4,300 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.
- 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 approximately $70 billion in sales in 1996.
This market is extremely fragmented and has experienced limited consolidation.
The Company believes that approximately 42% of this market is affiliated with
cooperatives which encourage its members to install computerized point-of-sale
systems to more effectively compete with the rest of the industry. The Company
believes this segment will continue to
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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
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 to reduce costs and improve service in order to maintain
their market positions. As a result, management believes that the Top 500 and
Top 500+ will become more computerized in order to effectively compete with the
Top 10.
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 (21% of 1997 Pro Forma 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:
- 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.
- 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 Eclipse product offers
the additional flexibility needed for these customers.
- Parts Sales Outlet. The Company currently markets three products to
PSOs: J-CON, Eclipse and Prism. These solutions all operate on platforms
that are assembled and integrated by
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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.
- Service Dealer. The Company has a number of products that it markets to
service dealers, including ServiceExpert EZ, ServiceExpert On-Line,
Triad Service Writer, PACE, Telepart and Service Cat, 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.
Hardlines and Lumber Systems (17% of 1997 Pro Forma Revenues)
The Company offers systems to a diverse group of approximately 60,000
retail stores in the hardlines and lumber industries, with annual revenues
ranging from approximately $0.5 million to approximately $1.0 billion. As of
September 30, 1997, the Company serviced approximately 5,700 hardlines and
lumber customers with over 7,800 store locations.
Within the hardlines and lumber industry, there is a lower level of
computerization compared to the automotive parts aftermarket industry. The
Company believes that independent hardlines and lumber retailers are
increasingly recognizing the advantages of computerization as they face
increased competition. Hardlines and lumber trade journals have strongly favored
computerization, and major hardlines wholesalers and cooperatives strongly
endorse computerization to their member dealers. Five of the seven leading
lumber and building materials groups and approximately 50% of the top 60
hardware distributors endorse the Company's products and services. In addition,
the Company has developed and currently maintains strong relationships with
three of the major hardlines cooperatives, Hardware Wholesalers Inc., Ace
Hardware and TruServ, and two of the major wholesale marketing groups, PRO Group
and Distribution America.
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:
- 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.
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- 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. Existing Triad Eagle customers are able to upgrade to a
Triad CSD system and utilize its newly incorporated technological
advancements. Triad CSD allows for product offerings suitable for
hardlines and building materials chains with up to 20 stores and $150
million in annual sales.
- 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 unparalleled flexibility in
tailoring the system to meet the needs required of individuals, groups,
departments and single or multiple store locations.
- LaserStation. The Company's LaserStation 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 (38% of 1997 Pro Forma 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.
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 (20% of 1997 Pro Forma 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 large, sophisticated 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.
- 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 productiv-
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ity 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, 1997, approximately
10,000 customers had licensed the Company's electronic catalog. Customers
are provided updates to the Company's electronic catalog monthly.
- 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.
- 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. LaborGuide had more than 2,700 subscribers at
September 30, 1997. Customers are provided updates to the Company's
Telepricing service daily and weekly.
- 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 and had more than 3,000 subscribers at September 30, 1997.
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.
- 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.
- 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,
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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 (4% of 1997 Pro Forma 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 noncancellable with
terms from one to six years. At March 31, 1998, Triad Financial had a portfolio
of outstanding leases to over 6,700 customers with a balance of approximately
$181 million.
Periodically, lease receivables are sold pursuant to discounting agreements
with banks and lending institutions under which available lines were
approximately $65.6 million at March 31, 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 period ended
September 30, 1997, Triad Financial failed to meet a profitability covenant of
these agreements. Such agreements were subsequently amended to, among other
provisions, eliminate the profitability covenant. The Company is in compliance
with the remaining 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 March
31, 1998, the Company had an immaterial amount of lease receivables discounted
that are subject to full recourse.
At March 31, 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 of 109 employees and
a telesales/telemarketing organization of 28 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.
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Similarly, the Company markets its products and services to the hardlines
and lumber industry through a geographically-based direct sales force of 107
employees and 37 telesales/telemarketing employees. As in the automotive parts
sales organization, incentive pay is a significant portion of the total
compensation package for all sales personnel.
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.
Distribution America and twenty of its twenty-eight member distributors
also endorse the Company's products. Additionally, PRO Group exclusively
endorses the Company's Eagle systems solutions to its 84 member distributors.
All six of the lumber-only cooperatives and buying groups endorse the Company.
Several of the paint and paint sundry marketing groups including Mid-South, All
Pro and Five Star endorse the Company's products. Benjamin Moore & Company, a
paint manufacturer, entered into a strategic partnership to exclusively endorse
the Company as its system provider for dealer point-of-sale store management
systems in May 1995.
SYSTEM INTEGRATION AND ASSEMBLY
The Company does not manufacture any of the hardware components of its
systems; but does assemble and integrate its products with hardware components
and software products of third party vendors. As of September 30, 1997, the
Company employed 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 179 copyrights and approximately 121
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 1997. 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.
49
<PAGE> 54
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.
Listed below are the principal properties operated by the Company as of
March 31, 1998.
<TABLE>
<CAPTION>
APPROX.
SIZE
LOCATION (SQ. FT.) DESCRIPTION OF USE LEASE TERMINATION
-------- --------- ------------------ -----------------
<S> <C> <C> <C>
Owned:
Newton, New Jersey................. 28,000 Administrative; software development NA
Leased:
Livermore, California.............. 220,000 Secondary executive offices; software 2002
development; data entry;
administrative
Austin, Texas...................... 50,000 Systems integration and assembly 2001
Austin, Texas...................... 36,000 Principal executive offices; software 2002
development
Longford, Ireland.................. 21,000 Data entry 2027
Austin, Texas...................... 20,000 Secondary executive offices; finance 1999
and accounting
Pleasanton, California............. 20,000 Administrative; sales 1999
Austin, Texas...................... 17,000 Data entry 2000
Denver, Colorado................... 17,400 Administrative; software development 1999
Plymouth, Minnesota................ 13,000 Administrative; sales and customer 1999
support
Austin, Texas...................... 10,000 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. As of March 1998, the Company was in the process of negotiating
a lease for an additional 57,000 square feet of office space. The lease is
expected to have a lease term of seven years, commencing January 1, 1999.
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.
EMPLOYEES
As of September 30, 1997, the Company had approximately 1,900 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.
50
<PAGE> 55
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the respective
directors and executive officers of the Company, Holding and certain
subsidiaries of the Company as of March 31, 1998. All directors hold office
until the next annual meeting of stockholders of the Company, Holding or the
applicable subsidiary of the Company, 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.............. 55 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
Daniel F. Dent................. 50 Vice President of Customer Services of the Company
Charles Fischer................ 40 Vice President of Information Services of the Company
Matthew Hale................... 45 Vice President of Finance and Chief Financial Officer
of Holding and the Company
John Patterson................. 57 Vice President of System Integration and Assembly of
the Company
Phillip L. Waters.............. 51 Vice President of Administration of the Company
</TABLE>
Glenn E. Staats founded Old CCI in 1976 and is the President and Chief
Executive Officer and Director of Holding and the Company. 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.
Preston W. Staats joined the Company in 1977 and serves as Executive Vice
President, Chief Operating Officer and Director of Holding and the Company. 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.
Thomas O. Hicks is a director of Holding and the Company and has held such
positions since February 1997. Mr. Hicks is Chairman of the Board and Chief
Executive Officer of Hicks Muse. From 1984 to May 1989, Mr. Hicks was
Co-Chairman of the Board and Co-Chief Executive Officer of Hicks & Haas
Incorporated, a Dallas-based private investment firm. Mr. Hicks also serves as a
director of Berg Electronics Corp., Chancellor Media Corporation, International
Home Foods, Inc., D.A.C. Vision, Inc., Capstar Broadcasting Partners, Inc., and
Sybron International Corporation.
Jack D. Furst is a director of Holding and the Company and has held such
positions since February 1997. Mr. Furst is a Managing Director and Principal of
Hicks Muse. 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 serves on the board of
directors of Viasystems, Inc., International Wire Holding Company, Hedstrom
Holdings, Inc., and Omni/Specialty Teleconductors.
51
<PAGE> 56
A. Laurence Jones is a director of Holding and the Company and has held
such positions since 1997. 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 a M.B.A. from Boston College.
James R. 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 February 1997. Mr.
Porter also serves as a director of Silicon Valley Bank, FirstWave Technologies,
Inc., Cellular Technical Services and Triad Park, LLC.
Daniel F. Dent serves as Vice President of Customer Services of the Company
and has held such position since September 1997. From 1993 to September 1997,
Mr. Dent served in various positions with the Company.
Charles Fischer is the Vice President of Information Services of the
Company. From December 1992 to February 1997, Mr. Fischer served as Vice
President of Global Sourcing for Federal Mogul Corp., a manufacturer and
distributor of auto parts. Before joining Federal Mogul Corp., Mr. Fischer
served as the Vice President of Purchasing and MIS for Hi/Lo Auto Supply from
1986 to February 1992.
Matthew 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.
John Patterson serves as the Vice President of System Integration and
Assembly of the Company and has held such position since February 1994. From
1978 to June 1993, Mr. Patterson was the Senior Vice President of Worldwide
Engineering and Manufacturing for the Tandy Corporation. Mr. Patterson has a
Ph.D. and M.S. in Electrical Engineering from the University of Texas at Austin.
Phillip L. Waters serves as the Vice President of Administration of the
Company and has held such position since 1990. From 1987 to 1990, Mr. Waters was
employed by Dell Computer Corporation as Director of Human Resources. Mr. Waters
has a Masters Degree from Southwest Texas State University.
COMPENSATION OF DIRECTORS
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 $5.00 per
share.
52
<PAGE> 57
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash and noncash compensation earned by
the Chief Executive Officer of the Company and the four other most highly
compensated executive officers of the Company and Holding, or their
predecessors, during the fiscal years ended September 30, 1997, November 30,
1996 and November 30, 1995. The Chief Executive Officer and such executive
officers are collectively referred to as the "Named Executive Officers." As of
the date hereof, the Company has not granted any stock options or stock
appreciation rights.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
FISCAL -------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) COMPENSATION($)(2)
--------------------------- ------- --------- -------- ------------------
<S> <C> <C> <C> <C>
Glenn E. Staats..................................... 1997 172,820 4,666(3) 5,330,929(4)
President and Chief Executive Officer 1996 199,944 4,750(3) 4,813,974(4)
of Holding and the Company 1995 192,096 3,665(3) 463,283(4)
Preston W. Staats................................... 1997 138,240 4,750(3) 877,697(4)
Executive Vice President and Chief 1996 159,938 4,750(3) 963,026(4)
Operating Officer of Holding and 1995 153,658 3,857(3) 92,678(4)
and the Company
James R. Porter..................................... 1997 250,000 22,805(5) --(6)
Chairman of the Board of Directors of the 1996 298,864 73,819(5) --
Company 1995 300,000 258,274(5)(7) --
Matthew Hale........................................ 1997 129,520 38,562(8) --
Vice President of Finance and Chief 1996 129,604 92,495(8) --
Financial Officer of Holding and the 1995 88,922 -- --
Company
Charles Fischer..................................... 1997 80,537 33,996 --
Vice President of Information Services 1996 -- -- --
of the Company 1995 -- -- --
</TABLE>
- ---------------
(1) Compensation for fiscal 1997 only includes compensation for the ten month
period ended September 30, 1997.
(2) 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.
(3) Represents 401(k) matching contributions.
(4) Represents corporate distributions of Subchapter S Corporation taxable
income received by Messrs. Glenn and Preston Staats.
(5) Includes 401(k) matching contributions of $1,711, $2,850 and $2,984 for
fiscal years 1997, 1996 and 1995, respectively.
(6) Excludes cash consideration received in connection with the Triad
Acquisition for cancellation of options to acquire Triad common stock.
(7) Includes a bonus of $100,074 paid with the exercise of stock options granted
before 1987. The bonuses paid were based on 30% of the excess of $2.50 per
share over the option price per share.
(8) Includes 401(k) matching contribution of $3,562 and $4,725 for fiscal years
1997 and 1996.
53
<PAGE> 58
EMPLOYMENT AGREEMENTS; CHANGE OF CONTROL ARRANGEMENTS
The Stockholders Agreement (as 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation decisions are made by the Board of Directors of the Company.
Messrs. Glenn Staats and Preston Staats and Mr. Porter served both as officers
and directors of the Company during 1997. Messrs. Glenn and Preston Staats are
expected to continue to serve in such capacities in 1998. 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.
54
<PAGE> 59
STOCK OWNERSHIP AND CERTAIN TRANSACTIONS
STOCK OWNERSHIP
All of the issued and outstanding shares of capital stock of the Company
are held by Holding. The following table sets forth as of March 31, 1998,
certain information regarding the beneficial ownership of the voting securities
of Holding by each person who beneficially owns more than 5% 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
SHARES CLASS
---------- ----------
<S> <C> <C>
5% STOCKHOLDERS:
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%
OFFICERS AND DIRECTORS:
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........................................... -- --
Daniel F. Dent............................................ -- --
Charles Fischer........................................... -- --
Matthew Hale.............................................. -- --
John Patterson............................................ -- --
Phillip L. Waters......................................... -- --
All executive officers and directors...................... -- --
as a group (11 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 officers, directors 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.
CERTAIN TRANSACTIONS
The Triad Acquisition
On February 27, 1997, affiliates of Hicks Muse invested $96 million in Old
CCI for 54.5% of Old CCI's capital stock in connection with a tender offer (the
"Tender Offer") by Old CCI and CCI Acquisition Corp., a subsidiary of Old CCI
("Acquisition Co."), for all of the issued and outstanding
55
<PAGE> 60
shares of Triad. On February 27, 1997, Old CCI acquired approximately 98% of the
outstanding shares of Triad in the Tender Offer. Pursuant to a Merger Agreement
dated October 17, 1996, as amended on January 15, 1997 and February 19, 1997,
among Old CCI, Acquisition Co. and Triad, all shares not acquired by Acquisition
Co. in the Tender Offer were acquired on February 27, 1997, pursuant to a merger
of Acquisition Co. with and into Triad, with the surviving entity in the merger
renamed as "Cooperative Computing, Inc."
In connection with the consummation of the Tender Offer, all Triad
shareholders received spun-off shares of an entity formed to hold real estate
and related assets of Triad. Immediately following the merger, Old CCI
contributed all of its operating assets to the Company and changed its name to
"Cooperative Computing Holding Company, Inc."
Monitoring and Oversight Agreement
Holding and the Company have 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 will 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 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 shall
be 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 1997, the Company paid Hicks Muse Partners a
fee of $379,266 for services provided by Hicks Muse Partners under the
Monitoring and Oversight Agreement.
Financial Advisory Agreement
In connection with the investment by affiliates of Hicks Muse in Holding,
Holding and the Company entered into a ten-year agreement (the "Financial
Advisory Agreement") pursuant to which Hicks Muse Partners received a financial
advisory fee of $4.9 million as compensation for its services as financial
advisor to the Company. Hicks Muse Partners also is entitled to receive 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
56
<PAGE> 61
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 which 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 1997, in connection with the Triad Acquisition the Company
paid Hicks Muse Partners a fee of $4.9 million for services provided by Hicks
Muse Partners under the Financial Advisory Agreement. In fiscal 1998, in
connection with the ARISB Acquisition the Company paid Hicks Muse Partners a fee
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 agree that 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 10% of the voting
capital stock of Holding or one individual so long as the HMC Group owns at
least 5% but less than 10% of the voting capital stock of Holding; 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 10% of the voting capital stock of Holding or one
individual so long as Messrs. Glenn and Preston Staats together own at least 5%
but less than 10% of the voting capital stock of Holding; and any remaining
positions on the Board of Directors of Holding and the Company will be
independent directors mutually acceptable to Hicks, Muse, Tate & Furst
Incorporated, an affiliate of Hicks Muse and the HMC Group, and Messrs. Glenn
and Preston Staats. In addition, all parties to the Stockholders Agreement agree
to vote any shares which it may vote on any particular matter which comes before
the Company's stockholders as a separate classes 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
which is wholly owned by Messrs. Glenn and Preston Staats. In fiscal 1997, the
rental payments for such facility were $450,000.
The Company's Livermore, California offices are leased from Triad Park,
LLC. James R. Porter, Chairman of the Board of Directors of the Company, is an
officer, director and stockholder of the
57
<PAGE> 62
sole manager of Triad Park, LLC. The rental payment for 1998 under the lease
will be approximately $2.5 million.
Lease of Corporate Aircraft
The Company leases an airplane for general corporate use from a corporation
which is wholly owned by Mr. Glenn Staats. Lease payments, which the Company
believes reasonably reflect the benefits thereof, totaled $466,000 in fiscal
1997.
Related Officers
Sharon W. Staats, the wife of Mr. Preston Staats, served as Vice President
of Special Projects during 1997 and earned compensation of $93,900, in fiscal
1997.
58
<PAGE> 63
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company on February 10, 1998, in the
Offering. In connection with that placement, the Company entered into the
Registration Rights Agreement, which requires that the Company file the
Registration Statement under the Securities Act with respect to the New Notes
and, upon the effectiveness of that Registration Statement, offer to the holders
of the Old Notes the opportunity to exchange their Old Notes for a like
principal amount of New Notes, which will be issued without a restrictive legend
and which generally may be reoffered and resold by the holder without
registration under the Securities Act. The Registration Rights Agreement further
provides that the Company must use its best efforts to (i) cause the
Registration Statement with respect to the Exchange Offer to be declared
effective on or before August 7, 1998 and (ii) consummate the Exchange Offer on
or before October 23, 1998. Except as provided below, upon the completion of the
Exchange Offer, the Company's obligations with respect to the registration of
the Old Notes and the New Notes will terminate. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part and the summary herein of certain provisions
thereof does not purport to be complete and is qualified in its entirety by
reference thereto. As a result of the filing and the effectiveness of the
Registration Statement, certain liquidated damages provided for in the
Registration Rights Agreement will not become payable by the Company. Following
the completion of the Exchange Offer (except as set forth in the paragraph
immediately below), holders of Old Notes not tendered will not have any further
registration rights and those Old Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the market for the Old
Notes could be adversely affected upon completion of the Exchange Offer.
In order to participate in the Exchange Offer, a holder must represent to
the Company, among other things, that (i) the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of the
person receiving the New Notes, (ii) neither the holder nor any such other
person is engaging in or intends to engage in a distribution of the New Notes,
(iii) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of the New
Notes and (iv) neither the holder nor any such other person is an "affiliate,"
as defined under Rule 405 promulgated under the Securities Act, of the Company.
Pursuant to the Registration Rights Agreement, the Company is required to file a
"shelf" registration statement for a continuous offering pursuant to Rule 415
under the Securities Act in respect of the Old Notes if (i) because of any
change in law or applicable interpretations of the staff of the Commission, the
Company is not permitted to effect the Exchange Offer, (ii) the Exchange Offer
is not consummated within 225 days of the Offering, (iii) any holder of Private
Exchange Securities (as defined) requests within 60 days after the Exchange
Offer, (iv) any applicable law or interpretations do not permit any holder of
Old Notes to participate in the Exchange Offer, (v) any holder of Old Notes
participates in the Exchange Offer and does not receive freely transferrable New
Notes in exchange for Old Notes or (vi) the Company so elects. In the event that
the Company is obligated to file a "shelf" registration statement, it will be
required to keep such "shelf" registration statement effective for at least
three years. Other than as set forth in this paragraph, no holder will have the
right to participate in the "shelf" registration statement nor otherwise to
require that the Company register such holder's shares of Old Notes under the
Securities Act. See "-- Procedures for Tendering."
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third-parties unrelated to the Company, the Company believes
that, with the exceptions set forth below, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any person receiving such New Notes, whether or not
such person is the registered holder (other than any such holder or such other
person which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without
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<PAGE> 64
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the New Notes are acquired in the ordinary course
of business of the holder or such other person and neither the holder nor such
other person has an arrangement or understanding with any person to participate
in the distribution of such New Notes. Any holder who tenders in the Exchange
Offer for the purpose of participating in a distribution of the New Notes cannot
rely on this interpretation by the Commission's staff and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Each broker-dealer that receives
New Notes for its own account in exchange for Old Notes, where the Old Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
Following the completion of the Exchange Offer (except as set forth in the
second paragraph under "-- Purpose and Effect" above), holders of Old Notes not
tendered will not have any further registration rights and those Old Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for a holder's Old Notes could be adversely affected
upon completion of the Exchange Offer if the holder does not participate in the
Exchange Offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of outstanding Old Notes accepted
in the Exchange Offer. Holders may tender some or all of their Old Notes
pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000 in principal amount.
The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes except that the New Notes have been registered under
the Securities Act and will not bear legends restricting their transfer. The New
Notes will evidence the same debt as the Old Notes and will be issued pursuant
to, and entitled to the benefits of, the Indenture pursuant to which the Old
Notes were issued.
As of March 31, 1998, Old Notes representing $100,000,000 aggregate
principal amount were outstanding and there was one registered holder, a nominee
of DTC. This Prospectus, together with the Letter of Transmittal, is being sent
to such registered Holder and to others believed to have beneficial interests in
the Old Notes. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company. If any tendered Old
Notes are not accepted for exchange because of an invalid tender, the occurrence
of certain other events set forth herein or otherwise, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
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EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. In order to extend the
Exchange Offer, the Company will issue a notice of any extension by press
release or other public announcement prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date. The
Company reserves the right, in its sole discretion, (i) to delay accepting any
Old Notes, to extend the Exchange Offer or, if any of the conditions set forth
under "-- Conditions to the Exchange Offer" shall not have been satisfied, to
terminate the Exchange Offer, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent, or (ii) to amend the terms of
the Exchange Offer in any manner.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender the Old Notes in the Exchange Offer.
Except as set forth under "-- Book Entry Transfer," to tender in the Exchange
Offer a holder must complete, sign, and date the Letter of Transmittal, or a
copy thereof, have the signatures thereon guaranteed if required by the Letter
of Transmittal, and mail or otherwise deliver the Letter of Transmittal or copy
to the Exchange Agent prior to the Expiration Date. In addition, either (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal, prior to the Expiration Date or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if that procedure is available, into the Exchange Agent's account at DTC
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the Letter of
Transmittal and other required documents must be received by the Exchange Agent
at the address set forth under "-- Exchange Agent" prior to the Expiration Date.
The tender by a holder that is not withdrawn before the Expiration Date
will constitute an agreement between that holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing the Letter of Transmittal and delivering the owner's
Old Notes, either make appropriate arrangements to register ownership of the Old
Notes in the beneficial owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registra-
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tion Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. If signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, the guarantee must be by any eligible guarantor
institution that is a member of or participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Program, the
Stock Exchange Medallion Program, or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, the Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as that registered holder's name appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal unless waived by the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities, or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent, nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding after the
Expiration Date or, as set forth under "-- Conditions to the Exchange Offer," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions, or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the registered holder, (ii) neither the
holder nor any such other person is engaging in or intends to engage in a
distribution of such New Notes, (iii) neither the holder nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such New Notes, and (iv) neither the holder nor any such other
person is an "affiliate," as defined under Rule 405 of the Securities Act, of
the Company.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal (or, with respect to the DTC and its participants, electronic
instructions in which the
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tendering holder acknowledges its receipt of and agreement to be bound by the
Letter of Transmittal), and all other required documents. If any tendered Old
Notes are not accepted for any reason set forth in the terms and conditions of
the Exchange Offer or if Old Notes are submitted for a greater principal amount
than the holder desires to exchange, such unaccepted or non-exchanged Old Notes
will be returned without expense to the tendering Holder thereof (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such nonexchanged Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where the Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or copy thereof, with
any required signature guarantees and any other required documents, must, in any
case other than as set forth in the following paragraph, be transmitted to and
received by the Exchange Agent at the address set forth under "-- Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system in lieu of sending a signed, hard copy Letter of
Transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agent. To tender Old Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the character by which the participant acknowledges its receipt of and
agrees to be bound by the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) the
certificates for all physically tendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation, as the
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case may be, and all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within three NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 pm., New
York City time, on the Expiration Date.
For a withdrawal of a tender of Old Notes to be effective, a written or
(for DTC participants) electronic ATOP transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth under "-- Exchange
Agent" prior to 5:00 pm., New York City time, on the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to
be withdrawn (including the certificate number or numbers and principal amount
of such Old Notes), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Old Notes into the name of the person withdrawing the tender, and (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form, and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender, or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures under "-- Procedures for Tendering" at any time on or prior to
the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Notes in exchange
for, any Old Notes and may terminate or amend the Exchange Offer if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, the Company determines that the Exchange Offer
violates applicable law, any applicable interpretation of the staff of the
Commission or any order of any governmental agency or court of competent
jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as amended
(the "TIA"). In any such event the Company is required to use every reasonable
effort to obtain the withdrawal of any stop order at the earliest possible time.
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EXCHANGE AGENT
All executed Letters of Transmittal should be directed to the Exchange
Agent. Norwest Bank Minnesota, N.A. has been appointed as Exchange Agent for the
Exchange Offer. Questions, requests for assistance and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent addressed as follows:
Deliver to:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, EXCHANGE AGENT
<TABLE>
<S> <C> <C>
By Registered or Certified
Mail: By Overnight Courier: By Hand Delivery:
Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
Corporate Trust Operations Corporate Trust Services Northstar East Building
P.O. Box 1517 Sixth and Marquette Avenue 608 Second Avenue South,
Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113 12th Floor
Corporate Trust Services
Minneapolis, MN
Facsimile Transmission Number:
(For Eligible Institutions
Only)
(612) 667-4927
Confirm Receipt of Facsimile
by Telephone:
(612) 667-9764
</TABLE>
(Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand, or by overnight delivery service.)
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$235,000, which includes fees and expenses of the Exchange Agent, accounting,
legal, printing, and related fees and expenses.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
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DESCRIPTION OF THE RESTATED SENIOR CREDIT FACILITIES
The description set forth below does not purport to be complete and is
qualified in its entirety by reference to the definitive agreements setting
forth the principal terms and conditions of the Restated Senior Credit
Facilities, as amended. Capitalized terms used in this "Description of the
Restated Senior Credit Facilities" but not otherwise defined in this Prospectus
have the meanings ascribed to them in the Restated Senior Credit Facilities, as
amended.
General. The Restated Senior Credit Facilities are provided by a syndicate
of banks and other financial institutions (the "Lenders") for which The Chase
Manhattan Bank acts as administrative agent (the "Administrative Agent"), and
Chase Securities Inc. acts as arranger. The Restated Senior Credit Facilities
provides for a borrowing of $50.0 million (the "New Term Loan") under a term
loan facility (the "New Term Loan Facility") and for borrowings of up to $50.0
million under a revolving credit facility (the "New Revolving Credit Facility"
and together with the New Term Loan Facility, the "Restated Senior Credit
Facilities"). The Restated Senior Credit Facilities may be amended at any time
in accordance with the terms thereof. On June 30, 1998, the Restated Senior
Credit Facilities were amended to clarify the manner of calculating Consolidated
EBITDA and to revise certain financial covenants temporarily while the Company
completes its expense alignment project. See Note 9 to the Company's unaudited
financial statements for the period ended March 31, 1998.
New Term Loan. The New Term Loan is repayable in 17 consecutive quarterly
installments, commencing on March 31, 1999 and ending on March 31, 2003. For the
period March 31, 1999 through September 30, 1999, the principal amount repayable
per quarter will be $2,000,000; for the period December 31, 1999 through
September 30, 2000, $2,500,000; for the period December 31, 2000 through
September 30, 2001, $3,000,000; for the period December 31, 2001 through
September 30, 2002, $3,500,000; and for the period December 31, 2002 through
March 31, 2003, $4,000,000.
New Revolving Credit Loans. The New Revolving Credit Facility provides for
borrowings of up to $50.0 million (the "New Revolving Credit Loans" and together
with the New Term Loan, the "New Loans"), of which $21.7 million has been drawn,
as of March 31, 1998. In addition, the New Revolving Credit Loans are available
for use in the form of Letters of Credit in an amount not to exceed $15.0
million and Swing Line Loans in an amount not to exceed $10.0 million. The New
Revolving Credit Facility is available on a revolving basis ending on the
earlier of (i) March 31, 2003 and (ii) the date on which the New Term Loan
matures or is repaid in full. The proceeds of the undrawn portion of the New
Revolving Credit Loans will be used for working capital purposes and other
general corporate purposes of the Borrower and its subsidiaries, including
funding capital expenditures, investments and acquisitions.
Interest. For purposes of calculating interest, the Borrower may elect that
all or a portion of the New Loans bear interest at the Alternate Base Rate
("ABR") plus the Applicable Margin ("ABR Loans") or at the Eurodollar Rate plus
the Applicable Margin ("Eurodollar Loans"). Prior to February 10, 1999, the
Applicable Margin for ABR Loans and Eurodollar Loans will be 1.25% and 2.25%,
respectively. Thereafter, if the ratio of Total Debt to Consolidated EBITDA is
greater than or equal to (i) 3.75x, the Applicable Margin will be 1.25% for ABR
Loans and 2.25% for Eurodollar Loans; (ii) 3.25x, the Applicable Margin will be
1.00% for ABR Loans and 2.00% for Eurodollar Loans; and (iii) 2.75x, the
Applicable Margin will be 0.75% for ABR Loans and 1.75% for Eurodollar Loans. If
the ratio of Total Debt to Consolidated EBITDA is less than 2.75x, the
Applicable Margin will be 0.50% for ABR Loans and 1.50% for Eurodollar Loans.
Repayment and Prepayment. The New Loans may be prepaid and commitments may
be reduced by the Company in certain minimum amounts set forth in the Restated
Senior Credit Facilities. Optional prepayments of the New Term Loan will be
applied to installments thereof ratably in accordance with the then remaining
number of installments, provided that the first $10.0 million of optional
prepayments of the New Term Loans may be applied in the order directed by the
Company.
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The New Revolving Credit Loans will be required to be repaid to the extent New
Revolving Credit Loans and Letters of Credit extensions of credit exceed the
amount of the New Revolving Credit Facility. The Company must mandatorily repay
the New Loans, in the amounts, at the times and subject to exceptions set forth
in the Restated Senior Credit Facilities, (a) in respect of 50% of consolidated
excess cash flow of the Company and its subsidiaries for those years in which
the ratio of Consolidated Total Debt to Consolidated EBITDA is greater than
2.50x, and (b) in respect of 100% of the Net Cash Proceeds of certain
dispositions of assets, issuances of stock or incurrences of indebtedness by the
Company or any of its Subsidiaries. The Company must mandatorily repay the New
Loans, in the amounts, at the times and subject to certain restrictions set
forth in the Restated Senior Credit Facilities, from Excess Cash Flow if Total
Debt to Consolidated EBITDA ratios exceed certain levels or if Holding, the
Company or any of the Company's subsidiaries makes certain dispositions of
material assets, or takes certain other actions.
Fees. The Company will pay a commitment fee calculated at a rate equal to
0.50% on the unused commitments under the Restated Senior Credit Facilities
prior to February 10, 1999. After such date, the commitment fee will be
determined and adjusted in increments based upon the ratio of Total Debt to
Consolidated EBITDA. After such date, if the ratio of Consolidated Total Debt to
Consolidated EBITDA is (i) greater than or equal to 3.25x, the Commitment Fee
will be 0.50%, or (ii) less than 3.25x, the Commitment Fee will be 0.375%.
Security. Borrowings and other extensions of credit under the Restated
Senior Credit Facilities and guarantees thereof are secured by a first priority
perfected security interest in substantially all of the assets of the Company
and its subsidiaries, including after-acquired property.
Guarantees. The Company's payment obligations under the Restated Senior
Credit Facilities will be jointly and severally guaranteed, on a senior secured
basis, by Holding and each of its direct and indirect subsidiaries, other than
the Company, certain foreign subsidiaries and CCI/Triad Financial Holding
Corporation (the "Guarantors").
Covenants. The Restated Senior Credit Facilities contain financial
covenants pursuant to which the Company and its direct and indirect subsidiaries
must, on a consolidated basis, maintain minimum Consolidated EBITDA, maximum
Consolidated Total Debt to Consolidated EBITDA, maximum Consolidated Senior Debt
to Consolidated EBITDA, and minimum Consolidated EBITDA to Consolidated Cash
Interest Expense. The Company must maintain (a) a Consolidated EBITDA to
Consolidated Cash Interest Expense ratio of (i) 1.85x for the fiscal quarter
beginning January 1, 1998 and ending March 31, 1998, (ii) 2.00x for the fiscal
quarter beginning April 1, 1998 and ending June 30, 1998, (iii) 2.25x for the
fiscal quarter beginning July 1, 1998 and ending June 30, 1999, (iv) 3.00x for
the fiscal quarters beginning on July 1, 1999 and ending June 30, 2000, and (v)
3.50x for the fiscal quarter beginning July 1, 2000 and each fiscal quarter
thereafter; (b) Consolidated EBITDA of (i) $28,000,000 for the fiscal quarter
beginning January 1, 1998 and ending March 31, 1998, (ii) $30,000,000 for the
fiscal quarter beginning April 1, 1998 and ending June 30, 1998, (iii)
$32,500,000 for the fiscal quarter beginning July 1, 1998 and increasing in
$2,500,000 increments for each fiscal quarter until the fiscal quarter ending
June 30, 1999, (iv) $45,000,000 for the fiscal quarter beginning July 1, 1999
and increasing in $2,500,000 increments for each fiscal quarter until the fiscal
quarter ending June 30, 2000, and (v) $55,000,000 for the fiscal quarter
beginning July 1, 2000 and each fiscal quarter thereafter; (c) a Consolidated
Total Debt to Consolidated EBITDA ratio of (i) 5.50x for the fiscal quarters
beginning January 1, 1998 and ending September 30, 1998, (ii) 5.00x for the
fiscal quarters beginning October 1, 1998 and ending June 30, 1999, (iii) 4.00x
for the fiscal quarters beginning July 1, 1999 and ending December 31, 1999,
(iv) 3.50x for the fiscal quarters beginning January 1, 2000 and ending June 30,
2000; and (v) 3.00x for the fiscal quarter beginning July 1, 2000 and each
fiscal quarter thereafter; and (d) a Consolidated Senior Debt to Consolidated
EBITDA ratio of (i) 2.25x for the fiscal quarter beginning January 1, 1998 and
ending March 31, 1998, (ii) 2.40x for the fiscal quarters beginning April 1,
1998 and ending September 30, 1998, (iii) 2.25x for the fiscal quarters
beginning October 1, 1998 and ending June 30, 1999, (iv) 1.75x for the fiscal
quarters beginning July 1, 1999 and ending June 30,
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<PAGE> 72
2000, and (v) 1.50x for the fiscal quarter beginning July 1, 2000 and each
fiscal quarter thereafter. The Company, as of March 31, 1998 had (a) a
Consolidated EBITDA to Consolidated Cash Interest Expense ratio of 2.42x, (b)
Consolidated EBITDA of $32,594,000, (c) a Consolidated Total Debt to
Consolidated EBITDA ratio of 5.29x, and (d) a Consolidated Senior Debt to
Consolidated EBITDA ratio of 2.22x.
In addition, the Restated Senior Credit Facilities contain covenants
pertaining to the management and operation of the Company and its subsidiaries.
These covenants include, among others, requirements that each of the Company and
its subsidiaries (i) preserve its corporate existence and not amend its charter
or bylaws; (ii) maintain adequate insurance coverage; (iii) maintain its
properties and all necessary licenses, permits and intellectual property; (iv)
perform its obligations under leases, related documents, material contracts and
other agreements; and (v) comply with applicable laws and regulations, including
those related to tax, employee, pension and environmental matters.
The Restated Senior Credit Facilities contain a number of covenants
customary for facilities similar to the Restated Senior Credit Facilities that,
among other things, restrict the ability of the Company and its subsidiaries to
incur additional indebtedness (other than certain exceptions customary for
facilities of this type, including intercompany indebtedness (whether as the
result of intercompany asset transfers or otherwise), indebtedness existing on
the date of the Restated Senior Credit Facilities, purchase money and capital
lease indebtedness not to exceed $5,000,000, indebtedness in respect of interest
rate agreements, indebtedness of foreign subsidiaries for working capital
purposes, additional indebtedness of the Company and certain subsidiaries not to
exceed $5,000,000, seller indebtedness in connection with permitted acquisitions
or indebtedness assumed in connection with any permitted acquisition not to
exceed $10,000,000, the lease obligations of Triad Systems Financial
Corporation, CCI/Triad Financial Holding Corporation (collectively, the "Lease
Transactions") and certain foreign subsidiaries (provided that the recourse is
limited and the Company otherwise meets certain established financial tests),
indebtedness of certain partnerships in which the Company and certain of its
customers have formed a partnership, indebtedness in respect of the Senior
Subordinated Indebtedness, and indebtedness resulting from the endorsement of
negotiable instruments), incur guarantee obligations, enter into mergers,
consolidations or amalgamations or liquidate, wind up or dissolve, dispose of
assets, pay dividends, make capital expenditures in excess of $21,500,000 in
1998, $22,000,000 in 1999, and $22,500,000 in 2000 and increasing by $500,000
each year thereafter (provided that (i) the lesser of (x) 100% of any amount not
used in any fiscal year, or (y) $10,000,000 may be carried forward into the next
succeeding fiscal year, and (ii) additional capital expenditures may be made
with the Company's share of excess cash flow to the extent such monies are not
used to make additional investments), make advances, loans, extensions of
credit, capital contributions to, or purchases of any stock, bonds, notes,
debentures or other securities or any assets constituting a business unit, amend
provisions of the documents governing the Lease Transactions, engage in certain
transactions with affiliates, enter into sale and leaseback transactions, make
changes in their fiscal year, limit the ability of the Company and its
subsidiaries to incur, assume or suffer to exist liens (other than certain
exceptions customary for facilities of this type, including liens granted in
connection with the Restated Senior Credit Facilities, liens for taxes not yet
due or which are being contested in accordance with the provisions of the
Restated Senior Credit Facilities, carriers', landlord's, warehousemen's,
mechanics', materialmen's, repairmen's or similar liens, deposits to secure the
performance of bids, trade contracts, leases, statutory obligations, insurance
contracts, surety and appeal bonds, performance bonds and other obligations of
similar nature, easements, rights-of-way, zoning restrictions and other similar
encumbrances, liens existing on the date of the Restated Senior Credit
Facilities, industrial revenue bonds, purchase money liens in respect of capital
expenditures, liens in favor of landlords, licenses, leases and subleases,
attachment or judgment Liens not constituting an event of default, precautionary
UCC filings with respect to operating leases or consignment arrangements, liens
in favor of banking institutions arising by operation of law, other liens
securing obligations not exceeding $2,000,000, and with respect to the Company's
subsidiar-
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ies, liens required pursuant to financing arrangements entered into by Triad
Systems Ireland Limited with the Industrial Development Authority of Ireland),
enter into unrelated lines of business, change the passive holding company
status of Cooperative Computing Holding Company, Inc., amend its constituent
documents in a manner that adversely affects the lender, make any payment or
redemption or otherwise defease the Senior Subordinated Indebtedness, or amend
the Notes in a manner that could adversely affect the lenders.
Events of Default. The Restated Senior Credit Facilities provide for events
of default customarily found in facilities of this type, including: (i) failure
to pay principal or interest or fees when due; (ii) any representation or
warranty proving to have been materially incorrect when made; (iii) failure to
perform or observe covenants after any applicable grace period; (iv)
cross-defaults to other material indebtedness; (v) bankruptcy defaults; (vi)
material judgment defaults; (vii) change of control; (viii) ERISA defaults; (ix)
any loan document ceasing to be in full force and effect; (x) any interest
created by the related security documents ceasing to be enforceable and of the
same effect and priority purported to be created thereby; and (xi) failure of
the Notes to be validly subordinated to the Restated Senior Credit Facilities.
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DESCRIPTION OF NEW NOTES
GENERAL
The New Notes are to be issued under an Indenture, dated as of February 10,
1998 (the "Indenture"), between the Company and Norwest Bank Minnesota, N.A., as
trustee (the "Trustee"). The following summary of certain provisions of the
Indenture and the New Notes does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Indenture (including the definitions of certain terms therein and those terms
made a part thereof by the Trust Indenture Act of 1939, as amended) and the New
Notes.
Principal of, premium, if any, and interest on the New Notes will be
payable, and the New Notes may be exchanged or transferred, at the office or
agency of the Company in the Borough of Manhattan, The City of New York (which
initially shall be the corporate trust office of the Trustee in New York, New
York), except that, at the option of the Company, payment of interest may be
made by check mailed to the address of the holders as such address appears in
the note register.
The New Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as Paying Agent and Registrar for the New Notes. The New
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar, which initially will be the Trustee's corporate trust office.
The Company may change any Paying Agent and Registrar without notice to holders
of the Notes.
PRINCIPAL, MATURITY AND INTEREST
The New Notes will be unsecured, senior subordinated obligations of the
Company and will be limited to $100,000,000 aggregate principal amount, and will
mature on February 1, 2008. Interest on the New Notes will accrue at the rate
per annum equal to 9% and will be payable in cash semi-annually on February 1
and August 1 commencing on August 1, 1998, to holders of record on the
immediately preceding January 15 and July 15. Interest on the New Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from February 6, 1998. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
OPTIONAL REDEMPTION
The New Notes may be redeemed at any time on or after February 1, 2003, in
whole or in part, at the option of the Company, at the redemption prices
(expressed as a percentage of the principal amount thereof on the applicable
redemption date) set forth below, plus accrued and unpaid interest, if any, to
the redemption date, if redeemed during the 12-month period beginning on of each
of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 104.500%
2004........................................................ 103.000%
2005........................................................ 101.500%
2006 and thereafter......................................... 100.000%
</TABLE>
In addition, prior to February 1, 2002, the Company may, at its option, use
the net cash proceeds of one or more Equity Offerings to redeem up to 35% of the
principal amount of the Notes at a redemption price equal to 109% of the
principal amount thereof plus accrued and unpaid interest to the redemption
date; provided, however, that after any such redemption, at least 65% of the
aggregate principal amount of the Notes would remain outstanding immediately
after giving effect to such redemption. Any such redemption will be required to
occur on or prior to the date that
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is one year after the receipt by the Company of the proceeds of an Equity
Offering. The Company shall effect such redemption on a pro rata basis.
In addition, prior to February 1, 2003, the Company may, at its option,
redeem the New Notes upon a Change of Control. See "-- Change of Control."
SELECTION AND NOTICE
If less than all of the New Notes are to be redeemed at any time, selection
of New Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
New Notes are listed or, in the absence of such requirements or if the New Notes
are not so listed, on a pro rata basis, provided that no New Notes of $1,000 or
less shall be redeemed in part. Notice of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each holder of New Notes to be redeemed at its registered address. If any New
Note is to be redeemed in part only, the notice of redemption that relates to
such New Note shall state the portion of the principal amount thereof to be
redeemed. A new New Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original New Note. On and after the redemption date, interest ceases to
accrue on New Notes or portions of them called for redemption.
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control,
each holder will have the right to require that the Company purchase all or a
portion of such holder's New Notes in cash pursuant to the offer described below
(the "Change of Control Offer"), at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following the date on which the Company
becomes aware that a Change of Control has occurred, if the purchase of the New
Notes would violate or constitute a default under any other Indebtedness of the
Company, then the Company shall, to the extent needed to permit such purchase of
New Notes, either (i) repay all such Indebtedness and terminate all commitments
outstanding thereunder or (ii) obtain the requisite consents, if any, under any
such Indebtedness required to permit the purchase of the New Notes as provided
below. The Company will first comply with the covenant in the preceding sentence
before it will be required to make the Change of Control Offer or purchase the
New Notes pursuant to the provisions described below.
Within 30 days following the date on which the Company becomes aware that a
Change of Control has occurred, the Company must send, by first-class mail
postage prepaid, a notice to each holder of New Notes, which notice shall govern
the terms of the Change of Control Offer. Such notice shall state, among other
things, the purchase date, which must be no earlier than 30 days nor later than
45 days from the date such notice is mailed, other than as may be required by
law (the "Change of Control Payment Date"). Holders electing to have any New
Notes purchased pursuant to a Change of Control Offer will be required to
surrender such New Notes to the paying agent and registrar for the New Notes at
the address specified in the notice prior to the close of business on the
business day prior to the Change of Control Payment Date.
In addition, the Indenture provides that, prior to February 1, 2003, upon
the occurrence of a Change of Control, the Company will have the option to
redeem the New Notes in whole but not in part (a "Change of Control Redemption")
at a redemption price equal to 100% of the principal amount thereof, plus
accrued and unpaid interest to the redemption date plus the Applicable Premium.
In order to effect a Change of Control Redemption, the Company must send a
notice to each holder of New Notes, which notice shall govern the terms of the
Change of Control Redemption. Such notice must be mailed to holders of the New
Notes within 30 days following the
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date the Change of Control occurred (the "Change of Control Redemption Date")
and state that the Company is effecting a Change of Control Redemption in lieu
of a Change of Control Offer.
"Applicable Premium" means, with respect to a New Note at any Change of
Control Redemption Date, the greater of (i) 1.0% of the principal amount of such
New Note and (ii) the excess of (A) the present value at such time of (1) the
redemption price of such Note at February 1, 2003 (such redemption price being
described under "-- Optional Redemption") plus (2) all semi-annual payments of
interest through February 1, 2003, computed using a discount rate equal to the
Treasury Rate plus 75 basis points over (B) the principal amount of such New
Note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) that
has become publicly available at least two business days prior to the Change of
Control Redemption Date (or, if such Statistical Release is no longer published,
any publicly available source or similar market data)) most nearly equal to the
period from the Change of Control Redemption Date to February 1, 2003; provided,
however, that if the period from the Change of Control Redemption Date to
February 1, 2003 is not equal to the constant maturity of a United States
Treasury security for which a weekly average yield is given, the Treasury Rate
shall be obtained by linear interpolation (calculated to the nearest one-twelfth
of a year) from the weekly average yields of United States Treasury securities
for which such yields are given except that if the period from the Change of
Control Redemption Date to February 1, 2003 is less than one year, the weekly
average yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
The Company will comply with the requirements of Rule 14e-1 under the
Securities Exchange Act of 1934, as amended, to the extent applicable in
connection with the purchase of New Notes pursuant to a Change of Control Offer.
This "Change of Control" covenant will not apply in the event of (a)
changes in a majority of the board of directors of the Company so long as a
majority of the board of directors continues to consist of Continuing Directors
and (b) certain transactions with Permitted Holders. In addition, this covenant
is not intended to, and does not, afford holders of New Notes protection in the
event of certain highly leveraged transactions, reorganizations, restructurings,
mergers and other similar transactions that might adversely affect the holders
of New Notes, but would not constitute a Change of Control. The Company could
enter into certain transactions, including certain recapitalizations of the
Company, that would not constitute a Change of Control with respect to the
Change of Control purchase feature of the New Notes, but would increase the
amount of Indebtedness outstanding at such time. However, the Indenture contains
limitations on the ability of the Company to incur additional Indebtedness and
to engage in certain mergers, consolidations and sales of assets, whether or not
a Change of Control is involved, subject, in each case, to limitations and
qualifications. See "-- Certain Covenants -- Limitation on Incurrence of
Additional Indebtedness and Issuance of Disqualified Capital Stock" and
"-- Certain Covenants -- Merger, Consolidation and Sale of Assets" below.
With respect to the sale of "all or substantially all" the assets of the
Company, which would constitute a Change of Control for purposes of the
Indenture, the meaning of the phrase "all or substantially all" varies according
to the facts and circumstances of the subject transaction, has no clearly
established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company and,
therefore, it may be unclear whether a Change of Control has occurred and
whether the New Notes should be subject to a Change of Control Offer.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Restated Senior Credit Facilities.
If such an event should occur, the lenders under the Restated Senior Credit
Facilities could accelerate the payment of all amounts due
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thereunder. As of March 31, 1998, there was $71.7 million outstanding (excluding
unused commitments) under the Restated Senior Credit Facilities. All amounts
borrowed under the Restated Senior Credit Facilities constitute Senior
Indebtedness. Consequently, the Company's ability to satisfy its obligations to
the holders of New Notes upon a Change of Control may be substantially impaired
by its obligations to the lenders under the Restated Senior Credit Facilities.
See "Risk Factors -- Subordination of New Notes to Senior Indebtedness."
"-- Limitation on Change of Control" and "Description of the Restated Senior
Credit Facilities."
Future Senior Indebtedness of the Company and its Subsidiaries may also
contain prohibitions of certain events that would constitute a Change of Control
or require such Senior Indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the New Notes could cause a default under such Senior Indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase on the Company. Finally, the Company's ability to pay cash to
the holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases. Even if sufficient
funds were otherwise available, the terms of the Credit Agreement may prohibit
the Company's prepayment of New Notes prior to their scheduled maturity.
Consequently, if the Company is not able to prepay the Indebtedness under the
Credit Agreement and any other Senior Indebtedness containing similar
restrictions or obtain requisite consents, as described above, the Company will
be unable to fulfill its repurchase obligations if holders of New Notes exercise
their repurchase rights following a Change of Control, thereby resulting in a
default under the Indenture.
None of the provisions in the Indenture relating to a purchase of New Notes
upon a Change of Control is waivable by the board of directors of the Company.
Without the consent of each holder of New Notes affected thereby, after the
mailing of the notice of a Change of Control Offer, no amendment to the
Indenture may, directly or indirectly, affect the Company's obligation to
purchase the outstanding New Notes or amend, modify or change the obligation of
the Company to consummate a Change of Control Offer or waive any default in the
performance thereof or modify any of the provisions of the definitions with
respect to any such offer.
RANKING AND SUBORDINATION
The payment of the principal of, premium (if any), and interest on and
other Obligations with respect to, the New Notes is subordinated in right of
payment, to the extent set forth in the Indenture, to the payment when due in
cash or Cash Equivalents of all Senior Indebtedness of the Company. However,
payment from the money, or the proceeds of U.S. Government Obligations, held in
any defeasance trust described under "Defeasance" below is not subordinate to
any Senior Indebtedness or subject to the restrictions described herein. As of
March 31, 1998, the Company had $71.7 million of Senior Indebtedness outstanding
(excluding unused commitments). Although the Indenture contains limitations on
the amount of additional Indebtedness that the Company and its Subsidiaries may
incur, under certain circumstances the amount of such additional Indebtedness
could be substantial and, in any case, all or a portion of such Indebtedness may
be Senior Indebtedness and may be secured. See "Certain Covenants -- Limitation
on Indebtedness" below.
"Senior Indebtedness" is defined, whether outstanding on the Issue Date or
thereafter issued, as (x) all obligations under the Credit Agreement (including,
with respect to Designated Senior Indebtedness, any interest accruing after the
commencement of any such proceeding at the rate specified in the applicable
Designated Senior Indebtedness whether or not such interest is an allowed claim
enforceable against the Company in any such proceeding) and (y) all other
Indebtedness of the Company, including interest (including, with respect to
Designated Senior Indebtedness, any interest accruing after the commencement of
any such proceeding at the rate specified in the applicable Designated Senior
Indebtedness whether or not such interest is an allowed claim enforceable
against the Company in any such proceeding) and premium, if any, thereon,
unless, in the instrument creating or evidencing the same or pursuant to which
the same is
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outstanding, it is provided that the obligations in respect of such Indebtedness
are not superior in right of payment to the Notes; provided, however, that
Senior Indebtedness will not include (1) any obligation of the Company to any
Subsidiary, (2) any liability for federal, state, foreign, local or other taxes
owed or owing by the Company, (3) any accounts payable or other liability to
trade creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities) or (4) any Indebtedness,
guarantee or obligation of the Company that is expressly subordinate or junior
in right of payment to any other Indebtedness, guarantee or obligation of the
Company, including any Senior Subordinated Indebtedness.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the New Notes in accordance with the provisions of the Indenture. The
New Notes will in all respects rank pari passu with all other Senior
Subordinated Indebtedness of the Company. The Company has agreed in the
Indenture that it will not incur, directly or indirectly, any Indebtedness that
is subordinate or junior in ranking in any respect to Senior Indebtedness unless
such Indebtedness is Senior Subordinated Indebtedness or is contractually
subordinated in right of payment to Senior Subordinated Indebtedness. Unsecured
Indebtedness is not deemed to be subordinate or junior to Secured Indebtedness
merely because it is unsecured, nor is any Indebtedness deemed to be subordinate
or junior to other Indebtedness merely because it matures after such other
Indebtedness. Secured Indebtedness is not deemed to be Senior Indebtedness
merely because it is secured.
The Company may not pay principal of, premium (if any), or interest on, and
other Obligations with respect to, the New Notes or make any deposit pursuant to
the provisions described under "Satisfaction and Discharge or Indenture;
Defeasance" below and may not otherwise purchase or retire any New Notes
(collectively, "pay the New Notes") if (i) any Senior Indebtedness is not paid
in cash or Cash Equivalents when due or (ii) any other default on Senior
Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated
in accordance with its terms unless, in either case, the default has been cured
or waived and/or any such acceleration has been rescinded or such Senior
Indebtedness has been paid; provided, however,that the Company may pay the New
Notes without regard to the foregoing if the Company and the Trustee receive
written notice approving such payment from the Representatives of the Designated
Senior Indebtedness with respect to which either of the events set forth in
clause (i) or (ii) of the immediately preceding sentence has occurred and is
continuing. During the continuance of any default (other than a default
described in clause (i) or (ii) of the preceding sentence) with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may be
accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, the Company may not pay the New Notes (except (i) in Qualified Capital
Stock issued by the Company to pay interest on the New Notes or issued in
exchange for the New Notes, (ii) in securities substantially identical to the
New Notes issued by the Company in payment of interest accrued thereon or (iii)
in securities issued by the Company which are subordinated to the Senior
Indebtedness at least to the same extent as the New Notes and having a Weighted
Average Life to Maturity at least equal to the remaining Weighted Average Life
to Maturity of the New Notes, as long as the court, in approving any payment or
distribution of stock or securities of the type described in the preceding
clauses (i)-(iii), gives effect to the subordination provisions set forth in the
Indenture) for a period (a "Payment Blockage Period") commencing upon the
receipt by the Trustee (with a copy to the Company) of written notice (a
"Blockage Notice") of such default from the Representative of the holders of
such Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter (or earlier if such Payment
Blockage Period is terminated (i) by written notice to the Trustee and the
Company from the Person or Persons who gave such Blockage Notice, (ii) because
the default giving rise to such Blockage Notice has been cured or waived or is
no longer continuing or (iii) because such Designated Senior Indebtedness has
been repaid in full). Notwithstanding the provisions described in the
immediately preceding sentence, but subject to the provisions of the first
sentence of this paragraph and the provisions of the immediately succeeding
paragraph, the Company may resume payments on the New Notes after the end of
such Payment Blockage Period. Not more than one
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Blockage Notice may be given, and not more than one payment Blockage Period may
occur, in any consecutive 360-day period, irrespective of the number of defaults
with respect to Designated Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization or bankruptcy of or
similar proceeding relating to the Company or its property, the holders of
Senior Indebtedness will be entitled to receive payment in full in cash or Cash
Equivalents of the Senior Indebtedness before the holders of the New Notes are
entitled to receive any payment, and until the Senior Indebtedness is paid in
full, any payment or distribution to which holders of the New Notes would be
entitled but for the subordination provisions of the Indenture will be made to
holders of the Senior Indebtedness as their interests may appear. If a
distribution is made to the Trustee or to holders of the New Notes that, due to
the subordination provisions, should not have been made to them, such Trustee or
holders are required to hold it in trust for the holders of Senior Indebtedness
and pay it over to them as their interests may appear.
If payment of the New Notes is accelerated because of an Event of Default,
the Company or the Trustee shall promptly notify the Representative (if any) of
any issue of Designated Senior Indebtedness which is then outstanding; provided,
however, that the Company and the Trustee shall be obligated to notify such a
Representative only if such Representative has delivered or caused to be
delivered an address for the service of such a notice to the Company and the
Trustee (and the Company and the Trustee shall only be obligated to deliver the
notice to the address so specified). If a notice is required pursuant to the
immediately preceding sentence, the Company may not pay the New Notes (except
payment (i) in Qualified Capital Stock issued by the Company to pay interest on
the New Notes or issued in exchange for the New Notes, (ii) in securities
substantially identical to the New Notes issued by the Company in payment of
interest accrued thereon or (iii) securities issued by the Company which are
subordinated to the Senior Indebtedness at least to the same extent as the New
Notes and have a Weighted Average Life to Maturity at least equal to the
remaining Weighted Average Life to Maturity of the New Notes, as long as the
court, in approving any payment or distribution of stock or securities of the
type described in the preceding clauses (i)-(iii), gives effect to the
subordination provisions set forth in the Indenture), until five business days
after the respective Representative of the Designated Senior Indebtedness
receives notice (at the address specified in the preceding sentence) of such
acceleration and, thereafter, may pay the New Notes only if the subordination
provisions of the Indenture otherwise permit payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the holders of the New Notes, and
creditors of the Company who are not holders of Senior Indebtedness (including
holders of the New Notes) may recover less, ratably, than holders of Senior
Indebtedness.
CERTAIN COVENANTS
Limitation on Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock. (a) The Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume, guarantee or
otherwise become directly or indirectly liable, contingently or otherwise, with
respect to (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness) and the Company will not issue any Disqualified Capital Stock and
will not permit its Subsidiaries to issue any Preferred Stock except Preferred
Stock of a Subsidiary issued to (and as long as it is held by) the Company or a
Wholly-Owned Subsidiary of the Company; provided, however, that the Company and
its Subsidiaries may incur Indebtedness or issue shares of such Capital Stock
if, in either case, at the time of and immediately after giving pro forma effect
to such incurrence of Indebtedness or the issuance of such Capital Stock, as the
case may be, and the use of proceeds therefrom, the Company's Consolidated
Coverage Ratio is greater than 2.00 to 1.00.
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(b) In addition, the Company will not incur any Secured Indebtedness (other
than Senior Indebtedness) unless contemporaneously therewith effective provision
is made to secure the New Notes equally and ratably with such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien.
(c) The Company will not incur or suffer to exist, or permit any of its
Subsidiaries to incur or suffer to exist, any Obligations with respect to an
Unrestricted Subsidiary that would violate the provisions set forth in the
definition of Unrestricted Subsidiary.
Limitation on Layering. The Company will not incur any Indebtedness if such
Indebtedness is subordinate or junior in ranking in any respect to any Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
contractually subordinated in right of payment to all Senior Subordinated
Indebtedness (including the New Notes).
Limitation on Restricted Payments. (a) The Indenture provides that neither
the Company nor any of its Subsidiaries will, directly or indirectly, make any
Restricted Payment if at the time of such Restricted Payment and immediately
after giving effect thereto:
(i) a Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Restricted
Payment; or
(ii) the Company is not able to incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness and Issuance of Disqualified Capital
Stock" covenant; or
(iii) the aggregate amount of Restricted Payments made subsequent to
the Issue Date (the amount expended for such purposes, if other than in
cash, being the fair market value of such property as determined by the
board of directors of the Company in good faith) exceeds the sum of (a) 50%
of Consolidated Net Income (or, in the case such Consolidated Net Income
shall be a deficit, minus 100% of such deficit) accruing during the period
(treated as one accounting period) from the Issue Date to the end of the
most recent fiscal quarter ending prior to the date of such Restricted
Payment as to which financial results are available plus (b) 100% of the
aggregate net proceeds, including the fair market value of property other
than cash as determined by the board of directors of the Company in good
faith, received subsequent to the Issue Date by the Company from any Person
(other than a Subsidiary of the Company) from the issuance and sale
subsequent to the Issue Date of Qualified Capital Stock of the Company
(excluding (i) any net proceeds from issuances and sales financed directly
or indirectly using funds borrowed from the Company or any Subsidiary of
the Company, until and to the extent such borrowing is repaid, but
including the proceeds from the issuance and sale of any securities
convertible into or exchangeable for Qualified Capital Stock to the extent
such securities are so converted or exchanged and including any additional
proceeds received by the Company upon such conversion or exchange and (ii)
any net proceeds received from issuances and sales that are used to
consummate a transaction described in clauses (2) and (3) of paragraph (b)
below), plus (c) without duplication of any amount included in clause
(iii)(b) above, 100% of the aggregate net proceeds, including the fair
market value of property other than cash (valued as provided in clause
(iii)(b) above), received by the Company as a capital contribution after
the Issue Date, plus (d) the amount equal to the net reduction in
Investments (other than Permitted Investments) made by the Company or any
of its Subsidiaries in any Person resulting from (i) repurchases or
redemptions of such Investments by such Person, proceeds realized upon the
sale of such Investment to an unaffiliated purchaser and repayments of
loans or advances or other transfers of assets by such Person to the
Company or any Subsidiary of the Company or (ii) the redesignation of
Unrestricted Subsidiaries as Subsidiaries (valued in each case as provided
in the definition of "Investment") not to exceed, in the case of any
Subsidiary, the amount of Investments previously made by the Company or any
Subsidiary in such Unrestricted Subsidiary, which amount was included in
the calculation of Restricted Payments; provided, however, that no amount
shall be included under this clause
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(d) to the extent it is already included in Consolidated Net Income, plus
(e) the aggregate net cash proceeds received by a Person in consideration
for the issuance of such Person's Capital Stock (other than Disqualified
Capital Stock) that are held by such Person at the time such Person is
merged with and into the Company in accordance with the "Merger,
Consolidation and Sale of Assets" covenant on or subsequent to the Issue
Date; provided, however, that concurrently with or immediately following
such merger the Company uses an amount equal to such net cash proceeds to
redeem or repurchase the Company's Capital Stock, plus (f) $5,000,000.
(b) Notwithstanding the foregoing, these provisions will not prohibit: (1)
the payment of any dividend or the making of any distribution within 60 days
after the date of its declaration if such dividend or distribution would have
been permitted on the date of declaration; (2) the purchase, redemption or other
acquisition or retirement of any Capital Stock of the Company or any warrants,
options or other rights to acquire shares of any class of such Capital Stock
either (x) solely in exchange for shares of Qualified Capital Stock or other
rights to acquire Qualified Capital Stock or (y) through the application of the
net proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of shares of Qualified Capital Stock or warrants,
options or other rights to acquire Qualified Capital Stock or (z) in the case of
Disqualified Capital Stock, solely in exchange for, or through the application
of the net proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of, Disqualified Capital Stock that has a redemption
date no earlier than, and requires the payment of current dividends or
distributions in cash no earlier than, in each case, the Disqualified Capital
Stock being purchased, redeemed or otherwise acquired or retired; (3) the
acquisition of Indebtedness of the Company that is subordinate or junior in
right of payment to the Notes either (x) solely in exchange for shares of
Qualified Capital Stock (or warrants, options or other rights to acquire
Qualified Capital Stock), for shares of Disqualified Capital Stock that have a
redemption date no earlier than, and require the payment of current dividends or
distributions in cash no earlier than, in each case, the maturity date and
interest payments dates, respectively, of the Indebtedness being acquired, or
for Indebtedness of the Company that is subordinate or junior in right of
payment to the New Notes, at least to the extent that the Indebtedness being
acquired is subordinated to the New Notes and has a Weighted Average Life to
Maturity no less than that of the Indebtedness being acquired or (y) through the
application of the net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of shares of Qualified Capital Stock
(or warrants, options or other rights to acquire Qualified Capital Stock),
shares of Disqualified Capital Stock that have a redemption date no earlier
than, and require the payment of current dividends or distributions in cash no
earlier than, in each case, the maturity date and interest payments dates,
respectively, of the Indebtedness being refinanced, or Indebtedness of the
Company that is subordinate or junior in right of payment to the New Notes at
least to the extent that the Indebtedness being acquired is subordinated to the
New Notes and has a Weighted Average Life to Maturity no less than that of the
Indebtedness being refinanced; (4) payments by the Company to repurchase or to
enable Holding (including for the purpose of this clause (4) and for the
purposes of clauses (5) and (6) below, any corporation that, directly or
indirectly, owns all of the Common Stock of Holding) to repurchase, Capital
Stock of Holding from employees of Holding or its Subsidiaries or such other
Corporation in an aggregate amount not to exceed $5,000,000; (5) payments to
enable Holding to redeem or repurchase stock purchase or similar rights granted
by Holding with respect to its Capital Stock in an aggregate amount not to
exceed $1,000,000; (6) payments, not to exceed $200,000 in the aggregate, to
enable Holding to make cash payments to holders of its Capital Stock in lieu of
the issuance of fractional shares of its Capital Stock; (7) payments made
pursuant to any merger, consolidation or sale of assets effected in accordance
with the "Merger, Consolidation and Sale of Assets" covenant; provided, however,
that no such payment may be made pursuant to this clause (7) unless, after
giving effect to such transaction (and the incurrence of any Indebtedness in
connection therewith and the use of the proceeds thereof), the Company would be
able to incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the
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"Limitation on Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock" covenant such that after incurring that $1.00 of
additional Indebtedness, the Consolidated Coverage Ratio would be greater than
2.00 to 1.00; (8) payments to enable Holding or the Company to pay dividends on
its Capital Stock (other than Disqualified Capital Stock) after the first Equity
Offering in an annual amount not to exceed 6.00% of the gross proceeds (before
deducting underwriting discounts and commissions and other fees and expenses of
the offering) received from shares of Capital Stock (other than Disqualified
Stock) sold for the account of the issuer thereof (and not for the account of
any stockholder) in such initial Equity Offering and contributed to the Company,
(9) payments by the Company to fund the payment by any direct or indirect
holding company thereof of audit, accounting, legal or other similar expenses,
to pay franchise or other similar taxes and to pay other corporate overhead
expenses, so long as such dividends are paid as and when needed by its
respective direct or indirect holding company and so long as the aggregate
amount of payments pursuant to this clause (9) does not exceed $1,000,000 in any
calendar year; (10) payments by the Company to fund taxes of Holding for a given
taxable year in an amount equal to the Company's "separate return liability," as
if the Company were the parent of a consolidated group (for purposes of this
clause (iv) "separate return liability" for a given taxable year shall mean the
hypothetical United States tax liability of the Company defined as if the
Company had filed its own United States federal tax return for such taxable
year) and (11) payments by the Company under the Financial Monitoring and
Oversight Agreements or the Corporate Leases; provided, however, that in the
case of clauses (3), (4), (5), (6), (7) and (8), no Event of Default shall have
occurred or be continuing at the time of such payment or as a result thereof. In
determining the aggregate amount of Restricted Payments made subsequent to the
Issue Date, amounts expended pursuant to clauses (1), (4), (5), (6), (7) and (8)
shall be included in such calculation.
Merger, Consolidation and Sale of Assets. The Indenture provides that the
Company may not, in a single transaction or a series of related transactions,
consolidate with or merge with or into, or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its assets to, another
Person or adopt a plan of liquidation unless (i) either (1) the Company is the
surviving or continuing Person or (2) the Person (if other than the Company)
formed by such consolidation or into which the Company is merged or the person
that acquires by conveyance, transfer or lease the properties and assets of the
Company substantially as an entirety or in the case of a plan of liquidation,
the Person to which assets of the Company have been transferred, shall be a
corporation, partnership or trust organized and existing under the laws of the
United States or any State thereof or the District of Columbia; (ii) such
surviving person shall assume all of the obligations of the Company under the
Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately after giving effect to
such transaction and the use of the proceeds therefrom (on a pro forma basis,
including giving effect to any Indebtedness incurred or anticipated to be
incurred in connection with such transaction), the Company (in the case of
clause (1) of the foregoing clause (i)) or such Person (in the case of clause
(2) of the foregoing clause (i)) shall be able to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock" covenant; (iv) immediately after giving effect to
such transactions, no Default or Event of Default shall have occurred or be
continuing; and (v) the Company has delivered to the Trustee prior to the
consummation of the proposed transaction an Officers' Certificate and an Opinion
of Counsel, each stating that such consolidation, merger or transfer complies
with the Indenture and that all conditions precedent in the Indenture relating
to such transaction have been satisfied. For purposes of the foregoing, the
transfer (by lease, assignment, sale or otherwise, in a single transaction or
series of related transactions) of all or substantially all of the properties
and assets of one or more Subsidiaries, the Capital Stock of which constitutes
all or substantially all of the properties or assets of the Company, will be
deemed to be the transfer of all or substantially all of the properties and
assets of the Company. Notwithstanding the foregoing clauses (ii) and (iii), (1)
any Subsidiary of the Company may consolidate with, merge into or transfer all
or part of its properties and assets to the Company and
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(2) the Company may merge with a corporate Affiliate thereof incorporated solely
for the purpose of reincorporating the Company in another jurisdiction in the
U.S. to realize tax or other benefits.
Limitation on Asset Sales. The Indenture provides that neither the Company
nor any of its Subsidiaries will consummate an Asset Sale unless (i) the Company
or the applicable Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets
sold or otherwise disposed of (as determined in good faith by management of the
Company or, if such Asset Sale involves consideration in excess of $5,000,000,
by the board of directors of the Company, as evidenced by a board resolution),
(ii) at least 75% of the consideration received by the Company or such
Subsidiary, as the case may be, from such Asset Sale is in the form of cash or
Cash Equivalents and is received at the time of such disposition and (iii) upon
the consummation of an Asset Sale, the Company applies, or causes such
Subsidiary to apply, such Net Cash Proceeds within 180 days of receipt thereof
either (A) to repay any Senior Indebtedness of the Company or any Indebtedness
of a Subsidiary of the Company (and, to the extent such Senior Indebtedness
relates to principal under a revolving credit or similar facility, to obtain a
corresponding reduction in the commitments thereunder, except that the Company
may temporarily repay Senior Indebtedness using the consideration from such
Asset Sale and thereafter use such funds to reinvest pursuant to clause (B)
below within the period set forth therein without having to obtain a
corresponding reduction in the commitments under such revolving credit or
similar facility), (B) to reinvest, or to be contractually committed to reinvest
pursuant to a binding agreement, in Productive Assets and, in the latter case,
to have so reinvested within 360 days of the date of receipt of such Net Cash
Proceeds or (C) to purchase New Notes and other Senior Subordinated
Indebtedness, pro rata tendered to the Company for purchase at a price equal to
100% of the principal amount thereof (or the accreted value of such other Senior
Subordinated Indebtedness, if such other Senior Subordinated Indebtedness is
issued at a discount) plus accrued interest thereon, if any, to the date of
purchase pursuant to an offer to purchase made by the Company as set forth below
(a "Net Proceeds Offer"); provided, however, that the Company may defer making a
Net Proceeds Offer until the aggregate Net Cash Proceeds from Asset Sales not
otherwise applied in accordance with this covenant equal or exceed $5,000,000.
Subject to the deferral right set forth in the final proviso of the
preceding paragraph, each notice of a Net Proceeds Offer will be mailed, by
first-class mail, to holders of New Notes not more than 180 days after the
relevant Asset Sale or, in the event the Company or a Subsidiary has entered
into a binding agreement as provided in (B) above, within 180 days following the
termination of such agreement but in no event later than 360 days after the
relevant Asset Sale. Such notice will specify, among other things, the purchase
date (which will be no earlier than 30 days nor later than 45 days from the date
such notice is mailed, except as otherwise required by law) and will otherwise
comply with the procedures set forth in the Indenture. Upon receiving notice of
the Net Proceeds Offer, holders of New Notes may elect to tender their New Notes
in whole or in part in integral multiples of $1,000. To the extent holders
properly tender New Notes in an amount which, together with all other Senior
Subordinated Indebtedness so tendered, exceeds the Net Proceeds Offer, New Notes
and other Senior Subordinated Indebtedness of tendering holders will be
repurchased on a pro rata basis (based upon the aggregate principal amount
tendered). To the extent that the aggregate principal amount of New Notes
tendered pursuant to any Net Proceeds Offer, which, together with the aggregate
principal amount or aggregate accreted value, as the case may be, of all other
Senior Subordinated Indebtedness so tendered, is less than the amount of Net
Cash Proceeds subject to such Net Proceeds Offer, the Company may use any
remaining portion of such Net Cash Proceeds not required to fund the repurchase
of tendered Notes and other Senior Subordinated Indebtedness for any purposes
otherwise permitted by the Indenture. Upon the consummation of any Net Proceeds
Offer, the amount of Net Cash Proceeds subject to any future Net Proceeds Offer
from the Asset Sales giving rise to such Net Cash Proceeds shall be deemed to be
zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act to the extent applicable in connection with the repurchase of New
Notes pursuant to a Net Proceeds Offer.
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Limitation on Asset Swaps. The Indenture provides that the Company will
not, and will not permit any Subsidiary to, engage in any Asset Swaps, unless:
(i) at the time of entering into such Asset Swap, and immediately after giving
effect to such Asset Swap, no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof; (ii) in the event
such Asset Swap involves an aggregate amount in excess of $2.0 million, the
terms of such Asset Swap have been approved by a majority of the members of the
board of directors of the Company which determination shall include a
determination that the fair market value of the assets being received in such
swap are at least equal to the fair market value of the assets being swapped and
(iii) in the event such Asset Swap involves an aggregate amount in excess of
$10.0 million, the Company has also received a written opinion from an
independent investment banking firm of nationally recognized standing that such
Asset Swap is fair to the Company or such Subsidiary, as the case may be, from a
financial point of view.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create or otherwise cause to permit to exist or
become effective, by operation of the charter of such Subsidiary or by reason of
any agreement, instrument, judgment, decree, rule, order, statute or
governmental regulation, any encumbrance or restriction on the ability of any
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock; (b) make loans or advances or pay any Indebtedness or other obligation
owed to the Company or any of its Subsidiaries; or (c) transfer any of its
property or assets to the Company, except for such encumbrances or restrictions
existing under or by reason of: (1) applicable law; (2) the Indenture; (3)
customary non-assignment provisions of any lease governing a leasehold interest
of the Company or any Subsidiary; (4) any instrument governing Acquired
Indebtedness or Acquired Preferred Stock, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired; (5)
agreements existing on the Issue Date (including the Credit Agreement) as such
agreements are from time to time in effect; provided, however, that any
amendments or modifications of such agreements that affect the encumbrances or
restrictions of the types subject to this covenant shall not result in such
encumbrances or restrictions being less favorable to the Company in any material
respect, as determined in good faith by the board of directors of the Company,
than the provisions as in effect before giving effect to the respective
amendment or modification; (6) any restriction with respect to such a Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Subsidiary pending the
closing of such sale or disposition; (7) an agreement effecting a refinancing,
replacement or substitution of Indebtedness issued, assumed or incurred pursuant
to an agreement referred to in clause (2), (4) or (5) above or any other
agreement evidencing Indebtedness permitted under the Indenture; provided,
however, that the provisions relating to such encumbrance or restriction
contained in any such refinancing, replacement or substitution agreement or any
such other agreement are no less favorable to the Company in any material
respect as determined in good faith by the board of directors of the Company
than the provisions relating to such encumbrance or restriction contained in
agreements referred to in such clause (2), (4) or (5); (8) restrictions on the
transfer of the assets subject to any Lien imposed by the holder of such Lien;
(9) a licensing agreement to the extent such restrictions or encumbrances limit
the transfer of property subject to such licensing agreement; (10) restrictions
relating to Subsidiary preferred stock that require that due and payable
dividends thereon to be paid in full prior to dividends on such Subsidiary's
common stock or (11) any agreement or charter provision evidencing Indebtedness
or Capital Stock permitted under the Indenture; provided, however, that the
provisions relating to such encumbrance or restriction contained in such
agreement or charter provision are not less favorable to the Company in any
material respect as determined in good faith by the board of directors of the
Company than the provisions relating to such encumbrance or restriction
contained in the Indenture.
Limitations on Transactions with Affiliates. The Indenture provides that
neither the Company nor any of its Subsidiaries will, directly or indirectly,
enter into or permit to exist any transaction
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(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with or for the benefit of any of its
Affiliates (other than transactions between the Company and a Wholly Owned
Subsidiary of the Company or among Wholly Owned Subsidiaries of the Company) (an
"Affiliate Transaction"), other than Affiliate Transactions on terms that are no
less favorable than those that might reasonably have been obtained in a
comparable transaction on an arm's-length basis from a person that is not an
Affiliate; provided, however, that for a transaction or series of related
transactions involving value of $5,000,000 or more, such determination will be
made in good faith by a majority of members of the board of directors of the
Company and by a majority of the disinterested members of the board of directors
of the Company, if any; provided, further, that for a transaction or series of
related transactions involving value of $15,000,000 or more, the board of
directors of the Company has received an opinion from a nationally recognized
investment banking firm that such Affiliate Transaction is fair, from a
financial point of view, to the Company or such Subsidiary. The foregoing
restrictions will not apply to (1) reasonable and customary directors' fees,
indemnification and similar arrangements and payments thereunder, (2) any
obligations of the Company under the Financial Monitoring and Oversight
Agreements, the Corporate Leases or any employment agreement, noncompetition or
confidentiality agreement with any officer of the Company (provided that each
amendment of any of the foregoing agreements shall be subject to the limitations
of this covenant), (3) reasonable and customary investment banking, financial
advisory, commercial banking and similar fees and expenses paid to any of the
Initial Purchasers and their Affiliates, (4) any Restricted Payment permitted to
be made pursuant to the covenant described under "Limitation on Restricted
Payments," (5) any issuance of securities, or other payments, awards or grants
in cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the board of
directors of the Company, (6) loans or advances to employees in the ordinary
course of business of the Company or any of its Subsidiaries consistent with
past practices, and (7) the issuance of Capital Stock of the Company (other than
Disqualified Stock).
Restriction on Transfer of Assets to Subsidiaries. The Indenture provides
that if, at any time, (x) more than 20% of the Company's consolidated total
assets are owned by Subsidiaries of the Company or (y) more than 20% of the
Company's Consolidated EBITDA is derived from Subsidiaries of the Company, the
Company shall cause such Subsidiaries to (i) execute and deliver to the Trustee
a supplemental indenture in form reasonably satisfactory to the Trustee pursuant
to which such Subsidiaries shall unconditionally guarantee, on a senior
subordinated basis, all the Company's obligations under the New Notes and (ii)
deliver to the Trustee an Opinion of Counsel that such supplemental indenture
has been duly executed and delivered by such Subsidiaries; provided that if no
Default or Event of Default shall have occurred or be continuing, and neither
condition (x) or (y) is then met, such guarantees will automatically, with no
action required on behalf of the Company or its Subsidiaries, be released;
provided, however, that the provisions contained herein shall not apply to
Subsidiaries of the Company organized outside of the United States.
Reports. The Indenture provides that so long as any of the New Notes are
outstanding, the Company will provide to the holders of New Notes and file with
the Commission, to the extent such submissions are accepted for filing by the
Commission, copies of the annual reports and of the information, documents and
other reports that the Company would have been required to file with the
Commission pursuant to Sections 13 or 15(d) of the Exchange Act regardless of
whether the Company is then obligated to file such reports, commencing for the
period ended March 31, 1998.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on the New Notes when the same becomes due and
payable and the Default continues for a period of 30 days (whether or not such
payment is prohibited by the provisions described under "-- Ranking and
Subordination" above); (ii) the failure to pay principal of or premium, if any,
on any New Notes when such principal or premium, if any, becomes due and
payable, at maturity, upon
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redemption or otherwise (whether or not such payment is prohibited by the
provisions described under "-- Ranking and Subordination" above); (iii) a
default in the observance or performance of any other covenant or agreement
contained in the New Notes or the Indenture, which default continues for a
period of 30 days after the Company receives written notice thereof specifying
the default from the Trustee or holders of at least 25% in aggregate principal
amount of outstanding New Notes; (iv) the failure to pay at the final stated
maturity (giving effect to any extensions thereof) the principal amount of any
Indebtedness of the Company or any Subsidiary of the Company, or the
acceleration of the final stated maturity of any such Indebtedness, if the
aggregate principal amount of such Indebtedness, together with the aggregate
principal amount of any other such Indebtedness in default for failure to pay
principal at the final stated maturity (giving effect to any extensions thereof)
or which has been accelerated, aggregates $10,000,000 or more at any time in
each case after a 10-day period during which such default shall not have been
cured or such acceleration rescinded; (v) one or more judgments in an aggregate
amount in excess of $10,000,000 (which are not covered by insurance as to which
the insurer has not disclaimed coverage) being rendered against the Company or
any of its Significant Subsidiaries and such judgment or judgments remain
undischarged or unstayed for a period of 60 days after such judgment or
judgments become final and nonappealable; and (vi) certain events of bankruptcy,
insolvency or reorganization affecting the Company or any of its Significant
Subsidiaries.
Upon the happening of any Event of Default specified in the Indenture, the
Trustee may, and the Trustee upon the request of holders of 25% in principal
amount of the outstanding New Notes shall, or the holders of at least 25% in
principal amount of outstanding New Notes may, declare the principal of all the
New Notes, together with all accrued and unpaid interest and premium, if any, to
be due and payable by notice in writing to the Company and the Trustee
specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice"), and the same shall become immediately
due and payable, except that if there are any amounts outstanding under the
Credit Agreement, the same will become due and payable upon the first to occur
of an acceleration under the Credit Agreement or five business days after
receipt by the Company and the agent under the Credit Agreement of such
Acceleration Notice (unless all Events of Default specified in such Acceleration
Notice have been cured or waived). If an Event of Default with respect to
bankruptcy proceedings relating to the Company occurs and is continuing, then
such amount will ipso facto become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any holder of the New
Notes.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the New Notes as described in the preceding
paragraph, the holders of a majority in principal amount of the New Notes then
outstanding (by notice to the Trustee) may rescind and cancel such declaration
and its consequences if (i) the rescission would not conflict with any judgment
or decree of a court of competent jurisdiction, (ii) all existing Events of
Default have been cured or waived except nonpayment of principal of or interest
on the New Notes that has become due solely by such declaration of acceleration,
(iii) to the extent the payment of such interest is lawful, interest (at the
same rate specified in the New Notes) on overdue installments of interest and
overdue payments of principal, which has become due otherwise than by such
declaration of acceleration, has been paid, (iv) the Company has paid the
Trustee its reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of a
Default or Event of Default of the type described in clause (vi) of the
description of Events of Default in the first paragraph above, the Trustee has
received an Officers' Certificate and Opinion of Counsel that such Default or
Event of Default has been cured or waived. The holders of a majority in
principal amount of the New Notes may waive any existing Default or Event of
Default under the Indenture, and its consequences, except a default in the
payment of the principal of or interest on any New Notes.
The Company is required to deliver to the Trustee, within 120 days after
the end of the Company's fiscal year, a certificate indicating whether the
signing officers know of any Default or
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Event of Default that occurred during the previous year and whether the Company
has complied with its obligations under the Indenture. In addition, the Company
will be required to notify the Trustee of the occurrence and continuation of any
Default or Event of Default promptly after the Company becomes aware of the
same.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default thereunder should occur and be continuing,
the Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the holders of the New
Notes unless such holders have offered to the Trustee reasonable indemnity or
security against any loss, liability or expense. Subject to such provision for
security or indemnification and certain limitations contained in the Indenture,
the holders of a majority in principal amount of the outstanding New Notes have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Company may terminate its obligations under the Indenture at any time
by delivering all outstanding Notes to the Trustee for cancellation and paying
all sums payable by it thereunder. The Company, at its option, (i) will be
discharged from any and all obligations with respect to the Notes (except for
certain obligations of the Company to register the transfer or exchange of such
Notes, replace stolen, lost or mutilated Notes, maintain paying agencies and
hold moneys for payment in trust) or (ii) need not comply with certain of the
restrictive covenants with respect to the Indenture, if the Company deposits
with the Trustee, in trust, U.S. legal tender or U.S. Government Obligations or
a combination thereof that, through the payment of interest and premium thereon
and principal in respect thereof in accordance with their terms, will be
sufficient to pay all the principal of and interest and premium on the Notes on
the dates such payments are due in accordance with the terms of such Notes as
well as the Trustee's fees and expenses. To exercise either such option, the
Company is required to deliver to the Trustee (A) an Opinion of Counsel or a
private letter ruling issued to the Company by the Internal Revenue Service (the
"IRS") to the effect that the holders of the Notes will not recognize income,
gain or loss for federal income tax purposes as a result of the deposit and
related defeasance and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
option had not been exercised and, in the case of an Opinion of Counsel
furnished in connection with a discharge pursuant to clause (i) above,
accompanied by a private letter ruling issued to the Company by the IRS to such
effect, (B) subject to certain qualifications, an opinion of counsel to the
effect that funds so deposited will not be subject to avoidance under applicable
bankruptcy law and (C) an officers' certificate and an opinion of counsel to the
effect that the Company has complied with all conditions precedent to the
defeasance which opinion shall also state that the exercise of such option does
not violate any loan agreement of the Company known to such counsel.
Notwithstanding the foregoing, the opinion of counsel required by clause (A)
above need not be delivered if all Notes not theretofore delivered to the
Trustee for cancellation (i) have become due and payable, (ii) will become due
and payable on the maturity date within one year or (iii) are to be called for
redemption within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, together, without the
consent of the holders of the New Notes, may amend or supplement the Indenture
for certain specified purposes, including curing ambiguities, defects or
inconsistencies. Other modifications and amendments of the Indenture may be made
with the consent of the holders of a majority in principal amount of the then
outstanding Notes, except that, without the consent of each holder of the Notes
affected thereby, no amendment may, directly or indirectly: (i) reduce the
amount of Notes whose holders must consent
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to an amendment; (ii) reduce the rate of or change the time for payment of
interest, including defaulted interest, on any Notes; (iii) reduce the principal
of or change the fixed maturity of any Notes, or change the date on which any
Notes may be subject to redemption or repurchase, or reduce the redemption or
repurchase price therefor; (iv) make any Notes payable in money other than that
stated in the Notes and the Indenture; (v) make any change in provisions of the
Indenture protecting the right of each holder of a Note to receive payment of
principal of, premium on and interest on such Note on or after the due date
thereof or to bring suit to enforce such payment or permitting holders of a
majority in principal amount of the Notes to waive Default or Event of Default;
or (vi) after the Company's obligation to purchase the Notes arises under the
Indenture, amend, modify or change the obligation of the Company to make or
consummate a Change of Control Offer or a Net Proceeds Offer or waive any
default in the performance thereof or modify any of the provisions or
definitions with respect to any such offers. Any amendment or modification of
the subordination provisions of the Notes or the Indenture, including related
definitions, shall also require the consent of the Representative under the
Credit Agreement.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest, it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of such person's own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of New Notes, unless such holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
GOVERNING LAW
The Indenture provides that it and the New Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the laws of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Subsidiary of the
Company or at the time it merges or consolidates with the Company or any of its
Subsidiaries or assumed in connection with the acquisition of assets from such
Person and not incurred by such Person in connection with, or in anticipation or
contemplation of, such Person becoming a Subsidiary of the Company or such
acquisition, merger or consolidation.
"Affiliate" means, as to any Person, any other Person who, directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, the first referred to Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or
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cause the direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
"Acquired Preferred Stock" means Preferred Stock of any Person at the time
such Person becomes a Subsidiary of the Company or at the time it merges or
consolidates with the Company or any of its Subsidiaries and not issued by such
person in connection with, or in anticipation or contemplation of, such
acquisition, merger or consolidation.
"Asset Acquisition" means (i) an Investment by the Company or any
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Subsidiary of the Company or shall be consolidated or merged with
the Company or any Subsidiary of the Company or (ii) the acquisition by the
Company or any Subsidiary of the Company of assets of any Person comprising a
division or line of business of such Person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Subsidiaries (excluding any Sale and Leaseback Transaction or any pledge of
assets or stock by the Company or any of its Subsidiaries) to any Person other
than the Company or a Wholly Owned Subsidiary of the Company of (i) any Capital
Stock of any Subsidiary of the Company or (ii) any other property or assets of
the Company or any Subsidiary of the Company other than in the ordinary course
of business; provided, however, that for purposes of the "Limitation on Asset
Sales" covenant, Asset Sales shall not include (a) a transaction or series of
related transactions in which the Company or its Subsidiaries receive aggregate
consideration of less than $1,000,000, (b) transactions covered by the "Merger,
Consolidation and Sale of Assets" covenant or permitted by the "Limitation on
Asset Swaps" covenant, (c) a Restricted Payment that otherwise qualifies under
the "Limitation on Restricted Payments" covenant, (d) any disposition of
obsolete or worn out equipment or equipment that is no longer useful in the
conduct of the business of the Company and its Subsidiaries and that is disposed
of, in each case, in the ordinary course of business or (e) sales of receivables
and leases in connection with the lease financing activities described in clause
(xii) of the definition of Permitted Indebtedness.
"Asset Swap" means the execution of a definitive agreement, subject only to
approval of the United States Federal Trade Commission, if applicable, and other
customary closing conditions, that the Company in good faith believes will be
satisfied, for a substantially concurrent purchase and sale, or exchange, of
Productive Assets between the Company or any of its Subsidiaries and another
Person or group of affiliated Persons; provided that any amendment to or waiver
of any closing condition that individually or in the aggregate is material to
the Asset Swap shall be deemed to be a new Asset Swap; it being understood that
an Asset Swap may include a cash equalization payment made in connection
therewith provided that such cash payment, if received by the Company or its
Subsidiaries, shall be deemed to be proceeds received from an Asset Sale and
applied in accordance with "Certain Covenants -- Limitation on Asset Sales."
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated) of capital stock of such Person and (ii) with respect to any Person
that is not a corporation, any and all partnership or other equity interests of
such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligation of
such Person to pay rent or other amounts under a lease to which such Person is a
party that is required to be classified and accounted for as a capital lease
obligation under GAAP, and for purposes of this definition, the amount of such
obligation at any date shall be the capitalized amount of such obligation at
such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of
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acquisition thereof; (ii) marketable direct obligations issued by any state of
the United States of America or any political subdivision of any such state or
any public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Corporation or Moody's
Investors Service, Inc.; (iii) commercial paper maturing no more than one year
from the date of creation thereof and, at the time of acquisition, having a
rating of at least A-1 from Standard & Poor's Corporation or at least P-1 from
Moody's Investors Service, Inc.; (iv) certificates of deposit or bankers'
acceptances maturing within one year from the date of acquisition thereof issued
by any commercial bank organized under the laws of the United States of America
or any state thereof or the District of Columbia or any U.S. branch of a foreign
bank having at the date of acquisition thereof combined capital and surplus of
not less than $200,000,000; (v) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clause (i)
above entered into with any bank meeting the qualifications specified in clause
(iv) above; and (vi) investments in money market funds that invest substantially
all their assets in securities of the types described in clauses (i) through (v)
above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
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 (a "Group") (whether or not otherwise in compliance with the
provisions of the Indenture), other than to Hicks Muse, any of its Affiliates,
officers and directors, Glenn E. Staats or any of his Affiliates or Preston W.
Staats or any of his Affiliates (collectively, the "Permitted Holders"); or (ii)
a majority of the board of directors of the Company or Holding shall consist of
Persons who are not Continuing Directors; or (iii) the acquisition by any Person
or Group (other than the Permitted Holders or any direct or indirect Subsidiary
of any Permitted Holder, including without limitation, Holding) 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 or Holding.
"Commodity Agreement" means any commodity futures contract, commodity
option or other similar agreement or arrangement entered into by the Company or
any of its Subsidiaries designed to protect the Company or any of its
Subsidiaries against fluctuations in the price of commodities actually used in
the ordinary course of business of the Company and its Subsidiaries.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated EBITDA for the four quarter
period of the most recent four consecutive fiscal quarters ending prior to the
date of such determination (the "Four Quarter Period") to (ii) Consolidated
Fixed Charges for such Four Quarter Period; provided, however, that (1) if the
Company or any Subsidiary of the Company has incurred any Indebtedness or issued
any preferred stock since the beginning of such Four Quarter Period that remains
outstanding on such date of determination or if the transaction giving rise to
the need to calculate the Consolidated Coverage Ratio is an incurrence of
Indebtedness or issuance of preferred stock, Consolidated EBITDA and
Consolidated Fixed Charges for such Four Quarter Period shall be calculated
after giving effect on a pro forma basis to such Indebtedness or issuance of
preferred stock as if such Indebtedness had been incurred or such preferred
stock had been issued on the first day of such Four Quarter Period and the
discharge of any other Indebtedness or preferred stock repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new Indebtedness or
preferred stock as if such discharge had occurred on the first day of such Four
Quarter Period, (2) if since the beginning of such Four Quarter Period the
Company or any Subsidiary of the Company shall have made any Asset Sale, the
Consolidated EBITDA for such Four Quarter Period shall be reduced by an amount
equal to the Consolidated EBITDA (if positive) directly attributable to the
assets that are the subject of such Asset Sale for such Four Quarter Period or
increased by an amount equal to the Consolidated EBITDA (if negative) directly
attributable thereto for such Four Quarter Period and Consolidated Fixed Charges
for such Four Quarter Period shall be reduced by
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an amount equal to the Consolidated Fixed Charges directly attributable to any
Indebtedness or preferred stock of the Company or any Subsidiary of the Company
repaid, repurchased, defeased or otherwise discharged with respect to the
Company and its continuing Subsidiaries in connection with such Asset Sale for
such Four Quarter Period (or, if the Capital Stock of any Subsidiary of the
Company are sold, the Consolidated Fixed Charges for such Four Quarter Period
directly attributable to the Indebtedness of such Subsidiary to the extent the
Company and its continuing Subsidiaries are no longer liable for such
Indebtedness after such sale), (3) if since the beginning of such Four Quarter
Period the Company or any Subsidiary of the Company (by merger or otherwise)
shall have made an Investment in any Subsidiary of the Company (or any Person
that becomes a Subsidiary of the Company) or an acquisition of assets, including
any acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder, which constitutes all or substantially all of
an operating unit of a business, Consolidated EBITDA and Consolidated Fixed
Charges for such Four Quarter Period shall be calculated after giving pro forma
effect thereto (including the Incurrence of any Indebtedness or the issuance of
any preferred stock) as if such Investment or acquisition occurred on the first
day of such Four Quarter Period and (4) if since the beginning of such Four
Quarter Period any Person (that subsequently became a Subsidiary or was merged
with or into the Company or any Subsidiary of the Company since the beginning of
such Four Quarter Period) shall have made any Asset Sale or any Investment or
acquisition of assets that would have required an adjustment pursuant to clause
(2) or (3) above if made by the Company or a Subsidiary of the Company during
such Four Quarter Period, Consolidated EBITDA and Consolidated Fixed Charges for
such Four Quarter Period shall be calculated after giving pro forma effect
thereto as if such Asset Sale, Investment or acquisition of assets occurred on,
with respect to any Investment or acquisition, the first day of such Four
Quarter Period and, with respect to any Asset Sale, the day prior to the first
day of such Four Quarter Period. For purposes of this definition, whenever pro
forma effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Fixed Charges
associated with any Indebtedness incurred or the issuance of any preferred stock
in connection therewith, the pro forma calculations shall be determined
reasonably and in good faith by a responsible financial or accounting officer of
the Company. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest expense on such Indebtedness shall be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any agreement under
which Interest Rate Protection Obligations are outstanding applicable to such
Indebtedness if such agreement under which such Interest Rate Protection
Obligations are outstanding has a remaining term as at the date of determination
in excess of 12 months); provided, however, that the Consolidated Interest
Expense of the Company attributable to interest on any Indebtedness incurred
under a revolving credit facility computed on a pro forma basis shall be
computed based upon the average daily balance of such Indebtedness during the
Four Quarter Period.
"Consolidated EBITDA" means, for any period, the Consolidated Net Income
for such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) Consolidated Income Tax Expense for such period;
(ii) Consolidated Fixed Charges for such period; and (iii) Consolidated Non-cash
Charges for such period less all non-cash items increasing Consolidated Net
Income for such period.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense and
(ii) the amount of all cash dividend payments or payments in Disqualified
Capital Stock on Preferred Stock of Subsidiaries of such Person or on
Disqualified Capital Stock of such Person held by Persons other than the Company
or any Wholly Owned Subsidiaries paid, accrued or scheduled to be paid or
accrued during such period.
"Consolidated Income Tax Expense" means, with respect to the Company for
any period, the provision for Federal, state, local and foreign income taxes
payable by the Company and its Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
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"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, the sum of (i) the interest expense of such Person
and its Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Swap Obligations (including any
amortization of discounts), (c) the interest portion of any deferred payment
obligation, (d) all commissions, discounts and other fees and charges owed with
respect to letters of credit, bankers' acceptance financing or similar
facilities, and (e) all accrued or capitalized interest and (ii) the interest
component of Capitalized Lease Obligations paid or accrued by such Person and
its Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or loss) of such Person and its Subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP; provided,
however, that there shall be excluded therefrom, without duplication, (a) gains
and losses from Asset Sales (without regard to the $1,000,000 limitation set
forth in the definition thereof) or abandonments or reserves relating thereto
and the related tax effects, (b) items classified as extraordinary or
nonrecurring gains and losses, and the related tax effects according to GAAP,
(c) the net income (or loss) of any Person acquired in a pooling of interests
transaction accrued prior to the date it becomes a Subsidiary of such first
referred to Person or is merged or consolidated with it or any of its
Subsidiaries, (d) the net income of any Subsidiary to the extent that the
declaration of dividends or similar distributions by that Subsidiary of that
income is restricted by contract, operation of law or otherwise, (e) the net
income of any Person, other than the Company or a Subsidiary or other than an
Unrestricted Subsidiary, except to the extent of the lesser of (x) dividends or
distributions paid to such first referred to Person or its Subsidiary by such
Person and (y) the net income of such Person (but in no event less than zero),
and the net loss of such Person shall be included only to the extent of the
aggregate Investment of the first referred to Person or a consolidated
Subsidiary of such Person and any non-cash expenses attributable to grants or
exercises of employee stock options, (f) charges relating to the amortization or
write-off of intangibles or other goodwill arising from the ARISB Acquisition or
the Triad Acquisition and (g) the cumulative effect of changes in accounting
principles.
"Consolidated Non-Cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Subsidiaries (excluding any such charges constituting an
extraordinary or nonrecurring item) reducing Consolidated Net Income of such
Person and its Subsidiaries for such period, determined on a consolidated basis
in accordance with GAAP.
"Continuing Director" means, as of the date of determination, any Person
who (i) was a member of the board of directors of the Company or Holdings on the
Issue Date, (ii) was nominated for election or elected to the board of directors
of the Company or Holdings, as the case may be, 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 representative of a
Permitted Holder.
"Corporate Leases" mean the lease agreements with respect to the Company's
offices and facilities in Austin, Texas, leased by the Company from a
corporation owned by Messrs. Glenn and Preston Staats and offices and facilities
in Livermore, California, leased from Triad Park LLC, each as in effect on the
Issue Date or as may be subsequently amended in a way not materially adverse to
holders of the Notes or the Company.
"Credit Agreement" means (i) the Credit Agreement, dated as of February 27,
1997, as amended and restated as of February 6, 1998, among the Company,
Holding, The Chase Manhattan Bank, as administrative agent, NationsBank of
Texas, N.A., as Lender, and any other financial institutions from time to time
party thereto, together with the related documents thereto (including, without
limitation, any guarantee agreements and security documents) as the same may be
amended, supplemented, restated, restored or otherwise modified from time to
time, including amendments, supplements or modifications relating to the
addition or elimination of Subsidiaries of
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the Company as borrowers or guarantors or other credit parties thereunder, and
(ii) any renewal, extension, refunding, restructuring, restatements, replacement
or refinancing thereof (whether with the original administrative agent, and
lenders or another administrative agent or agents or one or more other lenders
and whether provided under the original Credit Agreement or one or more other
credit or other agreements).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Subsidiaries against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all obligations under the Credit
Agreement and (ii) any other Senior Indebtedness of the Company which, at the
date of determination, has an aggregate principal amount outstanding of, or
under which, at the date of determination, the holders thereof are committed to
lend up to, at least $10,000,000 and is specifically designated by the Company
in the instrument evidencing or governing such Senior Indebtedness as
"Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Capital Stock" means any Capital Stock that, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures (excluding any
maturity as the result of an optional redemption by the issuer thereof) or is
mandatorily redeemable on or before February 1, 2008, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof (except, in each case, upon the occurrence of a Change of Control), in
whole or in part, on or prior to February 1, 2008; provided that only the
portion of Capital Stock which so matures or is mandatorily redeemable or is so
redeemable at the sole option of the holder thereof prior to February 1, 2008
shall be deemed to be Disqualified Capital Stock.
"Equity Offering" means a private sale or an underwritten public offering
of Capital Stock (other than Disqualified Capital Stock) of the Company or
Holdings (to the extent, in the case of Holdings, that the net cash proceeds
thereof are contributed to the common or non-redeemable preferred equity capital
of the Company).
"Financial Monitoring and Oversight Agreements" means the Monitoring and
Oversight Agreement among the Company, Holdings and Hicks Muse Partners, as in
effect on the Issue Date and the Financial Advisory Agreement among the Company,
Holdings and Hicks Muse Partners, each as in effect on the Issue Date or as may
be subsequently amended in a way not materially adverse to holders of the Notes
or the Company.
"GAAP," unless otherwise indicated, means generally accepted accounting
principles in the United States of America as in effect as of the date of the
Indenture, including those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or the Commission or in such other statements by such other
entity as approved by a significant segment of the accounting profession. All
ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP.
"Indebtedness" means with respect to any Person, without duplication, any
liability of such Person (i) for borrowed money, (ii) evidenced by bonds,
debentures, notes or other similar instruments, (iii) constituting Capitalized
Lease Obligations, (iv) incurred or assumed as the deferred purchase price of
property, or pursuant to conditional sale obligations and title retention
agreements (but excluding trade accounts payable arising in the ordinary course
of business), (v) for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (vi) for Indebtedness of
others guaranteed by such Person, (vii) for Interest Swap Obligations, Commodity
Agreements and Currency Agreements and (viii) for Indebtedness of any other
Person of the type referred to in clauses (i) through (vii) which is secured by
any Lien on any property or asset of such first referred to Person, the amount
of such Indebtedness being
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deemed to be the lesser of the value of such property or asset or the amount of
the Indebtedness so secured. The amount of Indebtedness of any Person at any
date shall be the outstanding principal amount of all unconditional obligations
described above, as such amount would be reflected on a balance sheet prepared
in accordance with GAAP, and the maximum liability at such date of such Person
for any contingent obligations described above.
"Interest Swap Obligations" means the obligations of any Person under any
interest rate protection agreement, interest rate future, interest rate option,
interest rate swap, interest rate cap or other interest rate hedge or
arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (in each case, including by way of Guarantee or
similar arrangement) or capital contribution to any Person, but excluding any
debt or extension of credit represented by a bank deposit other than a time
deposit. For purposes of the "Limitation on Restricted Payments" covenant, (A)
"Investment" shall include the portion (proportionate to the Company's equity
interest in a Subsidiary to be designated as an Unrestricted Subsidiary) of the
fair market value of the net assets of such Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Unrestricted Subsidiary as a
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(1) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (2) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so redesignated from an
Unrestricted Subsidiary to a Subsidiary; and (B) any property transferred to or
from an Unrestricted Subsidiary shall be valued at its fair market value at the
time of such transfer, in each case as determined in good faith by the board of
directors.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents (including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents)
received by the Company or any of its Subsidiaries from such Asset Sale net of
(i) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions, recording fees, relocation costs, title insurance
premiums, appraisers, fees and costs reasonably incurred in preparation of any
asset or property for sale), (ii) taxes paid or reasonably estimated to be
payable (calculated based on the combined state, federal and foreign statutory
tax rates applicable to the Company or the Subsidiary engaged in such Asset
Sale), (iii) all distributions and other payments required to be made to any
Person owning a beneficial interest in the assets subject to sale or minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Sale, (iv) any reserves established in accordance with GAAP for adjustment in
respect of the sales price of such asset or assets or for any liabilities
associated with such Asset Sale, and (v) repayment of Indebtedness secured by
assets subject to such Asset Sale; provided, however, that if the instrument or
agreement governing such Asset Sale requires the transferor to maintain a
portion of the purchase price in escrow (whether as a reserve for adjustment of
the purchase price or otherwise) or to indemnify the transferee for specified
liabilities in a maximum specified amount, the portion of the cash or Cash
Equivalents that is actually placed in escrow or segregated and set aside by the
transferor for such indemnification obligation shall not be deemed to be Net
Cash Proceeds until the escrow terminates or the transferor ceases to segregate
and set aside such funds, in whole or in part, and then only to the extent of
the proceeds released from escrow to the transferor or that are no longer
segregated and set aside by the transferor.
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<PAGE> 95
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing, or otherwise relating to, any
Indebtedness.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Indebtedness" means, without duplication, (i) Indebtedness
outstanding on the Issue Date; (ii) Indebtedness of the Company or a Subsidiary
incurred pursuant to the Credit Agreement (including guarantees thereof) in an
aggregate principal amount at any time outstanding not to exceed $100,000,000;
(iii) Indebtedness evidenced by or arising under the Notes and the Indenture;
(iv) Interest Swap Obligations; provided, however, that such Interest Swap
Obligations are entered into to protect the Company from fluctuations in
interest rates of its Indebtedness; (v) additional Indebtedness of the Company
or any of its Subsidiaries not to exceed $20,000,000 in principal amount
outstanding at any time (which amount may, but need not, be incurred under the
Credit Agreement); (vi) Refinancing Indebtedness; (vii) Indebtedness owed by the
Company to any Wholly Owned Subsidiary of the Company or by any Subsidiary of
the Company to the Company or any Wholly Owned Subsidiary of the Company; (viii)
guarantees by the Company or Subsidiaries of any Indebtedness permitted to be
incurred pursuant to the Indenture; (ix) Indebtedness in respect of performance
bonds, bankers' acceptances and surety or appeal bonds provided by the Company
or any of its Subsidiaries to their customers in the ordinary course of their
business; (x) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Subsidiaries pursuant to such
agreements, in each case incurred in connection with the disposition of any
business assets or Subsidiaries of the Company (other than guarantees of
Indebtedness or other obligations incurred by any Person acquiring all or any
portion of such business assets or Subsidiaries of the Company for the purpose
of financing such acquisition) in a principal amount not to exceed the gross
proceeds actually received by the Company or any of its Subsidiaries in
connection with such disposition; provided, however, that the principal amount
of any Indebtedness incurred pursuant to this clause (x), when taken together
with all Indebtedness incurred pursuant to this clause (x) and then outstanding,
shall not exceed $15,000,000; (xi) Indebtedness represented by Capitalized Lease
Obligations, mortgage financings or purchase money obligations, in each case
incurred for the purpose of financing all or any part of the purchase price or
cost of construction or improvement of property used in a related business or
incurred to refinance any such purchase price or cost of construction or
improvement, in each case incurred no later than 365 days after the date of such
acquisition or the date of completion of such construction or improvement;
provided, however, that the principal amount of any Indebtedness incurred
pursuant to this clause (xi) shall not exceed $3,000,000 at any time
outstanding; and (xii) Indebtedness and other Obligations of the Company and its
Subsidiaries related to lease financing activities which are not required to be
treated as indebtedness on a balance sheet, as determined in accordance with
generally accepted accounting principles as in effect on the date such
Indebtedness or other Obligation is incurred.
"Permitted Investments" means (i) Investments by the Company or any
Subsidiary of the Company to acquire the stock or assets of any Person (or
Acquired Indebtedness or Acquired Preferred Stock acquired in connection with a
transaction in which such Person becomes a Subsidiary of the Company); provided,
however, that the primary business of such person is in the good faith judgment
of management of the Company a business reasonably related, ancillary or
complementary to the business of the Company; provided, further, however, that
if any such Investment or series of related Investments involves an Investment
by the Company in excess of $3,000,000, the Company is able, at the time of such
investment and immediately after giving effect thereto, to incur at least $1.00
of additional Indebtedness (other than Permitted Indebtedness) in compliance
with the "Limitation on Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock" covenant, (ii) Investments received by the Company
or its Subsidiaries as
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<PAGE> 96
consideration for a sale of assets, (iii) Investments by the Company or any
Wholly Owned Subsidiary of the Company in any Wholly Owned Subsidiary of the
Company (whether existing on the Issue Date or created thereafter) or any Person
that after such Investments, and as a result thereof, becomes a Wholly Owned
Subsidiary of the Company and Investments in the Company by any Wholly Owned
Subsidiary of the Company, (iv) Investments in cash and Cash Equivalents, (v)
Investments in securities of trade creditors, wholesalers or customers received
pursuant to any plan of reorganization or similar arrangement, (vi) loans or
advances to employees of the Company or any Subsidiary thereof for purposes of
purchasing the Company's Capital Stock and other loans and advances to employees
made in the ordinary course of business consistent with past practices of the
Company or such Subsidiary, and (vii) additional Investments in an aggregate
amount not to exceed $1,000,000 at any time outstanding.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Productive Assets" means assets of a kind used or usable by the Company
and its Subsidiaries in its business; provided, however, that productive assets
to be acquired by the Company shall be, in the good faith judgment of management
of the Company, assets which are reasonably related, ancillary or complementary
to the business of the Company as conducted on the Issue Date.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinancing Indebtedness" means any refinancing of Indebtedness of the
Company or any of its Subsidiaries existing as of the Issue Date or incurred in
accordance with the "Limitation on Incurrence of Additional Indebtedness and
Issuance of Disqualified Capital Stock" covenant (other than pursuant to clause
(iii) or (iv) of the definition of Permitted Indebtedness) that does not (i)
result in an increase in the aggregate principal amount of Indebtedness (such
principal amount to include, for purposes of this definition, any premiums,
penalties or accrued interest paid with the proceeds of the Refinancing
Indebtedness) of such Person or (ii) create Indebtedness with (A) a Weighted
Average Life to Maturity that is less than the Weighted Average Life to Maturity
of the Indebtedness being refinanced or (B) a final maturity earlier than the
final maturity of the Indebtedness being refinanced.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Senior Indebtedness; provided, however, that
if, and for so long as, any issue of Senior Indebtedness lacks such a
representative, then the Representative for such issue of Senior Indebtedness
shall at all times constitute the holders of a majority in outstanding principal
amount of such issue of Senior Indebtedness.
"Restricted Payment" means (i) the declaration or payment of any dividend
or the making of any other distribution (other than dividends or distributions
payable in Qualified Capital Stock or in options, rights or warrants to acquire
Qualified Capital Stock) on shares of the Company's Capital Stock, (ii) the
purchase, redemption, retirement or other acquisition for value of any Capital
Stock of the Company, or any warrants, rights or options to acquire shares of
Capital Stock of the Company, other than through the exchange of such Capital
Stock or any warrants, rights or options to acquire shares of any class of such
Capital Stock for Qualified Capital Stock or warrants, rights or options to
acquire Qualified Capital Stock, (iii) the making of any principal payment on,
or the purchase, defeasance, redemption, prepayment, decrease or other
acquisition or retirement for value, prior to any scheduled final maturity,
scheduled repayment or scheduled sinking fund payment, of, any Indebtedness of
the Company or its Subsidiaries that is subordinated or junior in right of
payment to the Notes or (iv) the making of any Investment (other than a
Permitted Investment).
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<PAGE> 97
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Subsidiary transfers such
property to a Person and the Company or a Subsidiary leases it from such Person.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank pari passu with the Notes in right of payment and is not subordinated by
its terms in right of payment to any Indebtedness or other obligation of the
Company which is not Senior Indebtedness.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article I, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the Indenture.
"Subsidiary," with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly through one or more
intermediaries, by such Person or (ii) any other Person of which at least a
majority of the voting interest under ordinary circumstances is at the time,
directly or indirectly, through one or more intermediaries, owned by such
Person. Notwithstanding anything in the Indenture to the contrary, all
references to the Company and its consolidated Subsidiaries or to financial
information prepared on a consolidated basis in accordance with GAAP shall be
deemed to include the Company and its Subsidiaries as to which financial
statements are prepared on a combined basis in accordance with GAAP and to
financial information prepared on such a combined basis. Notwithstanding
anything in the Indenture to the contrary, an Unrestricted Subsidiary shall not
be deemed to be a Subsidiary for purposes of the Indenture.
"Unrestricted Subsidiary" means a Subsidiary of the Company created after
the Issue Date and so designated (together with its Subsidiaries) by a
resolution adopted by the board of directors of the Company; provided, however,
that (a) neither the Company nor any of its other Subsidiaries (other than
Unrestricted Subsidiaries) (1) provides any credit support for any Indebtedness
of such Subsidiary or its Subsidiaries (including any undertaking, agreement or
instrument evidencing such Indebtedness) or (2) is directly or indirectly liable
for any Indebtedness of such Subsidiary or its Subsidiaries and (b) except with
respect to the designation described in the last sentence of this definition at
the time of designation of such Subsidiary, such Subsidiary and its Subsidiaries
has no property or assets (other than de minimis assets resulting from the
initial capitalization of such Subsidiary). The board of directors may designate
any Unrestricted Subsidiary to be a Subsidiary; provided, however, that
immediately after giving effect to such designation (x) the Company could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Incurrence of Additional Indebtedness and
Issuance of Disqualified Capital Stock" covenant and (y) no Default or Event of
Default shall have occurred or be continuing. Any designation pursuant to this
definition by the board of directors of the Company shall be evidenced to the
Trustee by the filing with the Trustee of a certified copy of the resolution of
the Company's board of directors giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
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<PAGE> 98
"Wholly Owned Subsidiary" of any Person means any Subsidiary of such Person
of which all the outstanding voting securities (other than directors' qualifying
shares) which normally have the right to vote in the election of directors are
owned by such Person or any Wholly-Owned Subsidiary of such Person.
BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the New Notes initially will be
represented by one or more permanent global certificates in definitive, duly
registered form (the "Global Notes"). The Global Notes will be deposited on the
Issue Date with, or on behalf of, DTC and registered in the name of a nominee of
DTC.
The Global Notes. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount of New Notes
of the individual beneficial interests represented by such Global Notes to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Notes will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchasers and ownership of beneficial interests in the Global Notes will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. QIBs and institutional Accredited Investors
who are not QIB's may hold their interests in the Global Notes directly through
DTC if they are participants in such system, or indirectly through organizations
which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
New Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the New Notes represented by such Global Notes for all
purposes under the Indenture. No beneficial owner of an interest in the Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures.
Payments of the principal of, premium (if any) and interest on, the Global
Notes will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any Paying Agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any and interest on the Global Notes, will credit
participants' accounts with payments in amount proportionate to their respective
beneficial interests in the principal amount of the Global Notes as shown on the
records of DTC or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in the Global Notes held through
such participants will be governed by standing instructions and customary
practice, as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell New Notes to persons in
states which require physical delivery of the New Notes, or to pledge such
securities, such holder must transfer its interest in a Global Note, in
accordance with the normal procedures of DTC.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Notes for
exchange as described below) only at the
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<PAGE> 99
direction of one or more participants to whose account the DTC interests in the
Global Notes are credited and only in respect of such portion of the aggregate
principal amount of New Notes as to which such participant or participants has
or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended.
DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Issuer within 90 days, Certificated Securities will be issued
in exchange for the Global Notes.
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<PAGE> 100
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the exchange of Old Notes for New Notes, but does not
purport to be a complete analysis of all potential tax effects. The discussion
is based upon the Internal Revenue Code of 1986, as amended, Treasury
regulations, Internal Revenue Service rulings and pronouncements, and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect a holder of the New Notes.
The description does not consider the effect of any applicable foreign, state,
local or other tax laws or estate or gift tax considerations.
EACH HOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF EXCHANGING OLD NOTES FOR NEW NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not constitute a sale or exchange for federal income tax purposes. Accordingly,
such exchange will not have federal income tax consequences to holders of Old
Notes.
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<PAGE> 101
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 90 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 1998, all dealers effecting transactions in the New
Notes may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any
broker-dealers and will indemnify holders of the Old Notes (including any
broker-dealers) against certain liabilities, including certain liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Weil, Gotshal & Manges LLP, Dallas, Texas and New York, New York.
EXPERTS
The consolidated financial statements and schedule of Cooperative Computing
Holding Company, Inc. at September 30, 1997 and November 30, 1996, and for each
of the two years in the period ended November 30, 1996 and for the ten-month
period ended September 30, 1997 and the consolidated statement of operations and
cash flows of Triad for the five months ended February 28, 1997 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Triad for each of the two years in
the period ended September 30, 1996 have been included herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
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<PAGE> 102
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
Unaudited Interim Consolidated Financial Statements
Consolidated Balance Sheet as of March 31, 1998........ F-2
Consolidated Statements of Operations for the six month
periods ended March 31, 1997 and 1998................. F-3
Consolidated Statements of Cash Flows for the six month
periods ended March 31, 1997 and 1998................. F-4
Notes to the Unaudited Interim Consolidated Financial
Statements............................................ F-5
Audited Consolidated Financial Statements
Report of Independent Auditors......................... F-9
Consolidated Balance Sheets as of November 30, 1996 and
September 30, 1997.................................... F-10
Consolidated Statements of Operations for the years
ended November 30, 1995 and 1996 and the ten-month
period ended September 30, 1997....................... F-11
Consolidated Statements of Stockholders' Equity for the
years ended November 30, 1995 and 1996 and the
ten-month period ended September 30, 1997............. F-12
Consolidated Statements of Cash Flows for the years
ended November 30, 1995 and 1996 and the ten-month
period ended September 30, 1997....................... F-13
Notes to Consolidated Financial Statements............. F-14
TRIAD SYSTEMS CORPORATION
Audited Consolidated Financial Statements
Report of Independent Auditors......................... F-30
Report of Independent Accountants...................... F-31
Consolidated Balance Sheets as of September 30, 1995
and 1996.............................................. F-32
Consolidated Statements of Operations for the years
ended September 30, 1995 and 1996 and the five-month
period ended February 27, 1997........................ F-33
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 1995 and 1996............... F-34
Consolidated Statements of Cash Flows for the years
ended September 30, 1995 and 1996 and the five-month
period ended February 27, 1997........................ F-35
Notes to Consolidated Financial Statements............. F-36
</TABLE>
F-1
<PAGE> 103
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2
Trade accounts receivable, net............................ 30,835
Inventories............................................... 8,505
Investment in leases...................................... 2,305
Deferred income taxes..................................... 8,340
Prepaid expenses and other current assets................. 7,410
--------
Total current assets.............................. 57,397
Service parts............................................... 3,517
Property and equipment...................................... 12,291
Long-term investment in leases.............................. 13,456
Capitalized computer software costs......................... 33,607
Databases................................................... 18,700
Deferred financing costs.................................... 5,703
Other intangibles........................................... 12,172
Other assets................................................ 32,032
Goodwill.................................................... 123,557
--------
Total Assets...................................... $312,432
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 14,075
Income taxes payable...................................... 13
Payroll related accruals.................................. 10,106
Deferred revenue.......................................... 4,808
Current portion of long-term debt......................... 2,242
Accrued expenses and other current liabilities............ 13,482
--------
Total current liabilities......................... 44,726
Long-term debt.............................................. 170,079
Deferred income taxes....................................... 47,407
Other liabilities........................................... 12,735
--------
Total liabilities................................. 274,947
Stockholders' equity:
Common Stock, par value $.000125, authorized 50,000,000
shares, issued and outstanding 35,220,000.............. 4
Additional paid-in capital................................ 88,994
Retained deficit.......................................... (51,513)
--------
Total stockholders' equity:................................. 37,485
--------
Total liabilities and stockholders' equity.................. $312,432
========
</TABLE>
See accompanying notes
F-2
<PAGE> 104
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Revenues:
Systems................................................... $ 17,593 $ 34,463
Customer support and information services................. 17,934 66,101
Finance................................................... 1,731 3,850
-------- --------
Total revenues.............................................. 37,258 104,414
Cost of revenues:
Systems................................................... 8,576 24,489
Services and finance...................................... 10,325 42,092
-------- --------
Total cost of revenues...................................... 18,901 66,581
-------- --------
Gross margin................................................ 18,357 37,833
Operating expenses:
Sales and marketing....................................... 5,438 23,257
Product development....................................... 4,561 8,073
General and administrative................................ 3,873 18,183
Write-off of in-process research & development.............. 23,100 --
-------- --------
Total operating expenses.................................... 36,972 49,513
Operating income(loss)...................................... (18,615) (11,680)
Interest expense............................................ 1,355 7,350
Other income (expense), net................................. 1,083 254
-------- --------
Income (loss) before income taxes........................... (18,887) (18,776)
Income tax (provision) benefit.............................. (2,277) 5,659
Income (loss) before extraordinary charge................... (21,164) (13,117)
-------- --------
Extraordinary charge, net of tax of $1,969.................. -- 3,017
Net income(loss)............................................ $(21,164) $(16,134)
======== ========
Pro Forma information:
Historical loss before provision for income taxes......... $(18,887)
Pro Forma benefit for income taxes........................ 1,800
--------
Pro Forma net loss........................................ $(20,687)
========
</TABLE>
See accompanying notes.
F-3
<PAGE> 105
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ (21,164) $ (16,134)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation.............................................. 1,256 2,931
Amortization.............................................. 5,384 22,054
Write-off of in-process research & development............ 23,100 --
Loss on write-off of debt issuance costs.................. 222 3,017
Other, net................................................ 404 (10)
Changes in assets and liabilities, net of effects of
business acquired:
Trade accounts receivable.............................. 901 (3,917)
Inventories............................................ 267 (4,474)
Investment in leases................................... 6,104 352
Deferred income taxes.................................. 2,280 (7,926)
Prepaid expenses and other assets...................... 7,676 (1,178)
Accounts payable....................................... 413 4,193
Deferred revenue....................................... 551 585
Accrued expenses and other current liabilities......... (2,197) (2,164)
--------- ---------
Net cash provided by (used in) operating activities......... 25,197 (2,671)
INVESTING ACTIVITIES
Acquisition of Triad Systems, net of cash acquired.......... (179,893) --
Purchase of property and equipment.......................... (975) (3,358)
Capitalized computer software costs and databases........... (6,446) (6,328)
Equity in earnings (loss) of investments.................... (61) 131
Purchase of service parts................................... 178 (832)
ARISB asset purchase, net of cash acquired.................. -- (9,000)
Other....................................................... -- (1,021)
--------- ---------
Net cash used in investing activities....................... (187,197) (20,408)
FINANCING ACTIVITIES
Issuance of common stock.................................... 96,000 --
Stock issuance costs........................................ (7,355) --
Proceeds from bond issuance................................. 154,000 100,000
Proceeds from credit facility............................... -- 148,350
Payment on debt facilities.................................. (57,095) (220,850)
Advances from stockholders.................................. 500 --
Debt issuance costs......................................... (5,864) (5,801)
Shareholder distributions................................... (8,650) --
Advances from shareholders.................................. 1,995 --
Repayment of advances from shareholders..................... (7,584) --
Other....................................................... -- (251)
--------- ---------
Net cash provided by financing activities................... 165,947 21,448
Net decrease in cash and cash equivalents................... 3,947 (1,631)
Cash and cash equivalents, beginning of period.............. 2,388 1,633
--------- ---------
Cash and cash equivalents, end of period.................... $ 6,335 $ 2
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest.................................................. $ 370 $ 5,794
========= =========
Income taxes.............................................. $ -- $ 188
========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 106
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended March 31, 1998 may not
be indicative of the results for the year ended September 30, 1998.
2. DISCOUNTING OF LEASE RECEIVABLES
Activity in the following servicing liability account (recorded in other
liabilities in the Company's balance sheet) is as follows:
<TABLE>
<CAPTION>
LEASE
SERVICING RECOURSE
OBLIGATION OBLIGATION
---------- ----------
<S> <C> <C>
Balance at September 30, 1997............................... $2,206 $9,662
Newly-created liabilities................................... 552 1,728
Charges and lease write-offs................................ (717) (2,784)
------ ------
Balance at March 31, 1998................................... $2,041 $8,606
====== ======
</TABLE>
3. INCOME TAXES
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.
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 provision for income taxes attributable to
continuing operations is $1.8 million for the six months ended March 31, 1997.
The Company recorded an income tax benefit for the six months ended March
31, 1998 at an effective rate of 30%. The effective rate used to record the
income tax benefit in the six months ended March 31, 1998 is based on the
Company's anticipated results for the year and differs from the pro forma
effective rate for the ten-month period ended September 30, 1997 of 7% due
primarily to the impact of the write-off of in-process research and development
associated with the Triad acquisition. The Company's (provision) benefit for
income taxes differs from the amount computed by applying the statutory rate to
income before taxes primarily because of permanent differences, state taxes and
research and development tax credits.
4. COMMITMENTS AND CONTINGENCIES
Licensing Agreement
The Company has a license which allows it to sublicense a software product
that provides quick access to auto repair information. The Company is obligated
to a non-refundable Minimum Annual Commitment of $1.0 million through 2011.
F-5
<PAGE> 107
Operating Leases
The Company leases an airplane on a month-to-month basis from a company
owned by one of the stockholders of the Company. Rental payments are $33,500 per
month plus associated expenses. Rent expense under this lease during the six
months ended March 31, 1998 was approximately $243,000.
5. REFINANCING OF DEBT
On February 10, 1998, the Company consummated the sale of $100 million
Senior Subordinated Notes (the "Offering"). Concurrently with the consummation
of the Offering, the Company (i) amended and restated its $170 million credit
facility (the "Old Credit Facilities") by entering into a new $50 million term
loan facility and a new $50 million revolving credit facility and (ii) used the
net proceeds from the Offering and the new facilities to repay the Old Credit
Facilities. The refinancing of debt resulted in an extraordinary loss of
approximately $3.0 million, net of tax, as a result of the write-off of existing
deferred financing costs.
At March 31, 1998, the Company's debt consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Senior Subordinated Notes................................... $100,000
Senior Credit Facilities:
Term Loan Facility........................................ 50,000
Revolving Credit Facility................................. 21,650
Other debt.................................................. 671
--------
172,321
Current portion............................................. 2,242
--------
Long-term debt.............................................. $170,079
========
</TABLE>
The Senior Subordinated Notes (the "Notes") are unsecured and mature on
February 1, 2008. Interest on the Notes accrues at the rate per annum equal to
9% and is payable semiannually on February 1 and August 1.
The Notes may be redeemed at any time on or after February 1, 2003, in
whole or in part, at the option of the Company, at the redemption prices as set
forth in the Credit Agreement, plus accrued and unpaid interest. In addition,
prior to February 1, 2002, the Company, subject to certain requirements, may
redeem up to 35% of the aggregate principal amount of the Notes with the Net
Cash Proceeds, as defined in the Credit Agreement, received from one or more
private or public equity offerings at a price equal to 109% of the principal
amount to be redeemed, together with accrued and unpaid interest to the date of
redemption, provided that at least 65% of the aggregate principal amount of the
Notes remain outstanding immediately after each such redemption. Upon a change
of control, as defined in the Credit Agreement, the Company is required to make
an offer to repurchase the Notes at a price equal to 101% of the principal
amount plus the applicable premium, as defined in the Credit Agreement.
The Credit Agreement which governs the Senior Credit Facilities includes a
Term Loan Facility and a Revolving Credit Facility. Substantially all of the
assets of the Company are pledged as collateral for the Credit Agreement. The
terms of the Credit Agreement 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
Credit Agreement.
F-6
<PAGE> 108
The Credit Agreement requires prepayment of amounts under the Credit
Agreement in the event of issuances of common stock, cash proceeds from asset
sales, and the attainment of certain cash flow measures.
Borrowings under the Credit Agreement bear interest at rates which, at the
Company's option, vary with the prime rate or LIBOR rates plus a markup. Such
rates ranged from 7.88% to 10.00% at March 31, 1998. Interest is generally due
and payable quarterly (up to twelve months in certain circumstances).
The Term Loan Facility, in the amount of $50 million, is payable in
seventeen quarterly installments beginning March 31, 1999 as follows (in
thousands):
<TABLE>
<CAPTION>
QUARTERLY
PRINCIPAL
QUARTERS ENDING PAYABLE
- --------------- ---------
<S> <C>
March 1999 through September 1999........................... $2,000
December 1999 through September 2000........................ 2,500
December 2000 through September 2001........................ 3,000
December 2001 through September 2002........................ 3,500
December 2002 through March 2003............................ 4,000
</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 aggregate borrowings of $50 million through
advances in amounts of at least $500,000. All principal under the Revolving
Credit Facility is due on March 31, 2003.
In connection with the Revolving Credit Agreements, the Company is required
to pay a quarterly commitment fee equal to 1/2% per annum of the unused portion
of the Revolving Credit Facility. After February 10, 1999 this rate is adjusted
in increments based upon set ratios as defined in the Credit Agreement.
In connection with the Letters of Credit, the Company is required to pay a
letter of credit commission fee equal to 1.25% to 2.25% (depending on certain
financial tests) per annum on the amount of the Letter of Credit.
The Term Loan and Revolving Credit Facility contain restrictive covenants
which are measured quarterly. At March 31, 1998, the Company was in compliance
with these covenants.
Contractual maturities of debt, exclusive of interest, are as follows (in
thousands):
<TABLE>
<S> <C>
Six months ended September 1998............................. $ 40
1999........................................................ 6,288
2000........................................................ 10,237
2001........................................................ 12,106
2002........................................................ 14,000
2003........................................................ 29,650
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 March 31, 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 requirements
if the existing contracts had been settled at period end. The carrying amount
and fair value of these contracts are not significant. At March 31, 1998, the
F-7
<PAGE> 109
Company's 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.
6. ACQUISITIONS
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. These assets provide
products and services to the automotive recycling industry. The consummation of
this acquisition is subject to certain conditions, including approval by the
United States Federal Trade Commission. The operating results of the acquired
company are immaterial to the Company's financial statements.
7. STOCK OPTION PLAN
In February 1998, the Board of Directors of the Company gave tentative
approval for the implementation of a stock option plan and have reserved 4.8
million shares of the Company's Common Stock for issuance under the plan.
8. POST ACQUISITION RESERVES
In connection with the acquisition of Triad, the Company assumed
approximately $5.2 million of costs to be incurred with the consolidation of
Triad's management administration, manufacturing and finance operations with the
Company's. Such costs include severance costs for 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.
The consolidation of the manufacturing operation was completed by March 31,
1998 and the consolidation of the finance operations is expected to be completed
by September 30, 1998.
Total amounts charged to employee severance and to vacated lease accrual as
of March 31, 1998 were approximately $2.2 million and $0.4 million,
respectively.
9. SUBSEQUENT EVENT
In order to align operating expenses with its strategic plans, the Company
reduced its workforce in the third quarter of fiscal 1998, and expects to record
a charge of approximately $1.0 million for severance costs in relation to such
reduction.
F-8
<PAGE> 110
REPORT OF 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 November 30, 1996 and September 30, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended November 30, 1996 and
for the ten-month period ended September 30, 1997. Our audits also include the
financial statement schedule listed in Item 16(b) of this Registration
Statement. 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 November 30, 1996 and September 30, 1997, and
the consolidated results of its operations and its cash flows for each of the
two years in the period ended November 30, 1996 and for the ten-month period
ended September 30, 1997, 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
January 16, 1998, except for Note 19,
as to which the date is February 10, 1998.
F-9
<PAGE> 111
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,004 $ 1,633
Trade accounts receivable, net............................ 4,091 25,819
Inventories............................................... 1,164 4,031
Investment in leases...................................... -- 1,735
Deferred income taxes..................................... -- 7,871
Prepaid expenses and other current assets................. 787 7,245
------- --------
Total current assets.............................. 10,046 48,334
Service parts............................................... 611 3,801
Property and equipment...................................... 2,160 10,355
Long-term investment in leases.............................. -- 14,378
Capitalized computer software costs......................... -- 32,569
Databases................................................... 5,048 20,688
Deferred financing costs.................................... -- 5,436
Other intangibles........................................... -- 161,247
Other assets................................................ 898 11,132
------- --------
Total assets................................................ $18,763 $307,940
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,452 $ 9,882
Income taxes payable...................................... -- 1,803
Payroll related accruals.................................. 949 13,129
Deferred revenue.......................................... 1,196 4,223
Advances from stockholders................................ 5,089 --
Current portion of long-term debt......................... -- 6,436
Accrued expenses and other current liabilities............ 3,850 12,258
------- --------
Total current liabilities......................... 13,536 47,731
Long-term debt.............................................. -- 138,531
Deferred income taxes....................................... -- 53,240
Other liabilities........................................... -- 14,739
------- --------
Total liabilities................................. 13,536 254,241
Stockholders' equity:
Common Stock:
Cooperative Computing Holding Company, Inc. Common
Stock, par value $0.000125; authorized 50,000,000;
issued and outstanding 16,000,000 in 1996 and
35,220,000 in 1997.................................... 2 4
Applied Data Specialties, Inc., par value $1;
authorized, issued and outstanding -- 1,000 in 1996
and none in 1997...................................... 1 --
Canadian Aftermarket Network, Inc., par value $1;
authorized, issued and outstanding -- 1,000 in 1996
and none in 1997...................................... 1 --
Additional paid-in capital................................ 249 88,994
Retained earnings (deficit)............................... 4,974 (35,299)
------- --------
Total stockholders' equity........................ 5,227 53,699
------- --------
Total liabilities and stockholders' equity........ $18,763 $307,940
======= ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 112
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED TEN-MONTH
NOVEMBER 30, PERIOD ENDED
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Revenues:
Systems.................................................. $14,111 $18,544 $ 55,085
Customer support and information services................ 15,134 18,190 79,654
Finance.................................................. -- -- 5,577
------- ------- --------
Total revenues............................................. 29,245 36,734 140,316
Cost of revenues:
Systems.................................................. 9,492 11,172 35,169
Services and finance..................................... 7,241 10,685 49,295
------- ------- --------
Total cost of revenues..................................... 16,733 21,857 84,464
------- ------- --------
Gross margin............................................... 12,512 14,877 55,852
Operating expenses:
Sales and marketing...................................... 2,061 2,038 28,161
Product development...................................... 7,485 8,347 11,890
General and administrative............................... 2,675 2,992 19,929
Write off of purchased in-process research and
development........................................... -- -- 23,100
------- ------- --------
Total operating expenses................................... 12,221 13,377 83,080
------- ------- --------
Operating income (loss).................................... 291 1,500 (27,228)
Interest expense........................................... -- -- (8,403)
Other income (expense), net................................ 414 4,231 443
------- ------- --------
Income (loss) before income taxes.......................... 705 5,731 (35,188)
Income tax benefit:
Nonrecurring charge for termination of Subchapter S
election.............................................. -- -- (2,382)
C Corporation benefit.................................... -- -- 3,383
------- ------- --------
Total income tax benefit................................... -- -- 1,001
------- ------- --------
Net income (loss).......................................... $ 705 $ 5,731 $(34,187)
======= ======= ========
Unaudited pro forma information:
Historical income before provision for income taxes...... $ 705 $ 5,731 $(35,188)
Pro forma (provision) benefit for income taxes........... (157) (1,931) 2,392
------- ------- --------
Pro forma net income..................................... $ 548 $ 3,800 $(32,796)
======= ======= ========
</TABLE>
See accompanying notes.
F-11
<PAGE> 113
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------------------------
COOPERATIVE CANADIAN
COMPUTING APPLIED DATA AFTERMARKET
HOLDING 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,
1994.................... 16,000,000 $ 2 1,000 $ 1 1,000 $ 1 $ 249 $ 4,871 $ 5,124
Net income.............. -- -- -- -- -- -- -- 705 705
Shareholder
distributions......... -- -- -- -- -- -- -- (556) (556)
---------- ---- ------ --- ------ --- ------- -------- --------
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
distributions......... -- -- -- -- -- -- -- (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
Holding Company....... -- -- (1,000) (1) (1,000) (1) 2 -- --
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
========== ==== ====== === ====== === ======= ======== ========
</TABLE>
See accompanying notes.
F-12
<PAGE> 114
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED TEN-MONTH
NOVEMBER 30, PERIOD ENDED
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................... $ 705 $ 5,731 $ (34,187)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation......................................... 1,708 1,711 4,585
Amortization......................................... 3,700 4,683 24,758
Write-off of in-process research and development..... -- -- 23,100
Other, net........................................... (218) (272) 118
Changes in assets and liabilities, net of effects of
business acquired:
Trade accounts receivable......................... (1,879) 1,014 (11,231)
Inventories....................................... (434) 482 2,547
Investment in leases.............................. -- -- 7,401
Deferred income taxes............................. -- -- (4,710)
Prepaid expenses and other assets................. (164) (385) 10,697
Accounts payable.................................. (382) 753 (1,102)
Taxes payable..................................... -- -- 1,803
Deferred revenues................................. 206 350 3,027
Accrued expenses and other liabilities............ 1,635 1,184 (1,773)
------- ------- ---------
Net cash provided by operating activities.............. 4,877 15,251 25,033
INVESTING ACTIVITIES
Acquisition of Triad, net of cash acquired............. -- -- (179,893)
Purchase of property and equipment..................... (1,551) (1,617) (3,347)
Capitalized computer software costs and databases...... (4,841) (5,118) (11,879)
Purchase of service parts.............................. (135) (406) (754)
Distributions received from partnerships............... 205 256 221
------- ------- ---------
Net cash used in investing activities.................. (6,322) (6,885) (195,652)
FINANCING ACTIVITIES
Issuance of common stock............................... -- -- 96,100
Stock issuance costs................................... -- -- (7,355)
Proceeds from debt facility............................ -- -- 201,087
Payments on long-term debt............................. -- -- (103,844)
Debt issuance costs.................................... -- -- (6,442)
Shareholder distributions.............................. (556) (5,777) (6,209)
Advances from stockholders............................. 700 -- 2,496
Repayments of advances from stockholders............... -- -- (7,585)
------- ------- ---------
Net cash provided by (used in) financing activities.... 144 (5,777) 168,248
Increase (decrease) in cash and cash equivalents....... (1,301) 2,589 (2,371)
Cash and cash equivalents, beginning of period......... 2,716 1,415 4,004
------- ------- ---------
Cash and cash equivalents, end of period............... $ 1,415 $ 4,004 $ 1,633
======= ======= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.......................................... $ -- $ -- $ 6,792
Income taxes...................................... $ -- $ -- $ 139
</TABLE>
See accompanying notes.
F-13
<PAGE> 115
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The consolidated financial statements include the accounts of Cooperative
Computing Holding Company, Inc. ("Holdings" or the "Company"), and its wholly
owned subsidiary, Cooperative Computing, Inc. ("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. 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.
Basis of Presentation
Prior to February 27, 1997, the operations reflected in these financial
statements are those of Cooperative Computing, Inc., 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 entities have been
eliminated. Effective February 27, 1997, Canadian Aftermarket, Inc. and Applied
Data Specialty, Inc. merged into Cooperative Computing, Inc. ("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") (see Note 2).
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. and Old
CCI was renamed Cooperative Computing Holding Company.
The consolidated financial statements for the period ended September 30,
1997 include the accounts of Holdings, Holdings' wholly owned subsidiary,
Cooperative Computing, Inc. and its wholly owned subsidiaries, which include
Triad Systems Financial Corporation, after elimination of intercompany accounts
and transactions.
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
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.
F-14
<PAGE> 116
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 discounting
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 Extinguishments 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 has modified several agreements to meet the new requirements to enable
it to continue recognizing transfers of certain receivables to special-purpose
entities as sales. As a result, the impact of adoption on net income 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 totaled approximately
$1,000,000.
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
F-15
<PAGE> 117
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
over fifteen years, assembled workforce is amortized over five years and
favorable lease is amortized over two years. The carrying value of intangible
assets is periodically reviewed by the Company based on the expected future
undiscounted operating cash flows of the related business unit. Based upon its
most recent analysis, the Company believes that no material impairment of
intangible assets exists at September 30, 1997.
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.
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, 1997 there were no events or
circumstances which indicated that long-lived assets of the Company might be
impaired.
Revenue Recognition
Services revenue is recognized over 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, Cooperative Computing, Inc., 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 and Applied
Data Specialty 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. All significant debt obligations
carry variable interest rates and their carrying value is considered to
approximate fair value.
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
F-16
<PAGE> 118
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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 in 1995 and 1996 whose sales represented more
than 10% of the Company's total revenues. Sales to this customer were
approximately $8,250,000 and $6,184,000 in 1995 and 1996, respectively. No
customers accounted for more than 10% of the Company's revenues during the
ten-month period ended September 30, 1997.
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 hedge exposures associated with
intercompany product sales denominated in United Kingdom currencies. The Company
does not enter into foreign exchange contracts for trading purposes. See also
Note 7 "Discounting of Lease Receivables" and Note 17 "Commitments and
Contingencies".
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 January 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 not yet
assessed the potential impact these two SOPs will have on its 1998 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
F-17
<PAGE> 119
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1998.
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 1998 and is not anticipated to have a material impact on
the Company's financial position or results of operations.
2. ACQUISITION
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 to an investor 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 facility 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.
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>
F-18
<PAGE> 120
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 severance costs for 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). The consolidation of the
manufacturing and finance operations, which commenced after September 30, 1997,
is expected to be completed by June 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,
respectively. 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>
3. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable at November 30, 1996 and September 30, 1997
include allowances for doubtful accounts of $1,949,000 and $5,468,000,
respectively.
4. SERVICE PARTS
Service parts consist of the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Service parts........................................... $ 955 $12,404
Less accumulated depreciation........................... (344) (8,603)
----- -------
Total service parts..................................... $ 611 $ 3,801
===== =======
</TABLE>
F-19
<PAGE> 121
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Land.................................................... $ -- $ 138
Furniture and equipment................................. 3,741 12,532
Field service and demonstration equipment............... 669 1,365
Buildings and leasehold improvements.................... 260 1,569
Less accumulated depreciation and amortization.......... (2,510) (5,249)
------- -------
Total property and equipment............................ $ 2,160 $10,355
======= =======
</TABLE>
6. INVESTMENT IN LEASES
The Company, through its wholly-owned finance subsidiary and special
purpose entity, leases its 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>
NOVEMBER 30, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Total minimum lease payments receivable................. $ -- $18,535
Allowance for doubtful accounts......................... -- (730)
Initial direct costs.................................... -- 335
Estimated unguaranteed residual value................... -- 1,114
------- -------
Gross investment in leases.............................. -- 19,254
Unearned income......................................... -- (5,605)
Leases pending acceptance............................... -- 2,464
------- -------
Total investment in leases.............................. -- 16,113
Short-term investment in leases......................... -- 1,735
------- -------
Long-term investment in leases.......................... $ -- $14,378
======= =======
</TABLE>
A substantial portion of the lease receivables are discounted 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.
7. DISCOUNTING OF LEASE RECEIVABLES
Periodically, lease receivables are sold pursuant to discounting agreements
with banks and lending institutions under which available lines were $65,642,000
at September 30, 1997. 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 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.
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
F-20
<PAGE> 122
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prohibit further sales under the available credit facilities. During the period
ended September 30, 1997, the Company failed to meet a profitability covenant of
these agreements. Such agreements were subsequently amended to, among other
provisions, eliminate the profitability covenant. The Company is in compliance
with the remaining 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, 1997, the Company has an immaterial amount of lease receivables
discounted that are subject to the full recourse provision. Proceeds from the
discounting of lease receivables were approximately $39 million in 1997. There
were no proceeds from discounting of lease receivables in 1996 and 1995.
At September 30, 1997, the contingent liability for leases sold was
$25,990,000. 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, 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 lease write-offs................................ (703) (4,974)
------ -------
Balance at September 30, 1997............................... $2,206 $ 9,662
====== =======
</TABLE>
8. CAPITALIZED COMPUTER SOFTWARE COSTS
<TABLE>
<CAPTION>
YEAR ENDED TEN-MONTH
NOVEMBER 30, PERIOD ENDED
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance............................... $ -- $ -- $ --
Acquisition of assets........................... -- -- 38,700
Capitalized computer software costs............. -- -- 1,427
Amortization of computer software costs......... -- -- (7,558)
------- ------- -------
Ending balance.................................. $ -- $ -- $32,569
======= ======= =======
</TABLE>
F-21
<PAGE> 123
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DATABASES
<TABLE>
<CAPTION>
YEAR ENDED TEN-MONTH
NOVEMBER 30, PERIOD ENDED
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance........................................... $ 3,473 $ 4,613 $ 5,048
Acquisition of assets....................................... -- -- 15,900
Capitalized database costs.................................. 4,840 5,118 7,052
Amortization of database costs.............................. (3,700) (4,683) (7,312)
------- ------- -------
Ending balance.............................................. $ 4,613 $ 5,048 $20,688
======= ======= =======
</TABLE>
10. OTHER INTANGIBLES
The Company had no other intangibles during the two years ended November
30, 1996. Activity in other intangibles during the ten months ended September
30, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
TRADEMARKS
AND ASSEMBLED FAVORABLE
GOODWILL TRADENAMES WORK FORCE LEASE TOTAL
-------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Beginning cost......................... $ -- $ -- $ -- $ -- $ --
Acquisition of assets.................. 132,093 22,100 11,700 3,864 169,757
-------- ------- ------- ------- --------
Ending cost............................ 132,093 22,100 11,700 3,864 169,757
Beginning accumulated amortization..... -- -- -- -- --
Amortization........................... (5,159) (859) (1,365) (1,127) (8,510)
-------- ------- ------- ------- --------
Ending accumulated 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
======== ======= ======= ======= ========
</TABLE>
11. DEBT
<TABLE>
<CAPTION>
NOVEMBER 30, SEPTEMBER 30,
1996 1997
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Term Loan Facility...................................... $ -- $135,000
Revolving Credit Facility............................... -- 9,150
Other................................................... -- 817
------- --------
-- 144,967
Current portion......................................... -- 6,436
------- --------
Long-term debt.......................................... $ -- $138,531
======= ========
</TABLE>
Concurrent with the acquisition of Triad (see Note 2), 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 (the Credit
Agreement). The Credit Agreement includes a Term Loan Facility and a Revolving
Credit Facility.
Substantially all of the assets of the Company are pledged as collateral on
the Credit Agreement.
The terms of the Credit Agreement 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
F-22
<PAGE> 124
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
affiliates. The Company must also meet certain tests relating to financial
amounts and ratios defined in the agreement.
The Credit Agreement requires prepayment of amounts under the Credit
Agreement in the event of issuances of common stock, cash proceeds from asset
sales, and the attainment of certain cash flow measures as defined in the Credit
Agreement.
Borrowings under the Credit Agreement bear interest at rates which, at the
Company's option, vary with the prime rate or LIBOR rates plus a markup. Such
rates ranged from 8.16% to 10.00% at September 30, 1997. Interest is generally
due and payable quarterly (up to twelve months in some limited circumstances).
The Term Loan Facility, in the amount of $135,000,000, is payable in
quarterly installments beginning June 30, 1998 as follows (in thousands):
<TABLE>
<CAPTION>
QUARTERLY
PRINCIPAL
QUARTERS ENDING PAYABLE
--------------- ---------
<S> <C>
June 1998 through March 1999................................ $ 3,125
June 1999 through March 2000................................ 5,625
June 2000 through March 2001................................ 7,500
June 2001 through March 2002................................ 7,500
June 2002 through February 2003............................. 10,000
</TABLE>
Prepayments on the Term Loan Facility are allowed in $100,000 increments with a
$500,000 minimum and may not be reborrowed.
The Revolving Credit Facility, which includes Revolving Credit Notes, Swing
Line Notes (maximum of $10,000,000), and Letters of Credit (maximum of
$15,000,000), provides for maximum aggregate borrowings of $35 million through
advances in amounts of at least $500,000. All principal under the Revolving
Credit Facility is due on February 27, 2003.
In connection with the Revolving Credit Agreements, the Company is required
to pay a quarterly commitment fee equal to 1/2% per annum of the unused portion
of the Revolving Credit Facility.
In connection with the Letters of Credit, the Company is required to pay a
letter of credit commission fee equal to 2.0% or 2.5% (depending on certain
financial tests) per annum on the amount of the Letter of Credit.
The Term Loan and Revolving Credit Facility contain restrictive covenants
which are measured quarterly. At September 30, 1997, the Company did not meet
certain of the financial covenants and received an appropriate waiver. The
Company anticipates that it will not meet certain of the financial covenants for
the quarter ended December 31, 1997 but anticipates curing these violations
through the refinancing described in Note 18, accordingly $137,900,000 is
classified as long term.
Contractual maturities of debt, exclusive of interest, are as follows (in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 6,436
1999........................................................ 17,788
2000........................................................ 26,487
2001........................................................ 30,106
2002........................................................ 35,000
Thereafter.................................................. 29,150
</TABLE>
F-23
<PAGE> 125
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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,
1997, 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. The Company had no interest rate caps at November 30, 1996.
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, 1997 is $1.4 million. The carrying amount and fair
value of these contracts are not significant.
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.
Concurrent with the Triad Systems Corporation acquisition on February 27,
1997, (see Note 2) the Company's Subchapter S status was terminated and the
Company became subject to corporate 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 $(157,000) and $(1,931,000) for the
years ended November 30, 1995 and 1996, respectively, and $2,392,000 for the ten
month period ended September 30, 1997.
F-24
<PAGE> 126
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>
1997
-------
<S> <C>
Current:
Federal................................................... $(1,531)
State..................................................... (374)
Foreign................................................... (247)
-------
Total current............................................... (2,152)
Deferred:
Federal................................................... 2,765
State..................................................... 344
Foreign................................................... 44
-------
Total deferred.............................................. 3,153
-------
Income tax benefit.......................................... $ 1,001
=======
</TABLE>
The Company's (provision) benefit for income taxes differs from the amount
computed by applying the statutory rate to income before taxes as follows (in
thousands):
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA HISTORICAL PRO FORMA
1995 1996 1997 1997
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Income tax at U.S. statutory rate.............. $(247) $(2,006) $12,191 $ 12,191
State taxes, net of federal income tax
benefit...................................... (35) (266) 375 265
Foreign income taxes........................... -- -- (134) (134)
Permanent differences, primarily goodwill...... (28) (61) (2,008) (2,043)
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.......................... 153 402 200 198
----- ------- ------- ---------
Income tax (provision) benefit................. $(157) $(1,931) $ 1,001 $ 2,392
===== ======= ======= =========
</TABLE>
F-25
<PAGE> 127
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 as of September 30, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Inventory and sales return reserves....................... $ 3,066
Accrued expenses.......................................... 11,552
Deferred income........................................... 1,308
Federal tax carryforwards................................. 8,196
Depreciation.............................................. 5,387
Other..................................................... 1,105
--------
Total deferred tax assets................................... 30,614
Less valuation allowance.................................. --
--------
Deferred tax assets......................................... 30,614
Deferred tax liabilities:
Direct financing leases................................... (38,836)
Fixed and intangible assets............................... (34,316)
Accrual to cash adjustment................................ (1,310)
Other..................................................... (1,521)
--------
Total deferred tax liabilities.............................. (75,983)
--------
Net deferred tax liabilities................................ $(45,369)
========
</TABLE>
Deferred taxes are included in the balance sheets of the Company as follows
(in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Net current deferred tax asset........................... $ -- $ 7,871
Net noncurrent deferred tax liability.................... -- (53,240)
------- --------
Net deferred tax liability............................... $ -- $(45,369)
======= ========
</TABLE>
Upon the acquisition of Triad Systems Corporation 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, 1997, the Company had federal net operating loss
carryforwards of approximately $3,708,000 which resulted from the Company's
acquisition of Triad Systems Corporation. The net operating loss carryforwards
will expire in 2012 if not utilized. At September 30, 1997, the Company had
business tax credit carryforwards of $2,075,000, and alternative minimum tax
credit carryforwards of approximately $4,042,000, which resulted from the
Company's acquisition of Triad Systems Corporation. 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 carryforward before utilization.
Substantially all of the Company's operating income was generated from
domestic operations during 1997. The Company has not provided for United States
income taxes on the earnings of
F-26
<PAGE> 128
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1,892,000
at September 30, 1997.
14. STOCKHOLDERS' EQUITY
Stock Warrant
On September 10, 1997, the Company sold 20,000 shares of Common Stock for
total proceeds of $100,000 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. 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 the common stock account to additional paid-in capital. All
share information within the financial statements and notes thereto have been
restated to reflect the effect of the stock splits and change in par value.
15. SAVINGS AND INVESTMENT PLANS
The Company sponsors two 401(k) savings and investment plans: the
Cooperative Computing, Inc. 401(k) Plan and Trust and the Triad Systems
Corporation Savings and Investment Plan (collectively the "Plans"). The Plans
have generally the same terms and provisions and are open to all employees of
each respective Company meeting applicable age and service requirements. Under
the Plans, the Company matches 50% of the first 6% and 4%, respectively, of
participant contributions subject to certain restrictions. Certain of the Plans
also allow participant loans against their accounts. Contributions to the 401(k)
Plans are allocated among individual participants in the proportion of their
salaries relative to the total salaries of all participants. The Company's total
contributions to the 401(k) Plans amounted to $179,000 in 1995, $260,000 in 1996
and $772,000 in 1997.
16. OTHER INCOME
Other income in 1996 includes lawsuit settlements of $3,000,000 and
$710,000, net of related legal expenses of $360,000.
17. COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has guaranteed various debt obligations held by limited
partnerships in which the Company owns a minority interest. These obligations
total approximately $2,100,000 at September 30, 1997. No material loss is
anticipated by reason of such agreements and guarantees. The Company's earnings
from these minority interests are not material.
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 stockholders. Rental payments are $45,000 per month
and this lease expires in May 2002. Rental expense related to all
F-27
<PAGE> 129
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating leases was $842,000 in 1995, $873,000 in 1996, and $3,779,000 in 1997.
The Company's Livermore, California offices are leased from a company whose
director is an affiliate of the Company. Rent expensed under this lease during
fiscal 1997 was $1,462,000 and rental payments for 1998 under the lease will be
$2,505,720. Future minimum rental commitments under all noncancelable operating
leases are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 4,902
1999........................................................ 4,297
2000........................................................ 3,892
2001........................................................ 3,780
2002........................................................ 703
</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,
these matters will be resolved without material adverse effect on the Company's
results of operations or financial position.
18. RELATED PARTY TRANSACTIONS (Also see Note 17)
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 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.
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.
19. SUBSEQUENT EVENTS
Acquisitions
In November 1997, the Company entered into 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 for
$9,300,000 cash. The acquired company is engaged in providing inventory and
business management systems for the automotive recycling industry. The
transaction is subject to regulatory approval and is expected to close in March
1998. The operating results of the acquired company are immaterial to the
Company's financial statements.
F-28
<PAGE> 130
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Refinancing of Debt
On February 10, 1998, the Company consummated the sale of $100 million
Senior Subordinated Notes (the "Offering"). Concurrently with the consummation
of the Offering, the Company (i) amended and restated its $170 million credit
facility (the "Old Credit Facilities") by entering into a new $50 million term
loan facility and a new $50 million revolving credit facility and (ii) used the
net proceeds from the Offering and the new facilities to repay the Old Credit
Facilities. The refinancing of debt resulted in an extraordinary loss of
approximately $3.0 million, net of tax, as a result of the write-off of existing
deferred financing costs.
F-29
<PAGE> 131
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cooperative Computing Holding Company, Inc.
We have audited the consolidated statement of operations and cash flows of
Triad Systems Corporation for the five months ended February 27, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Triad Systems Corporation for the five months ended February 27,
1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Austin, Texas
January 16, 1998
F-30
<PAGE> 132
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Triad Systems Corporation
Livermore, California
We have audited the consolidated balance sheets of Triad Systems
Corporation and Subsidiaries as of September 30, 1995 and 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Triad Systems
Corporation and Subsidiaries as of September 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
ended September 30, 1996 and 1995, in conformity with generally accepted
accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
San Jose, California
October 23, 1996
F-31
<PAGE> 133
TRIAD SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1996
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 7,263 $ 7,652
Trade accounts receivable................................. 13,175 17,746
Investment in leases...................................... 2,001 1,635
Inventories............................................... 5,636 5,799
Prepaid expenses and other current assets................. 6,702 8,551
-------- --------
Current assets.............................................. 34,777 41,383
Service parts............................................... 3,316 3,273
Property, plant and equipment............................... 27,017 26,887
Long-term investment in leases.............................. 16,540 14,380
Land for resale............................................. 25,250 22,850
Capitalized software and intangible assets 16,222.. 21,312
Other assets................................................ 9,587 9,668
-------- --------
Total assets...................................... $132,709 $139,753
======== ========
LIABILITIES
Current liabilities:
Notes payable and current portion of long-term debt....... $ 3,032 $ 25,990
Accounts payable.......................................... 9,373 10,590
Accrued employee compensation............................. 7,908 8,275
Deferred income taxes..................................... 3,338 2,701
Other current liabilities and accrued expenses............ 9,695 10,968
-------- --------
Current liabilities......................................... 33,346 58,524
Long-term debt.............................................. 52,577 29,923
Deferred income taxes....................................... 26,176 27,656
Other liabilities........................................... 6,389 6,863
-------- --------
Total liabilities........................................... 118,488 122,966
Commitments and contingencies
Stockholders' equity:
Common stock
$.001 par value; authorized 50,000,000 shares; issued
17,969,000 shares and 18,394,000 shares at September
30, 1995 and 1996, respectively........................ 18 18
Treasury stock
599,000 shares and 645,000 shares at September 30, 1995
and 1996, respectively................................. (3,204) (3,478)
Capital in excess of par value............................ 28,201 29,954
Accumulated deficit....................................... (10,794) (9,707)
-------- --------
Total stockholders' equity.................................. 14,221 16,787
-------- --------
Total liabilities and stockholders' equity.................. $132,709 $139,753
======== ========
</TABLE>
See accompanying notes.
F-32
<PAGE> 134
TRIAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
------------------------ FEBRUARY 27,
1995 1996 1997
---------- ---------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Systems.............................................. $ 73,312 $ 70,090 $21,065
Customer support services............................ 62,429 64,148 29,227
Information services................................. 28,092 31,792 13,860
Finance.............................................. 11,244 9,646 2,280
-------- -------- -------
Total revenues......................................... 175,077 175,676 66,432
Cost of sales:
Systems.............................................. 35,606 37,544 11,954
Services and finance................................. 52,903 56,264 26,362
-------- -------- -------
Total cost of sales.................................... 88,509 93,808 38,316
-------- -------- -------
Gross margin........................................... 86,568 81,868 28,116
Marketing............................................ 46,929 48,688 18,779
Product development.................................. 8,136 8,414 4,119
General and administrative........................... 10,971 10,233 4,792
Restructuring charge................................. -- 9,000 --
-------- -------- -------
Operating expenses..................................... 66,036 76,335 27,690
-------- -------- -------
Operating income....................................... 20,532 5,533 426
Interest and other expense............................. 6,941 5,944 2,405
Other income........................................... -- 2,926 94
-------- -------- -------
Income before income taxes and extraordinary charge.... 13,591 2,515 (1,885)
(Provision) benefit for income taxes................... (5,165) (956) 290
-------- -------- -------
Income (loss) before extraordinary charge.............. 8,426 1,559 (1,595)
Extraordinary charge on repurchase of debt, net of
taxes................................................ 396 377 --
-------- -------- -------
Net income (loss)...................................... $ 8,030 $ 1,182 $(1,595)
======== ======== =======
</TABLE>
See accompanying notes.
F-33
<PAGE> 135
TRIAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
1995 1996 1995 1996
-------- -------- ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cumulative convertible preferred stock:
Beginning balance.............................. $ 10 $ -- 1,000 --
Repurchase and conversion...................... (10) -- (1,000) --
-------- -------- ------ ------
Ending balance................................... -- -- -- --
====== ======
Common stock
Beginning balance.............................. 14 18 13,896 17,969
Common stock issuance.......................... 4 -- 4,073 425
-------- -------- ------ ------
Ending balance................................... 18 18 17,969 18,394
====== ======
Treasury stock
Beginning balance.............................. (1,326) (3,204) 270 599
Treasury stock purchase........................ (1,878) (274) 329 46
-------- -------- ------ ------
Ending balance................................... (3,204) (3,478) 599 645
====== ======
Capital in excess of par:
Beginning balance.............................. 31,680 28,201
Preferred stock repurchase/conversion.......... (10,079) --
Preferred stock conversion dividend............ (151) --
Common stock issuance.......................... 4,083 1,662
Market rate adjustment on dividend............. 435 --
Tax benefit of options exercised............... 2,233 91
-------- --------
Ending balance................................... 28,201 29,954
Accumulated deficit:
Beginning balance.............................. (18,237) (10,794)
Net income..................................... 8,030 1,182
Translation gain (loss)........................ 97 (95)
Preferred stock conversion dividend............ 151 --
Dividends declared on cumulative convertible
preferred stock................................ (400) --
Market rate adjustment on dividends............ (435) --
-------- --------
Ending balance................................... (10,794) (9,707)
-------- --------
Stockholders' equity............................. $ 14,221 $ 16,787
======== ========
</TABLE>
See accompanying notes.
F-34
<PAGE> 136
TRIAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS
SEPTEMBER 30, ENDED
-------------------- FEBRUARY 27,
1995 1996 1997
-------- -------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before extraordinary charge................... $ 8,426 $ 1,559 $ (1,595)
Adjustments to reconcile income (loss) before extraordinary
charge to net cash provided by operating activities:
Extraordinary charge on repurchase of debt, net of taxes.... (396) (377) --
Depreciation and amortization............................... 8,793 8,704 4,361
Receivable and inventory loss provisions.................... 8,271 10,956 4,925
Restructuring charge........................................ -- 9,000 --
Gains from lease discounting................................ (7,585) (6,981) (1,228)
Gain on sale of marketable security......................... -- (1,779) --
Gain from sale of land -- (1,194) (124)
Other....................................................... 876 (3,395) (2,498)
Changes in assets and liabilities:
Trade accounts receivable................................... (2,138) (6,525) 532
Investment in leases........................................ 13,607 6,637 (7,950)
Inventories................................................. (207) (49) (1,630)
Deferred income taxes....................................... 1,349 559 (103)
Prepaid expenses and other current assets................... (634) (1,277) (7,425)
Accounts payable............................................ 433 448 (2,058)
Accrued employee compensation............................... (182) 127 (927)
Other current liabilities and accrued expenses.............. (494) (969) (2,762)
-------- -------- --------
Net cash provided (used) by operating activities............ 30,119 15,444 (18,482)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment................. (2,819) (2,931) (1,107)
Capitalized software and databases.......................... (7,043) (8,452) (3,046)
Investment in service parts................................. (1,887) (1,041) (520)
Proceeds from the sale of land.............................. -- 3,523 576
Acquisition of businesses................................... -- (4,054) --
Sale of marketable securities............................... -- 2,321 --
Other....................................................... (1,116) (1,065) (274)
-------- -------- --------
Net cash used in investing activities....................... (12,865) (11,699) (4,371)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of debt............................................ 53,391 53,924 17,882
Repayment of debt........................................... (62,718) (58,668) (7,471)
Redemption of preferred stock............................... (10,000) -- --
Proceeds from sale of common stock.......................... 3,998 1,662 7,612
Dividends paid.............................................. (400) -- --
Purchase of treasury stock.................................. (1,878) (274) --
Other....................................................... (347) -- --
-------- -------- --------
Net cash provided (used) in financing activities............ (17,954) (3,356) 18,023
-------- -------- --------
Net increase (decrease) in cash and equivalents............. (700) 389 (4,830)
Beginning cash and equivalents.............................. 7,963 7,263 7,652
-------- -------- --------
Ending cash and equivalents................................. $ 7,263 $ 7,652 $ 2,822
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................... $ 6,644 $ 6,058 $ 2,397
Income taxes................................................ 557 1,279 99
Noncash investing and financing activities:
Conversion of preferred stock............................... 11,195 -- --
Leases capitalized.......................................... 913 -- --
Assessment district refinancing............................. -- 5,300 --
</TABLE>
See accompanying notes.
F-35
<PAGE> 137
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Triad Systems Corporation ("Triad" or the "Company") is a leading provider
of business and information management services to the automotive aftermarket
and the hardlines and lumber industry. The Company produces and markets
proprietary databases and software products, and designs, develops, assembles,
markets, services and leases computer systems. Development and assembly
facilities are located in Livermore, California, Denver, Colorado and Newton,
New Jersey. Principal markets are located in the United States and Canada,
Puerto Rico, Ireland and the United Kingdom.
Financial Statement Presentation
The Consolidated Financial Statements include the accounts of Triad and its
wholly-owned subsidiaries, including Triad Systems Financial Corporation ("Triad
Financial"), after elimination of intercompany accounts and transactions.
Cash and Equivalents
Cash equivalents are short-term interest bearing instruments with maturity
dates of ninety days or less at the time of purchase.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and include amounts which ultimately may be capitalized as 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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized using the straight-line method over
their estimated useful lives or the lease term, whichever is less. As property,
plant and equipment are disposed of, the asset cost and related accumulated
depreciation or amortization are removed from the accounts, and the resulting
gains or losses are reflected in operations.
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. Leases discounted under the agreements with banks or
lending institutions are removed from the balance sheet and the gains are
reflected in operations.
During 1997, the Company adopted the requirements of FASB Statement No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Accordingly, the
F-36
<PAGE> 138
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company has modified several agreements to meet the new requirements to enable
it to continue recognizing transfers of certain receivables to special purpose
entities as sales. As a result, the impact of adoption on net income in 1997 was
immaterial. Additionally, no leases were discounted during the period from
January 1, 1996 to February 27, 1997.
Capitalized Software
Costs relating to the conceptual formulation and design of software
products are expensed as product development, and 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 three, five or seven year period, or a cost per unit
sold basis.
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 February 27, 1997 there were no events or
circumstances which indicated that long-lived assets of the Company might be
impaired.
Debt Costs
The unamortized costs associated with the issuance of debt instruments are
recorded with the associated liability. Amortization is computed according to
the interest and is included in interest expense. Upon retirement of remaining
principal balances, the associated unamortized costs are reflected in
operations.
Income Taxes
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes. This statement prescribes the use of the
liability method whereby deferred tax asset and liability account balances 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.
Treasury Stock
Purchases of the Company's common stock are valued at cost.
Revenue Recognition
Services revenue is recognized over 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 discounting gains,
which are recognized at the time of discounting.
F-37
<PAGE> 139
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
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. All significant debt obligations
either carry variable interest rates and their carrying value is considered to
approximate fair value or for the senior fixed rate notes and the mortgage loan
payable, the settlement rates which when factored into these instruments
approximate fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affects the reported amounts of assets and liabilities. It also
affects the disclosure of contingent assets and liabilities at the dates of the
financial statements along with the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Certain Risks and Concentrations
Cash and cash equivalents are, for the most part, maintained with several
major financial institutions in the United States. Deposits held with banks may
exceed the amount of insurance provided on such deposits. Generally these
deposits may be redeemed upon demand and therefore, bear minimal risk. 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.
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 United Kingdom
currencies. The Company does not enter into foreign exchange contracts for
trading purposes.
Limited and full recourse agreements are maintained with banks and lending
institutions under which lease receivables are discounted and removed from the
balance sheet. Triad Financial is contingently liable in the event of lessee
nonpayment. See Note 4 "Discounting of Lease Receivables."
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.
2. MERGER AGREEMENT
On October 17, 1996, the Company signed a definitive merger agreement (the
"Merger") with Cooperative Computing, Inc. and CCI Acquisition Corp. ("CAC"),
under which CAC would acquire all of the issued and outstanding shares of the
Company at a price of $9.25 per share. On February 27, 1997, the acquisition was
consummated with CAC accepting all validly tendered shares
F-38
<PAGE> 140
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Company's common stock. In conjunction with the acquisition by CAC, the
Company's shares were removed from listing for trading on the Nasdaq Stock
Market.
In addition to the cash consideration received by the Company's
shareholders pursuant to the tender offer or the merger transaction, the merger
agreement provided that the Company's shareholders of record immediately prior
to the consummation of the tender offer receive a dividend consisting of their
pro rata share of the equity of a newly formed company whose assets consist of
all the Company's owned real property located in Livermore, California,
including its corporate headquarters buildings and land held for sale in the
Triad Park development in Livermore. The spun-off real estate entity, which the
Company expects to be a public company, assumed all the indebtedness currently
secured by the spun-off real estate and leases the corporate headquarters
buildings to the Company's post merger successor. Over time, the real estate
entity is expected to liquidate its real estate portfolio, with proceeds used to
pay expenses (including taxes), repay secured debt and distribute any remaining
proceeds to its equity holders. The Company's ability to market this property is
dependent upon interest rates, general economic and market conditions, the
prospective purchaser's ability to develop the property and the purchaser's
ability to obtain a variety of governmental approvals, none of which is assured
and all of which are subject to objections from the public.
Financial information for the five month period ended February 27, 1997
includes all transactions of the Company that occurred prior to the acquisition.
3. FINANCE SUBSIDIARY
Triad Financial is a wholly-owned subsidiary that purchases Triad systems
and other products and leases those products to third parties under full-payout
and direct financing leases. Triad Financial's purchases from Triad were
$36,984,000 in 1995, $38,731,000 in 1996 and $8,564,000 in 1997. Summarized
financial information of the Company's combined leasing operations, included in
the Consolidated Financial Statements, is as follows:
<TABLE>
<CAPTION>
CONDENSED COMBINED
BALANCE SHEETS
SEPTEMBER 30
----------------------
1995 1996
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash........................................................ $ 5 $ 10
Net investment in leases.................................... 18,541 16,015
Residual value retained on leases discounted, less unearned
income of $7,476 in 1995 and $7,735 in 1996............... 6,452 7,012
Receivable from parent company.............................. 50,262 55,243
Other assets................................................ 3,652 3,880
------- -------
Total assets................................................ $78,912 $82,160
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Other liabilities and accrued expenses...................... $ 8,367 $ 8,687
Deferred income............................................. 2,337 2,570
Debt........................................................ 13,033 10,059
Stockholder's equity........................................ 55,175 60,844
------- -------
Liabilities and stockholder's equity........................ $78,912 $82,160
======= =======
</TABLE>
F-39
<PAGE> 141
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED COMBINED
STATEMENTS OF INCOME
-------------------------------
YEAR ENDED FIVE MONTHS
SEPTEMBER 30, ENDED
---------------- FEBRUARY 27,
1995 1996 1997
------- ------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................... $11,244 $9,646 $2,280
Costs and expenses
Selling and administrative........................... 1,750 1,544 537
Provision for doubtful accounts and revaluation
charges........................................... 3,232 5,897 1,962
------- ------ ------
Operating income (loss)................................ 6,262 2,205 (219)
Interest expense....................................... (132) (925) (326)
Intercompany income.................................... 5,678 7,766 3,358
------- ------ ------
Income before taxes.................................... 11,808 9,046 2,813
Provision for income taxes............................. 4,413 3,413 1,027
------- ------ ------
Net income............................................. $ 7,395 $5,633 $1,786
======= ====== ======
</TABLE>
4. DISCOUNTING OF LEASE RECEIVABLES
Limited and full recourse agreements are maintained with banks and lending
institutions under which available lines were $45,885,000 at September 30, 1996.
As leases are discounted, a sale is recorded and gains, the difference between
proceeds received and the book value of the lease receivables, are reflected in
finance revenue. No leases were discounted or sold during the period from
January 1, 1997 to February 27, 1997. Proceeds from discounting of lease
receivables were $73,216,000 in 1995, $73,624,000 in 1996, and $11,493,000 in
1997. A portion of discounting gains is deferred to offset future administration
costs for discounted leases and is amortized over the remaining lease term.
Under the discounting agreements, Triad Financial is contingently liable
for losses in the event of lessee nonpayment. The agreements provide for limited
recourse of up to 15% or full recourse at 100% of discounting proceeds,
depending on the credit risk associated with specific leases. At September 30,
1996, the contingent liability for discounted leases was $25,855,000. Title to
equipment discounted under the agreements is generally pledged as collateral.
The discounting agreements contain restrictive covenants which allow Triad
Financial 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 February 27, 1997, the Company failed to meet the
profitability covenant and received appropriate waiver. After receipt of the
waiver, the Company is in compliance with the covenants, and management believes
that it will maintain compliance with such covenants in the foreseeable future.
5. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable at September 30, 1995 and 1996 include allowances
for doubtful accounts of $1,420,000 and $1,980,000, respectively.
F-40
<PAGE> 142
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. BUSINESS COMBINATION
On June 27, 1996, the Company acquired Computer System Dynamics, Inc.
(CSD), a supplier of systems and software products to the lumber and building
materials segment of the hardlines and lumber market.
The acquisition was accounted for as a purchase. The purchase price was
$8,500,000 with additional future obligations contingent upon CSD's attainment
of certain performance objectives. The fair market values of the acquired assets
and assumed liabilities were included in the Company's financial statements. The
purchase price was allocated to the acquired assets and assumed liabilities
based on the fair market values. Of the $6,000,000 recorded as intangibles,
$3,700,000 was goodwill and $2,300,000 million was purchased technology and the
customer base. The intangibles will be amortized on a straight-line basis over
seven years. The operating results of CSD have been included in the Company's
consolidated financial statements since the date of acquisition.
7. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1996
------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Purchased parts............................................. $2,189 $2,233
Work in process............................................. 391 12
Finished goods.............................................. 3,056 3,554
------ ------
Total inventories........................................... $5,636 $5,799
====== ======
</TABLE>
8. SERVICE PARTS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1996
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Service parts............................................... $10,980 $10,154
Less accumulated depreciation............................... 7,664 6,881
------- -------
Total service parts......................................... $ 3,316 $ 3,273
======= =======
</TABLE>
9. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1996
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Furniture and equipment..................................... $21,269 $24,928
Field service and demonstration equipment................... 12,519 12,949
Buildings and leasehold improvements........................ 17,210 17,421
------- -------
50,998 55,298
Less accumulated depreciation and amortization.............. 30,768 35,198
------- -------
20,230 20,100
Land........................................................ 6,787 6,787
------- -------
Total property, plant and equipment......................... $27,017 $26,887
======= =======
</TABLE>
F-41
<PAGE> 143
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INVESTMENT IN LEASES
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1996
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Total minimum lease payments receivable..................... $17,226 $12,469
Allowance for doubtful accounts............................. (233) (222)
Initial direct costs........................................ 287 216
Estimated unguaranteed residual value....................... 1,211 882
------- -------
Gross investment in leases.................................. 18,491 13,345
Unearned income............................................. (5,456) (3,561)
Leases pending acceptance................................... 5,506 6,231
------- -------
Total investment in leases.................................. 18,541 16,015
------- -------
Short-term investment in leases............................. 2,001 1,635
Long-term investment in leases.............................. $16,540 $14,380
======= =======
</TABLE>
Historically, a substantial portion of the lease receivables are discounted
prior to maturity. Accordingly, a schedule of maturities for the next five years
is not indicative of future cash collections. Most of Triad Financial's
customers are in the automotive aftermarket and the hardlines and lumber
industry.
11. CAPITALIZED SOFTWARE
<TABLE>
<CAPTION>
YEAR ENDED FIVE-MONTH
SEPTEMBER 30, PERIOD ENDED
------------------ FEBRUARY 27,
1995 1996 1997
------- ------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance........................................ $ 8,114 $ 9,127 $4,399
Restructuring charge..................................... -- (7,500) --
Acquisition of assets.................................... -- 677 --
Capitalized software costs............................... 2,930 3,465 1,052
Amortization of software costs........................... (1,917) (1,370) (603)
------- ------- ------
Ending balance........................................... $ 9,127 $ 4,399 $4,848
======= ======= ======
</TABLE>
12. LAND FOR RESALE
Prior to February 26, 1997, Triad Park, LLC was a wholly-owned subsidiary
of Triad Systems Corporation. Triad Park, LLC holds over one hundred acres in
Livermore, California.
During February 1997, Triad transferred certain real estate assets and
related liabilities to Triad Park, LLC as a condition precedent to Triad's
merger with Cooperative Computing, Inc.
Effective February 26, 1997, Triad spun-off the Triad Park, LLC as a
dividend to the shareholders.
13. SAVINGS AND INVESTMENT PLAN
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 the calendar quarter following date of
hire and are able to apply for and secure loans from their account in the Plan.
F-42
<PAGE> 144
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Plan provides for contributions by the Company as determined annually
by the Board of Directors. The Company matches 50% of the first 4% of
compensation contributed by each employee and the deferred amount cannot exceed
15% of the annual aggregate salaries of those employees eligible for
participation. 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 $985,000 in 1995, $1,005,000 in 1996, and $436,000
in 1997.
14. DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1996
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
12.25% senior fixed rate notes, due in 1999................. $19,300 $ 9,200
Line of credit.............................................. -- 15,800
Warehousing credit agreement................................ 11,916 10,000
Mortgage loan payable, bearing interest at 9.9%, and
maturing through 2003..................................... 10,946 10,001
Assessment district improvement bonds, bearing interest at
rates ranging from 4.75% to 7.25% and maturing through
2014:
Land for operations....................................... 2,432 1,453
Land for resale........................................... 8,500 8,153
Other, bearing interest at rates ranging from 7% to 12%, and
maturing through 1998..................................... 3,290 1,612
Unamortized debt issuance costs............................. (775) (306)
------- -------
Total debt.................................................. 55,609 55,913
------- -------
Short-term debt............................................. 3,032 25,990
Long-term debt.............................................. $52,577 $29,923
======= =======
</TABLE>
The Company retired $10,100,000 of the 12.25% senior fixed rate notes
("fixed rate notes") at 103.75% of principal plus accrued interest in July 1996.
The remaining $9,200,000 12.25% fixed rate notes mature in 1999, however,
$8,334,000 of principal plus accrued interest is subject to mandatory redemption
in August 1997. The balance can be redeemed at the option of the Company
beginning in August 1997 at 101% of principal plus accrued interest and at 100%
of principal plus accrued interest after August 1998. Interest is payable
semiannually.
The Company retired $1.9 million on the Warehouse Credit Agreement during
1996. The term of the original 1995 Warehousing Credit Agreement was a one year
revolver with a three year term out option. During October 1996, the revolver
was renegotiated and now requires monthly payments of $333,333 starting in April
1997 with the remaining balance due December 1997. Interest on this revolver is
the LIBOR rate plus 1.85% (7.35% at September 30, 1996). The collateral for this
facility is the non-discounted leases receivables.
The interest rate on the mortgage financing for the Livermore headquarters
facility may be adjusted at the option of the lender in 1998 and could impact
the interest rate from 1999 to its maturity in 2003. Borrowings are
collateralized by the land and buildings, and are payable in monthly
installments.
A portion of the Company's land for resale and the parcels retained for its
facilities are part of assessment districts and are subject to bonded
indebtedness incurred in connection with the development of improvements and
community services. Semiannual principal and interest payments on the bonds are
required to be made by Triad as long as the parcels are owned by the Company. As
the Company sells land, the corresponding obligation will be assumed by the new
owners.
F-43
<PAGE> 145
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's $26,875,000 revolving line of credit with a bank bears
interest at prime rate plus 0.75% (9% at September 30, 1996), and is
collateralized by receivables and inventories. The line of credit commitment
decreases by $1,125,000 each quarter through maturity in 1997. Commitment fees
are 0.5% on the average unused commitment.
The fixed rate notes and the line of credit agreements contain restrictive
covenants regarding payment of dividends, incurrence of additional debt and
maintenance of consolidated tangible net worth and certain financial ratios. In
the event the Company is unable to meet these covenants, accelerated repayments
could be required. At June 30, the Company failed to meet certain credit line
covenants which were waived. At September 30, the Company received a waiver on
the credit line covenants because of its failure to meet the equity requirements
and the current and quick ratios.
In connection with the Merger (see Note 2), a significant portion of the
Company's existing debt was refinanced. As such, future aggregate maturities of
the existing debt are not indicative of future cash payments.
15. EQUITY
Cumulative Convertible Preferred Stock
On March 31, 1995, the Company financed the exchange of 1,000,000 preferred
stock and the associated warrants to purchase 3,500,000 shares of common stock.
The financial consideration given was $10,000,000 cash and 2,222,222 shares of
Triad common stock.
Common Stock
Triad has declared no dividends on its common stock since its incorporation
and anticipates it will continue to retain its earnings for use in its business.
The Company's loan agreements contain restrictions on the payment of dividends
on its common stock. The most restrictive covenant regarding the payment of
common stock cash dividends requires the ability to cover interest expense three
times from operating income.
16. RESTRUCTURING CHARGE
In the third quarter of 1996, the Company recorded a $9,000,000
restructuring charge related to an automotive product issue and realignment of
the automotive aftermarket operations. This charge includes a $7,500,000 write
off of previously capitalized costs for the Triad Prism system software, along
with $1,000,000 in reserves for related product issues. Also included is
$500,000 in costs associated with the realignment of aftermarket sales and
support personnel to address increasing consolidation of the automotive
aftermarket. The Company believes that this event will not adversely affect its
future liquidity or working capital.
17. OTHER INCOME
Other income in 1996 is comprised of a sale of marketable securities,
$1,779,000, net land sales totaling $1,194,000, and other expenses of $47,000.
18. EXTRAORDINARY CHARGES
Extraordinary charges resulted from the retirement of debt in 1995 and
1996. The early retirement of the senior fixed rate notes in 1995 and 1996
generated extraordinary charges of $153,000 and $377,000 that included premiums
of $198,000 and $379,000, unamortized debt costs
F-44
<PAGE> 146
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $49,000 and $229,000 less taxes of $94,000 and $231,000, respectively. In
addition, in 1995, the refinancing of floating rate notes resulted in an
extraordinary charge of $243,000, that included unamortized debt costs of
$392,000 less taxes of $149,000.
19. EMPLOYEE STOCK PLANS
Effects of the Merger
As part of the Merger, all outstanding stock options from the Company's
various plans were canceled and the holders were paid the difference between the
Offer Consideration (as defined in the Agreement and Plan of Merger and its
amendments) and the per share exercise price of the options held. All stock
option plans terminated upon the merger.
Stock Options
Prior to their termination, the Company had reserved shares of common stock
for issuance under its employee and outside director stock option plans for
nonqualified or incentive stock options. The option price was not to be less
than the fair market value at the date of grant. Options typically vested
ratably over five years and expired ten years from the date of grant.
Stock Option Activity
<TABLE>
<CAPTION>
OPTION PRICE EXERCISABLE AVAILABLE FOR
SHARES PER SHARE AMOUNT OPTIONS GRANT
------ -------------- ------- ----------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Options outstanding at September
30, 1994...................... 3,656 $1.50 to $6.25 $10,561 3,210 194
Granted....................... 177 5.00 to 6.63 934
Exercised..................... (1,702) 1.50 to 5.50 (3,534)
------ -------------- ------- ----- ---
Options outstanding at September
30, 1995...................... 2,131 1.78 to 6.63 7,961 1,645 17
Granted....................... 31 5.00 to 6.38 189
Exercised..................... (277) 1.90 to 5.50 (886)
Canceled...................... (47) 3.81 to 5.50 (238)
------ -------------- ------- ----- ---
Options outstanding at September
30, 1996...................... 1,838 1.78 to 6.63 7,026 1,491 383
Exercised..................... (113) 1.90 to 6.25 (402)
Canceled...................... (2) 5.81 (12)
------ -------------- ------- ----- ---
Options outstanding at February
27, 1997...................... 1,723 $1.78 to $6.63 $ 6,612 -- --
====== ============== ======= ===== ===
</TABLE>
Stock Purchase Plan
The Company had an Employee Stock Purchase Plan under which shares of
common stock were reserved for issuance to all permanent employees who had met
minimum employment criteria. Employees who did not own 5% or more of the
outstanding shares of the Company were eligible to participate through payroll
deductions in amounts relating to their basic compensation. At the end of an
offering period, shares were purchased by the participants at 85% of the lower
of the fair market value at the beginning or the end of the offering period, to
a maximum of 500 shares per participant.
F-45
<PAGE> 147
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. COMMITMENTS AND CONTINGENCIES
The Company rents office facilities and certain office equipment under
noncancelable operating lease agreements for periods of up to five years.
Certain lease agreements contain renewal options and provisions for maintenance,
taxes or insurance. Rental expense under operating leases was $3,445,000 in
1995, $2,773,000 in 1996, and $855,000 in 1997. As discussed in Note 2 -- Merger
Agreement, certain real estate was spun-off into a stand-alone company
concurrent with the Merger. Subsequently, the Company is leasing certain real
estate from this stand-alone company. As such, future minimum lease payments
related to existing lease arrangements are not indicative of future cash
payments.
The Company is involved in litigation arising in the ordinary course of
business and has been named as defendants in legal proceeding wherein
substantial damages are claimed. Such proceedings are not uncommon in the
Company's business and historically, the Company has been successful in
defending such actions or have settled them within insured limits. In the
opinion of management, after consultation with legal counsel, these matters will
be resolved without material adverse effect on the Company's result of
operations or financial position.
21. INCOME TAXES
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
FIVE-MONTH
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, FEBRUARY 27,
---------------- ------------
1995 1996 1997
------ ---- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $1,433 $ 37 $(342)
State.......................................... 523 387 121
Foreign........................................ 367 136 44
------ ---- -----
Current provision................................ 2,323 560 (177)
Deferred:
Federal........................................ 3,628 104 (84)
State.......................................... (904) 49 (10)
Foreign........................................ (125) 12 (19)
------ ---- -----
Deferred provision............................... 2,599 165 (113)
------ ---- -----
Provision for income taxes....................... $4,922 $725 $(290)
====== ==== =====
</TABLE>
In 1995, 1996, and 1997, taxes of $5,165,000, $956,000, and $(290,000),
respectively, were provided on income from continuing operations. Respective tax
benefits of $243,000 and $231,000 related to extraordinary charges on the
repurchases of debt are included in the 1995 and 1996 total provision for income
taxes.
F-46
<PAGE> 148
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective tax rate from continuing operations differs from
the U.S. statutory income tax rate as set forth below:
<TABLE>
<CAPTION>
FIVE-MONTH
YEAR ENDED PERIOD
SEPTEMBER 30, ENDED
--------------- FEBRUARY 27,
1995 1996 1997
---- ----- ------------
<S> <C> <C> <C>
U.S. statutory income tax rate..................... 35.0% 35.0% 35.0%
State taxes, net of Federal income tax benefit..... (1.8) 14.9 1.9
Foreign income taxes............................... 3.8 5.6 (2.6)
Favorable tax settlements on prior years........... -- (30.2) --
Permanent differences, primarily goodwill.......... -- 12.7 (17.6)
Income tax credits................................. (1.0) -- --
Other.............................................. 2.0 -- (1.3)
---- ----- -----
Effective tax rate................................. 38.0% 38.0% 15.4%
==== ===== =====
</TABLE>
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 as of September 30, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------
1995 1996
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Current gross deferred tax assets:
Inventory and sales return reserves.................... $ 2,771 $ 3,246
Accrued compensation................................... 700 777
Other.................................................. 1,036 1,374
------- -------
Current gross deferred tax assets......................... 4,507 5,397
Noncurrent gross deferred tax assets:
Federal tax credit..................................... 5,368 5,108
Depreciation........................................... 1,612 1,123
Other.................................................. 1,424 1,134
------- -------
Noncurrent gross deferred tax assets...................... 8,404 7,365
------- -------
Gross deferred tax assets................................... 12,911 12,762
Less valuation allowance.................................. -- --
------- -------
Deferred tax assets......................................... 12,911 12,762
Deferred tax liabilities:
Current gross deferred tax liabilities:
Direct financing leases................................ 7,595 7,694
Other.................................................. 250 390
------- -------
Current gross deferred tax liabilities.................... 7,845 8,084
Noncurrent gross deferred tax liabilities:
Direct financing leases................................ 34,029 34,011
Other.................................................. 551 1,024
------- -------
Noncurrent gross deferred tax liabilities................. 34,580 35,035
------- -------
Gross deferred tax liabilities.............................. 42,425 43,119
------- -------
Net deferred tax liabilities................................ $29,514 $30,357
======= =======
</TABLE>
As of February 27, 1997, the Company had federal net operating loss
carryforwards of approximately $9,565,000. The net operating loss will expire in
2012, if not utilized. Utilization of the
F-47
<PAGE> 149
TRIAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net operating losses may be subject to an annual limitation due to the "change
in ownership" provision of the Internal Revenue Code of 1986. The annual
limitation may result in the expiration of net operating losses before
utilization.
At February 27, 1997, the Company had business tax credit carryforwards of
$2,705,000, which may be used to reduce future federal income taxes, if any. The
business tax credit carryforwards expire from 1999 through 2010. Also available
to the Company to reduce future regular federal income taxes are alternative
minimum tax credits of approximately $4,402,000 with no statutory expiration
date.
Substantially all of the Company's operating income was generated from
domestic operations during 1995, 1996 and 1997. 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 $2,396,000 and $1,351,000 at September 30,
1996 and February 27, 1997, respectively.
The exercise of certain stock options which have been granted under the
Company's stock option plan gives rise to compensation which is includable in
the taxable income of the applicable option holder and deductible by the Company
for federal and state income tax purposes. Such compensation results from
increases in the fair market value of the Company's common stock subsequent to
the date of grant of the applicable exercised stock options and, in accordance
with APB 25, such compensation is not recognized as an expense for financial
accounting purposes; however, the related tax benefits are recorded as an
addition to Additional Paid-In Capital.
22. SEGMENT INFORMATION
The Company operates in one industry segment; it produces and markets
proprietary databases and software products, and designs, develops, assembles,
markets, services and leases computer systems. The Company markets its products
in the United States, Puerto Rico, the United Kingdom, France, Canada and
Ireland and has no customer which accounts for 10% or more of its revenue.
Revenue, operating income and assets outside the United States were not material
to the consolidated financial statements of the Company.
F-48
<PAGE> 150
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER
OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
- ------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary......................... 1
Risk Factors............................... 15
Use of Proceeds............................ 21
Capitalization............................. 21
Selected Historical and Pro Forma Financial
Data..................................... 22
Selected Historical Financial Data......... 23
Unaudited Pro Forma Financial
Information.............................. 24
Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................ 29
Business................................... 37
Management................................. 51
Stock Ownership and Certain Transactions... 55
The Exchange Offer......................... 59
Description of the Restated Senior Credit
Facilities............................... 66
Description of New Notes................... 70
Certain Federal Income Tax
Considerations........................... 96
Plan of Distribution....................... 97
Legal Matters.............................. 97
Experts.................................... 97
Index to Financial Statements.............. F-1
</TABLE>
OFFER TO EXCHANGE
ALL OUTSTANDING
9% SENIOR SUBORDINATED NOTES
DUE 2008 FOR
9% SENIOR SUBORDINATED NOTES
DUE 2008
COOPERATIVE COMPUTING, INC.
[LOGO]
--------------------
PROSPECTUS
--------------------
, 1998
<PAGE> 151
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the issuance and distribution of the securities
being registered are estimated (other than with respect to the SEC registration
fee) to be as follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 29,500
Printing and Engraving Expenses............................. 50,000
Accounting Fees and Expenses................................ 75,000
Legal Fees and Expenses..................................... 75,000
Miscellaneous............................................... 5,000
--------
Total............................................. $234,500
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Restated Certificate of Incorporation of Cooperative Computing, Inc.
("the Registrant") provides for the mandatory indemnification of the directors
and officers to the fullest extent permitted by the General Corporation Law of
the State of Delaware (the "Delaware Code"). Pursuant to Section 145 of the
Delaware Code, the Registrant has the discretionary power to indemnify its
present and former directors and officers against expenses actually and
reasonably incurred by them in connection with any suit (other than an action by
or in the right of the Registrant) to which such directors and officers were,
are, or are threatened to be made, a party by reason of their serving in such
positions, so long as they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interest of the corporation for
which they served in such positions, and with respect to any criminal action,
they had no reasonable cause to believe their conduct was unlawful.
Under the Delaware Code, a corporation may also indemnify any person who
was or is a party to an action brought by or in the right of the Registrant by
reason of the fact that the person is or was a director or officer of the
corporation, but only for actual or reasonable defense and settlement expenses
and not for any satisfaction of a judgment or settlement of the claim itself,
and with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication that such director or officer is liable to
the corporation unless the court, upon application, finds that in light of all
the circumstances such person is fairly and reasonably entitled to indemnity for
such expenses. The Delaware Code further provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
The above discussion of the Restated Certificate of Incorporation of the
Registrant and of Section 145 of the Delaware Code is not intended to be
exhaustive and is qualified in its entirety by such Certificate of Incorporation
and the Delaware Code.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in this Item 14, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
II-1
<PAGE> 152
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On February 10, 1998, the Registrant sold $100,000,000 aggregate principal
amount of its 9% Senior Subordinated Notes due 2008 (the "Old Notes") in a
private placement in reliance on Section 4(2) under the Securities Act, at a
price equal to 100% of the stated principal amount of such Old Notes.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
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 9% Note.*
4.3 -- Exchange and Registration Rights Agreement dated February
10, 1998 among Cooperative Computing, Inc., Chase
Securities Inc. and NationsBanc Montgomery Securities
LLC.*
5.1 -- Opinion of Weil, Gotshal & Manges LLP as to the
securities registered hereby.*
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.*
</TABLE>
II-2
<PAGE> 153
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
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.*
12.1 -- Computation of Ratio of Earnings to Fixed Charges.*
21.1 -- List of Subsidiaries.*
23.1 -- Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.1 to this Registration
Statement).
23.2 -- Consent of Ernst & Young LLP.**
23.3 -- Consent of Coopers & Lybrand L.L.P.**
24.1 -- Powers of Attorney (see page II-5 of this Registration
Statement).
</TABLE>
II-3
<PAGE> 154
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
25.1 -- Form T-1 of Norwest Bank Minnesota, National Association,
as Trustee under the Indenture filed as Exhibit 4.1.*
27.1 -- Financial Data Schedule.*
99.1 -- Form of Letter of Transmittal.*
99.2 -- Form of Notice of Guaranteed Delivery.*
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules:
The following Financial Statement Schedule is included in this Registration
Statement:
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(h) See Item 14.
II-4
<PAGE> 155
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Austin, State of Texas,
on August 4, 1998.
COOPERATIVE COMPUTING, INC.
By: /s/ MATTHEW HALE
----------------------------------
Matthew Hale,
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President and Chief Executive August 4, 1998
- ----------------------------------------------------- Officer and Director (Principal
Glenn E. Staats Executive Officer)
* Executive Vice President, Chief August 4, 1998
- ----------------------------------------------------- Operating Officer and Director
Preston W. Staats
/s/ MATTHEW HALE Vice President of Finance and August 4, 1998
- ----------------------------------------------------- Chief Financial Officer
Matthew Hale (Principal Accounting and
Financial Officer)
* Director August 4, 1998
- -----------------------------------------------------
Thomas O. Hicks
* Director August 4, 1998
- -----------------------------------------------------
Jack D. Furst
* Director August 4, 1998
- -----------------------------------------------------
A. Laurence Jones
* Director August 4, 1998
- -----------------------------------------------------
James R. Porter
</TABLE>
*By: /s/ MATTHEW HALE
-------------------------------
Matthew Hale
Attorney-in-Fact
II-5
<PAGE> 156
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED BALANCE
BEGINNING TO COSTS AT END
DESCRIPTION OF PERIOD AND EXPENSES DEDUCTIONS OF PERIOD
----------- --------- ------------ ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED NOVEMBER 30, 1995:
Allowance for doubtful accounts and system
returns....................................... $1,077 $ 740 $ -- $1,817
Inventory valuation............................. $ 54 $ 14 $ -- $ 68
YEAR ENDED NOVEMBER 30, 1996:
Allowance for doubtful accounts and system
returns....................................... $1,817 $ 132 $ -- $1,949
Inventory valuation............................. $ 68 $ 80 $ -- $ 148
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
SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED):
Allowance for doubtful accounts and system
returns....................................... $5,468 $2,121 $2,826 $4,763
Inventory valuation............................. $2,070 $ 321 $ 491 $1,900
</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.
S-1
<PAGE> 157
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
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 9% Note.*
4.3 -- Exchange and Registration Rights Agreement dated February
10, 1998 among Cooperative Computing, Inc., Chase
Securities Inc. and NationsBanc Montgomery Securities
LLC.*
5.1 -- Opinion of Weil, Gotshal & Manges LLP as to the
securities registered hereby.*
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.*
</TABLE>
<PAGE> 158
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
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.*
12.1 -- Computation of Ratio of Earnings to Fixed Charges.*
21.1 -- List of Subsidiaries.*
23.1 -- Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.1 to this Registration
Statement).
23.2 -- Consent of Ernst & Young LLP.**
23.3 -- Consent of Coopers & Lybrand L.L.P.**
24.1 -- Powers of Attorney (see page II-5 of this Registration
Statement).
25.1 -- Form T-1 of Norwest Bank Minnesota, National Association,
as Trustee under the Indenture filed as Exhibit 4.1.*
27.1 -- Financial Data Schedule.*
99.1 -- Form of Letter of Transmittal.*
99.2 -- Form of Notice of Guaranteed Delivery.*
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 16, 1998 (except Note 19, as to which the
date is February 10, 1998), with respect to the consolidated financial
statements and schedule of Cooperative Computing Holding Company, Inc. and our
report dated January 16, 1998, with respect to the consolidated financial
statements of Triad Systems Corporation, in Amendment No. 3 to the Registration
Statement (Form S-1 No. 333-49389) and related Prospectus of Cooperative
Computing, Inc. for the registration of $100 million of 9% Senior Subordinated
Notes due 2008.
/s/ ERNST & YOUNG LLP
Austin, Texas
August 4, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Amendment No. 3 to the Registration Statement on
Form S-1 (File No. 333-49389) and related Prospectus of Cooperative Computing,
Inc. of our report dated October 23, 1996 on our audits of the consolidated
financial statements of Triad Systems Corporation as of and for the years ended
September 30, 1995 and 1996. We also consent to the reference to our firm under
the Caption "Experts".
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 4, 1998
