SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-49389
COOPERATIVE COMPUTING, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 94-2160013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
804 LAS CIMAS PARKWAY, SUITE 200
AUSTIN, TEXAS 78746
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: 512-328-2300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [X]
No established published trading market exists for the Common Stock, par value
$0.01 per share, of Cooperative Computing, Inc. All of the outstanding shares
of Common Stock, par value $0.01 per share, of Cooperative Computing, Inc., are
held by Cooperative Computing Holding Company, Inc.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
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Class Outstanding at December 22, 2000
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Common Stock 1,000 Shares
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FORWARD-LOOKING STATEMENTS
INFORMATION SET FORTH IN THIS ANNUAL REPORT ON FORM 10-K REGARDING EXPECTED OR
POSSIBLE FUTURE EVENTS, INCLUDING STATEMENTS OF THE PLANS AND OBJECTIVES OF
MANAGEMENT FOR FUTURE GROWTH, OPERATIONS, PRODUCTS AND SERVICES AND STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE, IS FORWARD-LOOKING AND SUBJECT TO RISKS
AND UNCERTAINTIES. FOR THOSE STATEMENTS, THE COMPANY CLAIMS THE PROTECTION OF
THE SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS PROVIDED FOR BY SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS
ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY, WHICH,
ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE
RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE
CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS
LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY
SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE
THE FOLLOWING: (1) INCREASED COMPETITION; (2) RAPID TECHNOLOGICAL CHANGE; (3)
INCREASED COSTS; (4) RISKS ASSOCIATED WITH THE INTRODUCTION OF NEW PRODUCTS AND
PRODUCT UPGRADES AND DEPENDENCE ON PROPRIETARY TECHNOLOGY; (5) LOSS OR
RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (6) INABILITY OF THE COMPANY TO
SUCCESSFULLY INTEGRATE BUSINESSES ACQUIRED IN THE FUTURE AND TO REALIZE
ANTICIPATED REVENUE AND COST SAVINGS OPPORTUNITIES; (7) INCREASES IN THE
COMPANY'S COST OF BORROWINGS OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY
CAPITAL; AND (8) CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH
THE COMPANY MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND
THE CONTROL OF THE COMPANY AND ITS MANAGEMENT. IN ADDITION, OTHER FACTORS THAT
COULD AFFECT THE FUTURE RESULTS OF THE COMPANY AND COULD CAUSE THOSE RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS ARE
DISCUSSED AT GREATER LENGTH UNDER ITEM 1. "BUSINESS" AND ITEM 7. "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
APPEAR ELSEWHERE IN THIS ANNUAL REPORT. THESE RISKS, UNCERTAINTIES AND OTHER
FACTORS SHOULD NOT BE CONSTRUED AS EXHAUSTIVE, AND THE COMPANY DOES NOT
UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION TO UPDATE ANY FORWARD-
LOOKING STATEMENTS TO REFLECT OCCURRENCES OR UNANTICIPATED EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
USE OF TRADEMARKS AND TRADENAMES
Several trademarks and tradenames appear in this Annual Report on Form 10-K.
Automotive Aftermarket Information Highway, J-CON, A-DIS, Triad Prism,
ServiceExpert, Series 12, The Paperless Warehouse, MarketPACE, RepairSource,
Telepart, InterChange, Aftermarket Connex, Telepricing, VISTA, Lasercat,
Lasercat 2000, Triad Servicewriter and CCI Autobahn are federally registered
trademarks of the Company. Other trademarks of the Company include CCI/Triad
Ultimate, CCI/Triad Prism, Eclipse, Triad Eagle, Pace, LaborGuide, True Start,
CCI/Triad, CCI, Triad, PartInsight, ePartExpert, LOADSTAR, Checkmate, Orion,
Compass, Triad CSD, Triad Falcon, and Triad Gemini. Other trademarks and
tradenames are used in this Annual Report on Form 10-K that identify other
entities claiming the marks and names of their products. The Company disclaims
proprietary interest in such marks and names of others. 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.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Cooperative Computing, Inc., a Delaware corporation (hereinafter referred to as
the "Company" or "CCI"), is the leading designer and provider of management
information systems and services for the automotive parts aftermarket and the
hardlines and lumber industry. The automotive parts aftermarket 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 products are designed to improve the operating efficiency and
profitability of suppliers and retailers through enhanced information, control
and inventory management. 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. The system
offerings are enhanced by extensive information services featuring specialized
database products and by customer support and maintenance services. In the
automotive parts aftermarket industry, interconnectivity throughout the
distribution channel is provided by the Company's network of electronically
linked customers, which adds to the efficiency and functionality of the
Company's products and enhances customer profitability.
The Company is the leading provider of industry-specific management information
systems and solutions to every level of the wholesale distribution channel in
the automotive parts aftermarket, which includes manufacturers, warehouse
distributors, parts sales outlets ("PSOs") and service dealers. By servicing all
of these levels, the Company has acquired substantial industry knowledge to
improve and support the information products and services that are made
available to its customers.
COMPANY HISTORY AND OWNERSHIP
As used herein, unless the context otherwise requires, the "Company" represents
the combined businesses of Cooperative Computing, Inc., a Texas corporation
("Old CCI"), and Triad Systems Corporation, a Delaware corporation ("Triad").
Old CCI was founded in 1976 with a focus on a diverse segment of businesses,
including the automotive parts aftermarket. As the automotive parts aftermarket
began to experience significant growth and moved toward computerization, the
Company expanded its automotive parts customer base and developed a wider range
of products and services.
Triad was founded in 1973 as a provider of business and management information
solutions. Over the years, Triad established a presence in the automotive parts
aftermarket throughout the United States, Canada, Puerto Rico, and the United
Kingdom. Triad also developed a significant presence in the hardlines and lumber
industry throughout the United States and Canada. From 1979 until February 27,
1997, Triad was a publicly held company, with its common stock quoted on the
Nasdaq National Market.
On February 27, 1997, Old CCI joined with Hicks, Muse, Tate & Furst Incorporated
("Hicks Muse") to acquire 100% of the stock of Triad (the "Triad Acquisition").
Prior to the Triad Acquisition, Old CCI maintained a strong relationship with
warehouse distributors and a growing relationship with PSOs and service dealers.
The Triad Acquisition was consummated, in part, to broaden Old CCI's
relationship with PSOs in order to provide a platform to further penetrate the
service dealer market and to establish a presence in the hardlines and lumber
industry. Since the Triad Acquisition, management of the Company has focused on
integrating the strengths of Old CCI and Triad.
On March 1, 1998, the Company acquired certain assets of ADP Claims Solutions
Group, Inc. for total consideration (including the assumption of certain
liabilities) of approximately $9.3 million (the "ARISB Acquisition"). These
assets provide products and services to the automotive recycling industry.
AUTOMOTIVE DIVISION
AUTOMOTIVE PARTS AFTERMARKET INDUSTRY OVERVIEW
The automotive parts aftermarket industry consists of the sale of automotive
parts, accessories, lubricants, chemicals, tires, and repair services. It is
estimated to generate approximately $160 billion in revenue for 2000 according
to the Automotive Aftermarket Industry Association.
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
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each of these three channels there are varying levels of distribution. In the
wholesale channel there are generally four primary levels of distribution:
manufacturers, warehouse distributors, PSOs (wholesale PSOs, retailers and new
car dealers) and service dealers. Manufacturers supply automotive parts to
warehouse distributors, which distribute automotive parts to PSOs, which stock
and sell the automobile parts used by service dealers and "do-it-yourself"
purchasers. The retail channel is similarly structured, but with fewer
intermediaries. In the retail channel, parts flow directly from the manufacturer
to the retailer. In turn, the retailer sells directly to the "do-it-yourself"
market, as well as to many service dealers. Parts in the new car manufacturer
channel are distributed directly from the manufacturer to new car dealers, often
through a feeder warehouse. Additionally, new car dealers sell parts to
independent service dealers.
o Wholesale Channel. The wholesale channel is the predominant distribution
channel in the automotive parts aftermarket. Warehouse distributors sell to
service dealers through PSOs. PSOs, which are smaller than warehouse
distributors and positioned geographically near the service dealers they
serve, are utilized due to the time-critical nature of the repair business
and the inability of the service dealer to stock an extensive part
selection.
Historically, the wholesale channel has involved the four distribution
levels described above in a three-step process. However, this channel has
various hybrid distribution methods with the predominant of these hybrids
being the 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 in recent years,
many warehouse distributors have purchased and continue to purchase PSOs
both from independent owners and from small wholesale chains. This
consolidation improves warehouse distributors' buying power with
manufacturers and, therefore, strengthens their competitive position in the
market. The Automotive Division, as the leading provider of systems and
services to the U.S. and Canadian warehouse distributor market, has
benefited from the industry consolidation as many warehouse distributors
have replaced acquired PSOs' existing systems with the Automotive Division'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 chain stores
and specialized shops. However, the Automotive Division believes that since
the late 1980s, the market share of service stations and independent garages
has remained relatively stable.
o Retail Channel. 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. 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 for the large specialty retailers and purchased from third
parties for the smaller organizations.
o New Car Manufacturer Channel. 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., Universal Computer
Systems, Inc. and several car manufacturers themselves.
AUTOMOTIVE RECYCLING INDUSTRY OVERVIEW
The automotive recycling industry consists of the sale of used auto parts that
have been reclaimed from wrecked automobiles. Buyers of these parts are auto
body and collision repair shops, service dealers and "do-it-yourselfers."
PRODUCTS AND SERVICES
The Automotive Division's software and systems, together with its database
products, provide comprehensive business solutions targeted to the automotive
parts aftermarket. The Automotive Division provides standard application
programs that include user options allowing the selective structuring of
applications files and reports to meet customers' specific requirements. These
software products also allow the Automotive Division's customers to access the
Automotive Division's proprietary databases. Automotive Division supplied
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 Automotive Division's
systems also have communication capabilities allowing users to exchange purchase
orders and pricing and inventory information with suppliers and, in some cases,
customers.
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AUTOMOTIVE PARTS AFTERMARKET SYSTEMS
The Automotive Division's automotive parts aftermarket products have been
designed to provide interconnectivity to all levels of the wholesale
distribution channel. This electronic network, which management calls the
"Automotive Aftermarket Information Highway," enables the automotive parts
aftermarket industry to efficiently market parts throughout the distribution
channel.
The Automotive Division's principal automotive parts aftermarket industry
products, based on the level of the distribution channel for which such products
are targeted, are as follows:
o Manufacturer. The Automotive Division has one product, the CCI AutoBahn
system, devoted to the needs of manufacturers. The CCI AutoBahn system is
designed to provide connectivity between manufacturers of auto parts and
warehouse distributors and enables warehouse distributors and manufacturers
to place and confirm orders electronically.
o Warehouse Distributor. The Automotive Division has four products available
to meet the needs of warehouse distributors. One of these products, the A-
DIS system, 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. The A-DIS product is fully connected
to the CCI AutoBahn product, as well as to the J-CON product, a PSO product,
and to the ServiceExpert EZ product for service dealers. In addition, the
Series 12 and CCI/Triad Prism products have connectivity and limited
integration with A-DIS. A second product, CCI/Triad 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.
A third product is the Paperless Warehouse product which is fully integrated
with the A-DIS and CCI/Triad Ultimate products. This product incorporates
radio frequency wireless networking, barcode scanning and handheld computing
technology to improve the efficiency of the receive, pick and ship functions
of the warehouse. The last product in this category is the PartInsight Data
Warehouse. The product can be connected to all the Auto Division's warehouse
and PSO applications as well as third party applications. It provides a data
hub capability to allow large buying groups to have information on a virtual
entity basis.
o Parts Sales Outlet. The Automotive Division currently markets four products
to PSOs: J-CON, Eclipse, CCI/Triad Prism and LaserCat 2000. These products
all operate on platforms that are assembled and integrated by the Automotive
Division. The J-CON product 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. The J-CON
product also allows the PSO to connect with service dealers through the
ServiceExpert EZ product. The J-CON product serves as an inventory
management and electronic purchasing tool. The Eclipse product tracks
inventory, performs accounting functions and executes point-of-sale
operations such as invoicing and billing. The CCI/Triad Prism product is
designed to meet the needs of both national and independent PSOs as well as
PSOs in a two-step distribution process. The LaserCat 2000 product is a
stand alone CPU used by the PSO to access and use the Automotive Division's
various information services products. The Automotive Division also
maintains and supports Series 12, loadSTAR and LaserCat products.
o Service Dealer. The Automotive Division has two groups of products that it
markets to service dealers, ServiceExpert EZ and PACE, which are focused to
specific segments of the service dealer market. The ServiceExpert EZ family
of products offers a range of shop management solutions which blends the
Automotive Division'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. The
ServiceExpert EZ products can create printed repair estimates, automated
work orders and maintain 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 Automotive
Division's PSO and warehouse distributor products to allow parts inquiry and
ordering functions in the service dealer's parts supplier network. The
ServiceExpert EZ products, which are available as software only and as
hardware/software bundled products, can be configured from a simple
estimator product (marketed as ServiceEstimator II) to a full shop
management system that includes inventory management. The PACE product is
specifically tailored to the Canadian service dealer market and is
exclusively marketed in Canada. The Automotive Division also maintains the
Triad ServiceWriter products.
AUTOMOTIVE RECYCLING SYSTEMS
The Automotive Division's automotive recycling products provide yard management
and parts locator functionality that fits the needs of the smallest to the
largest automotive recycling yards as follows:
o Checkmate. The Checkmate system is a complete yard management system that
provides inventory control, point of sales and back office accounting
functions. This system is delivered with the industry standard Hollander
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Interchange, which the Automotive Division licenses from Automated Data
Systems ("ADS"). The Checkmate system also integrates the Orion satellite
based parts locator system.
o Orion. The Orion system is sold either as a stand-alone terminal or is
integrated with the Checkmate yard management system. The Orion system uses
a publicly accessible Kband satellite to communicate with regional and
national yards that are also on the system to locate parts not in their
local inventory. Nightly, yards that are on the network are polled for their
yard's inventory by the Automotive Division's central server creating a
central database of parts that is available each day for part sourcing by
the network members.
o Compass. The Compass product is an open line "spoke and hub" telephone
system that yards within the same geographic area can join. This phone
network is used by yards to source recycled parts to meet customer demands
from other than their own yard inventory. The Automotive Division provides
monitoring and settlement services to each of the Compass networks.
CUSTOMER SUPPORT SERVICES
The Automotive Division's customer support services organization provides
service, training and support to its customers. The Automotive Division'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 generally require a high level of service, training and
support.
The Automotive Division typically provides a limited warranty on its systems
ranging from 30 to 90 days. The Automotive Division 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 Automotive
Division's customers can call the Automotive Division'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. CCI has developed a Web-
based product called Entrypoint that allows customers direct access to a call
tracking system, on-line product training courses, and on-line knowledge base.
These features allow customers to request support services, review specific
calls or their entire call history, increase employee system knowledge through
on-line coursework, or search a knowledge base to obtain immediate answers to
questions. 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 Automotive Division offers training for new and existing customers at the
facilities of both the Automotive Division and its customers. In addition to
training in system operations and software enhancements, the Automotive Division
offers seminars and workshops to assist customers in understanding the
capabilities of their systems.
For many of the Automotive Division's large automotive warehouse distributor
customers, the Automotive Division provides information facilities management
services. Many of these are facilitated through a limited partnership
arrangement. Through these arrangements, the Automotive Division provides
customers with on-site managers and employees experienced in warehouse and store
applications to operate the customers' computer facilities.
INFORMATION SERVICES
The Company provides electronic catalogs, bar codes, related repair information,
and reports based on point-of-sale activity through a variety of information
services. These proprietary database products and services generate recurring
revenues through monthly subscription fees and differentiate the Company's
products from those of its competitors. The Company offers information services
to its automotive parts aftermarket industry customers, including distributors,
manufacturers and retail parts and services chains.
o Electronic Catalog. The Company's electronic catalog products provide access
to a database of over 17 million automobile part applications for 2,800
automotive aftermarket product lines. These products virtually eliminate the
time consuming and cumbersome use of printed catalogs and are designed to
increase productivity and accuracy in parts selection and handling. Software
on the 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, 2000, approximately 10,000
distributor locations, 3,000 retail locations, and 9,000 service locations
subscribed to the Company's electronic catalogs service.
o ePartExpert. The Company's electronic catalog database is available in a
format designed for Internet use. Named ePartExpert, the database and access
software have been modified to enable consumers and service professionals to
look-up automotive product applications for themselves, view diagrams and
select the parts for their vehicle.
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o Interchange. The Interchange database 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 Interchange product monthly.
o Telepricing. The Telepricing service provides electronic price updates
directly to the warehouse distributor, PSO or service dealer system for
automotive parts following a manufacturer's price change, eliminating a
customer's need to input this data manually. Customers are provided updates
to the Telepricing service daily and weekly.
o LaborGuide Database. The Company has licensed from Mitchell the LaborGuide
database, which provides authorized guidance of labor hours for car repairs.
This database, which can be integrated with the Company's PSO systems and
the ServiceExpert EZ family of products, is targeted to the approximately
340,000 service dealers in the United States. LaborGuide permits users to
comply more easily with regulations in many states that require written
estimates of repair costs. The repair functions within the LaborGuide
product 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 LaborGuide database monthly.
o RepairSource. The Company has a license for the integration and distribution
of Mitchell's "Mitchell on Demand" electronic automobile repair information
product. The Company has integrated this product into its ServiceExpert EZ
system and markets it under the name RepairSource. The RepairSource
electronic database 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.
o MarketPACE. Inventory is the most costly asset for automotive parts
distributors. The typical parts store can only afford to stock one of every
five parts offered by their primary suppliers. Deciding which parts to stock
to meet local market needs is a critical job. The Company's MarketPACE
service provides all the information needed to pick an optimal assortment of
parts to stock in any location in the U.S. Using vehicle registration data
licensed from Polk, plus part replacement rates derived from sales activity
in the customer base, MarketPACE forecasts local demand by ZIP code for
every part in a product line. Stores can increase sales and inventory turns
by stocking the parts with the best forecasts. The MarketPACE process and
products are protected by patents owned by the Company.
SALES AND MARKETING
The Automotive Division markets its products to the automotive parts aftermarket
through a geographically-based direct sales force and a telesales/telemarketing
organization with approximately 123 employees. Incentive pay is a significant
portion of the total compensation package for all sales representatives and
sales managers. Additionally, the Automotive Division 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.
INTERNET INITIATIVES
On May 31, 2000, the Company, along with its majority stockholder, Hicks Muse,
entered into a joint venture arrangement with other investors to form Internet
Autoparts, Inc. ("IAP"). The Company granted licenses to the new venture. IAP
will provide the automotive aftermarket with a Web-based parts ordering and
communications platform linking automotive service providers and wholesale
distributors. CCI granted certain licenses to IAP in return for a one-third
interest in IAP. IAP will be powered by CCI's Web-based parts catalog,
ePartExpert, and will have access to CCI's communications gateway, AConneX,
which will provide seamless communications among the various CCI business
platforms and third-party management systems.
Two other Internet related products are PartInsight(TM) and EntryPoint(TM).
PartInsight(TM), CCI's data warehouse product, has also been Web enabled for
user access providing improved user access. PartInsight(TM) assists companies in
managing their business through providing business intelligence solution sets in
areas of sales, margin, national accounts, customers and inventory analysis.
EntryPoint(TM) is a new Web support application portal that provides customers
online problem submission, issue tracking, access to support knowledge base,
product manuals, and online product training courses.
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HARDLINES AND LUMBER DIVISION
INDUSTRY OVERVIEW
The hardlines and lumber industry consists of the sale of products for
residential and commercial building construction, maintenance and repair, lawn
and garden, and agribusiness. Management estimates that this industry, comprised
primarily of hardware retailers, home centers, lumber and building materials
suppliers and manufacturers, agribusiness retailers, lawn and garden retailers
and paint retailers, generated over $163 billion in revenues in 2000. This
market is segmented primarily into three groups:
o Top 10 Market. The ten largest retailers in the hardlines and lumber
industry (the "Top 10") represent over 2,600 stores and accounted for
approximately 40% of the annual industry sales volume. The Top 10 include
mass merchandisers such as Home Depot, Lowe's and Sears. As a result of
their size, it is generally more cost effective for the Top 10 to develop
and support their own systems, and, therefore, the Top 10 do not purchase
systems from the Hardlines and Lumber Division. The Hardlines and Lumber
Division believes that the growth of the Top 10 generally has 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 increase their merchandising efficiencies and
productivity.
o Top 11-500 Market. The 500 largest retailers in the hardlines and lumber
industry, excluding the Top 10, is estimated to account for approximately
20% of the industry's annual sales volume. There are approximately 4,200
stores in this market, of which a majority are lumber and home center
businesses. This 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 Hardlines and
Lumber Division. The Hardlines and Lumber Division believes that retailers
will continue to upgrade systems as the industry continues to respond to
competition and innovation by the Top 10.
o Top 500+ Market. The hardlines and lumber retailers which do not rank in the
Top 500 (the "Top 500+") are typically smaller, independent stores with a
niche focus. Management believes that there are approximately 34,000 stores
in this market, which accounted for nearly 40% of the industry annual sales
volume. This market is fragmented and has experienced limited consolidation.
The Hardlines and Lumber Division believes the majority of this market is
affiliated with cooperatives, which encourage their members to install
computerized point-of-sale and store management systems to more effectively
compete with the rest of the industry. The Hardlines and Lumber Division
believes the larger stores in this segment will continue to represent a
large portion of the Hardlines and Lumber Division's revenue base as firms
upgrade their computer systems in order to protect their niche market
positions.
Drivers of Computerization. Computerization within the hardlines and lumber
industry has been predominantly driven by the Top 10 which have expanded their
business throughout the United States by providing products and services by
using a mass merchandising format. As a result of this strategy, hardlines and
lumber consumers have been able to purchase products and services cheaper from
the Top 10 than was traditionally available. This has driven the Top 11-500
Market and the Top 500+ to computerize in order to reduce costs and improve
service to maintain their market positions.
PRODUCTS AND SERVICES
The Hardlines and Lumber Division's software and systems, together with its full
range of services, provide comprehensive business solutions targeted to the
hardlines and lumber industry. The Hardlines and Lumber Division provides
standard application programs that include user options allowing the selective
structuring of applications files and reports to meet customers' specific
requirements. In addition, the Hardlines and Lumber division provides point of
sale product movement information services to manufacturers.
PRINCIPAL PRODUCTS
The Hardlines and Lumber Division's hardlines and lumber systems automate
inventory control, point-of-sale functions (such as invoicing and billing),
payroll, accounting and purchase orders. The Hardlines and Lumber Division's
principal go forward systems products are as follows:
o Triad Eagle. The Triad Eagle system blends the power and flexibility of the
Hardlines and Lumber Division's management information systems with
applications and features created to meet the unique needs of hardware
stores and lumber and building materials operations. It manages the flow of
a typical transaction, including estimating, ordering, inventory management,
shipping, invoicing and tracking accounts receivable.
6
<PAGE>
o Triad Falcon. The Triad Falcon system is the Hardlines and Lumber Division's
next generation product targeted at large multi-location lumber and building
material and home center retailers. Triad Falcon provides flexibility in
tailoring the system to meet the needs required of individuals, groups,
departments and single or multiple store locations.
In addition to the principal go forward products, the Hardlines and Lumber
Division also maintains several legacy products. The Hardlines and Lumber
Division expects the customers of these products to migrate to the Triad Eagle
or Triad Falcon over the next few years.
o Triad CSD. The Triad CSD series of systems is designed for mid- to large-
sized hardlines and lumber dealers due to its greater power and
functionality. Triad CSD products allow for product offerings suitable for
hardlines and building materials chains with up to 20 stores and
$150 million in annual sales.
o Triad Gemini. The Triad Gemini system is designed for large hardlines and
lumber dealers. Triad Gemini customers represent some of the largest
companies in the hardlines and lumber industry. Gemini's largest customer
has over 160 locations with revenue exceeding $1 billion.
CUSTOMER SUPPORT SERVICES
The Hardlines and Lumber Division's customer support services organization
provides service, training and support to the Hardlines and Lumber Division's
customers. The Hardlines and Lumber Division's system owners are principally
small and medium business proprietors without complete 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 Hardlines and Lumber Division typically provides a limited warranty on its
systems ranging from 30 to 90 days. The Hardlines and Lumber Division also sells
a variety of post sale support programs through its system support agreements,
including on-site maintenance, depot repair services and daily system operating
support by phone. The Hardlines and Lumber Division's customers can call the
Hardlines and Lumber Division'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 Hardlines and Lumber Division offers training for new and existing customers
at both its facilities and the facilities of its customers. In addition to
training in system operations and software enhancements, the Hardlines and
Lumber Division offers seminars and workshops to assist customers in
understanding the capabilities of their systems.
INFORMATION SERVICES
The Hardlines and Lumber Division markets database services to manufacturers
with a product called VISTA. 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 VISTA give manufacturers' insight into how a
specific product or brand performs against its competitors and the market in
general.
SALES AND MARKETING
The Hardlines and Lumber Division markets its products and services to the
hardlines and lumber industry through a geographically-based direct and
telesales/telemarketing sales force of approximately 58 employees. Incentive pay
is a significant portion of the total compensation package for all sales
personnel.
The Hardlines and Lumber Division'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 Hardlines and Lumber Division enjoys over 22 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 March 2000 CCI and TruServ Corporation entered into an exclusive agreement to
develop, market and support a modified version of the Triad Eagle System to
TruServ's 9,500 store locations. In September 2000 Ace Hardware Corporation
entered into an exclusive agreement to market and sell a modified Triad Eagle
System named EagleVision to its approximately 5,000 dealers. These systems are
based on a Windows version of the Triad Eagle System which became available in
FY 2000. These agreements have allowed a streamlining of the distribution
channel and reductions in direct sales costs.
7
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CORPORATE SERVICES
CUSTOMER FINANCING
The Company believes that its 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 Systems Financial Corporation ("Triad Financial"). These financing leases
are noncancelable with terms from one to five years. At September 30, 2000,
Triad Financial had a portfolio of outstanding leases to over 7,300 customers
with a balance of approximately $91.8 million.
Historically, the Company has sold lease receivables via short-term lending
agreements with banks and other financial institutions. 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 short-term financing agreements contain restrictive covenants, which allow
the Company to sell only while in compliance with covenants contained in the
agreements. In the event of noncompliance, 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, 2000, the Company was in compliance with such covenants, and
management believes that it will be able to 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 15%
of the aggregate initial proceeds adjusted for certain expenses and payments
remitted on the leases) and full recourse on lease receivables discounted that
do not meet certain requirements established by the bank or lending
institutions.
At September 30, 2000, the contingent liability for leases sold was
approximately $28.4 million. The Company provides for the fair value of the
recourse obligation based upon an analysis that considers among other things,
the creditworthiness 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.
SYSTEM INTEGRATION AND ASSEMBLY
The Company does not manufacture the hardware components of its systems, but the
Company does assemble and integrate its products with hardware components and
software products of third party vendors. As of September 30, 2000, the Company
employed approximately 75 employees in its system integration operation.
The Company utilizes a just-in-time inventory system to help ensure that
efficient cost controls are in place. The commodity nature of the component
business ensures a consistent supply of required components. In addition to the
external customer base, the Company's manufacturing facility also produces
engineering workstations and personal computers for internal use.
SOFTWARE DEVELOPMENT AND TECHNOLOGY
The Company has approximately 200 copyrights and approximately 70 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 producing or receiving proprietary information of the Company
execute an assignment, confidentiality and non-disclosure agreement.
Product development expense in fiscal 1998, 1999, and 2000 was $15.4 million,
$14.9 million, and $11.4 million, respectively.
CUSTOMERS AND SUPPLIERS
No single customer accounted for more than 10% of the Company's total sales in
fiscal 2000. 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.
8
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EMPLOYEES
As of September 30, 2000, the Company had approximately 1,700 employees, none of
whom 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.
SEGMENT REPORTING
See Note 18 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES.
Other than its Newton, New Jersey facility, the Company does not own any real
property. The Company's properties include assembly, software development and
data entry facilities and administrative, executive, sales, and customer support
offices. The Company's principal executive offices are located at 804 Las Cimas
Parkway, Suite 200, Austin, Texas 78746. The Company considers its properties to
be 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
December 22, 2000.
<TABLE>
<CAPTION>
APPROX.
SIZE LEASE
LOCATION (SQ. FT.) DESCRIPTION OF USE TERMINATION
-------- -------- ------------------ -----------
<S> <C> <C> <C>
Owned:
Newton, New Jersey 28,000 Administrative; software development NA
Leased:
Livermore, California 220,000 Divisional executive offices; software 2002
development; data entry; sales; administrative
Austin, Texas 70,000 Principal and divisional executive offices; 2006
software development; sales; administrative
Austin, Texas 49,000 Systems integration and assembly 2002
Austin, Texas 36,000 Administrative 2002
Denver, Colorado 25,000 Administrative; software development 2005
Longford, Ireland 21,000 Data entry; administrative; sales 2027
Florence, Alabama 18,000 Administrative; sales; customer support 2001
Austin, Texas 19,000 Data entry 2005
Plymouth, Minnesot 4,000 Administrative; sales and customer support 2001
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.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings and administrative actions,
all of which are of an ordinary or routine nature incidental to the operation of
the Company. In the opinion of the Company's management, such proceedings and
actions should not, individually or in the aggregate, have a material adverse
effect on the Company's results of operations, financial condition or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders in the
Company's fourth fiscal quarter in 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for any class of the Company's
common equity. All of the Company's common stock is held by Cooperative
Computing Holding Company, Inc., a Delaware corporation ("Holding"). Neither the
Company nor Holding paid any dividends in fiscal 2000, nor do they anticipate
paying any dividends in the foreseeable future. The Company's ability to pay
such dividends is limited by the terms of the Company's Restated Senior Credit
Facilities (as herein defined). See Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of the Company for the
years ended November 30, 1996, the ten-month period ended September 30, 1997,
and the years ended September 30, 1998, 1999 and 2000. The balance sheet data as
of September 30, 1999 and 2000, and the statement of operations data for the
years ended September 30, 1998, 1999, and 2000 set forth below are derived from
the audited consolidated financial statements of the Company included elsewhere
herein. The balance sheet data as of September 30, 1997, and the statement of
operations data for the ten months ended September 30, 1997 set forth below are
derived from the audited consolidated financial statements of the Company that
are not included herein. The consolidated financial statements for the periods
ended September 30, 1997, 1998, 1999, and 2000 include the accounts of Holding
and CCI. Holding has no assets or liabilities other than (1) its investment in
its wholly owned subsidiary CCI and (2) its Redeemable Convertible Class A
Common Stock, the net proceeds of which were contributed in full to CCI (see
Note 12 to audited consolidated financial statements); accordingly these
consolidated financial statements represent the operations of CCI and its
subsidiaries. The balance sheet data as of November 30, 1996 and the statement
of operations data as of November 30, 1996 set forth below are derived from
audited consolidated financial statements of Old CCI and the Company not
included herein. The selected financial data below should be read in conjunction
with Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the audited consolidated financial statements of the
Company included elsewhere herein.
<TABLE>
<CAPTION>
OLD CCI CCI
------------ ------------------------------------------------------------
TEN-MONTH PERIOD
YEAR ENDED ENDED YEAR ENDED
NOVEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998 1999 2000
------------ ----------------- ----------- ------------ -----------
STATEMENT OF OPERATIONS DATA: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 36,734 $ 140,316 $ 227,221 $ 240,745 $ 223,919
Cost of revenues 21,857 84,464 143,516 151,866 130,881
---------- ---------------- ---------- ---------- ----------
Gross profit 14,877 55,852 83,705 88,879 93,038
Sales and marketing 2,038 28,161 51,426 65,556 49,986
Product development 8,347 11,890 15,401 14,932 11,441
General and administrative 2,992 19,929 35,413 38,200 41,611
Write off of purchased in-process research and
development - 23,100 - - -
---------- ---------------- ---------- ---------- ----------
Total operating expenses 13,377 83,080 102,240 118,688 103,038
Operating income (loss) 1,500 (27,228) (18,535) (29,809) (10,000)
Interest expense - (8,403) (15,868) 18,512 18,872
Other income (expense), net 4,231(1) 443 766 175 1,108
---------- ---------------- ---------- ---------- ----------
Income (loss) before income taxes and (48,146)
extraordinary charge 5,731 (35,188) (33,637) (27,764)
Income tax benefit - 1,001 8,731 11,120 4,691
---------- ---------------- ---------- ---------- ----------
Income (loss) before extraordinary charge 5,731 (34,187) (24,906) (37,026) (23,073)
Extraordinary charge, net of taxes - - 3,017 - -
---------- ---------------- ---------- ---------- ----------
Net income (loss) 5,731 (34,187) (27,923) (37,026) (23,073)
Accretion of redeemable convertible stock - - - 3,020 9,834
---------- ---------------- ---------- ---------- ----------
Net income (loss) attributable to common stock $ 5,731 $ (34,187) $ (27,923) $ (40,046) $ (32,907)
========== ================ ========== ========== ==========
UNAUDITED PRO FORMA INFORMATION:(2)
Historical income (loss) before provision for
income taxes $ 5,731 $ (35,188)
Pro forma income tax (provision) benefit (1,931) 2,392
---------- ----------------
Pro forma net income (loss) $ 3,800 $ (32,796)
========== ================
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 4,004 $ 1,633 $ 1,159 $ - $ 679
Working capital (deficit) (3,490) 603 6,101 12,146 1,931
Total assets 18,763 307,940 300,849 286,803 245,184
Total debt, including current maturities 5,089(3) 144,967(4) 183,318(4) 181,848(4) 178,600(4)
Stockholders' equity (deficit) 5,227 53,699 25,363 (14,494) (48,455)
</TABLE>
------------
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<PAGE>
(1) Included in other income, net, are net gains of $3.4 million related to
settlement of two breach of contract lawsuits recognized by Old CCI.
(2) Concurrent with the Triad Acquisition, Old CCI terminated its S
Corporation status. The unaudited pro forma (provision) benefit for
income taxes computes the tax as if Old CCI and CCI had been subject to
corporate income tax for the entire period.
(3) Consists of advances from stockholders repaid during fiscal 1997.
(4) Total debt does not include any amounts relating to lease receivables
that have been sold by the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the audited historical
consolidated financial statements and notes thereto, which are included
elsewhere herein.
On February 10, 1998, the Company refinanced approximately $149.7 million of
indebtedness, primarily incurred in connection with the Triad Acquisition,
through the issuance of $100.0 million of 9% Senior Subordinated Notes (the
"Notes") due 2008 and the restructuring of an existing $170.0 million Senior
Credit Facility into a $50.0 million term loan facility and a $50.0 million
revolving credit facility ("Restated Senior Credit Facilities").
GENERAL
The Company is the leading designer and provider of management information
systems and services for the automotive parts aftermarket and 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 69% of total revenues in fiscal
2000. The Company's total revenues for the year ended September 30, 2000 were
$223.9 million.
HISTORICAL RESULTS OF OPERATIONS
Year Ended September 30, 2000 Compared to Year Ended September 30, 1999
Revenues for the year ended September 30, 2000 were $223.9 million compared to
$240.7 million for the year ended September 30, 1999, a decrease of
$16.8 million or 7%. For the year ended September 30, 2000, revenues for the
Automotive Division decreased $14.6 million, or 10%, to $135.4 million as
compared to the year ended September 30, 1999. For the year ended September 30,
2000, revenues for the Hardlines and Lumber Division decreased $2.2 million, or
3%, to $88.5 million as compared to the year ended September 30, 1999.
Systems revenues for the year ended September 30, 2000 were $66.0 million
compared to $86.8 million for the year ended September 30, 1999, a decrease of
$20.8 million or 24%. Systems revenues for the Automotive Division for the year
ended September 30, 2000 decreased $16.8 million to $33.0 million as compared to
the year ended September 30, 1999. Systems revenues for the Hardlines and Lumber
Division for the year ended September 30, 2000 decreased $4.0 million to
$33.0 million as compared to the year ended September 30, 1999. The revenue
decrease was primarily due to both market factors and sales strategy changes.
The market factors include an unusually high level of automotive aftermarket
consolidation activity during 1999 resulting in an increase in the amount of
systems purchased during that time, an increase in systems purchased in 1999 to
upgrade in anticipation of Y2K, and an unusually mild winter during 1999-2000
resulting in lower automotive aftermarket parts sales and a corresponding
decrease in system sales. Additionally changes from an internal reorganization
in both the Automotive Division and Hardlines and Lumber Division shifted one
automotive sales model to a lower price point and focused on attracting more
profitable new customers.
Customer support and information services revenues were $154.6 million for the
year ended September 30, 2000 compared to $148.9 million for the year ended
September 30, 1999, an increase of $5.7 million or 4%. Customer support and
information services revenues for the Automotive Division for the year ended
September 30, 2000 increased $2.9 million to $100.6 million as compared to the
year ended September 30, 1999, primarily due to improved product and service
offerings that have attracted and retained customers. Customer support and
information services revenues for the Hardlines and Lumber Division for the year
ended September 30, 2000 increased $2.8 million to $54.0 million as compared to
the year ended September 30, 1999. The main growth is from the information
services groups which grew a combined $2.5 million. Contributing to the
Automotive Division's information services growth is the improvement of the
11
<PAGE>
timeliness of the catalog data entry which caused the catalog product to be an
improved product in fiscal 2000. This increase in the Hardlines and Lumber
Division's revenues is due to an increase in the installed base of customers,
Vista product growth, growth in the sales of point-of-sale information and data
warehouse products, and price increases.
Revenues from financing activities for the year ended September 30, 2000 were
$3.3 million compared to $5.1 million for the year ended September 30, 1999, a
decrease of $1.8 million or 35%. Revenues from financing activities for the
Automotive Division for the year ended September 30, 2000 declined $0.7 million
to $1.8 million as compared to the year ended September 30, 1999. Revenues from
financing activities for the Hardlines and Lumber Division for the year ended
September 30, 2000 declined $1.1 million to $1.5 million as compared to the year
ended September 30, 1999. The decrease in finance revenue is primarily due to a
decrease in the volume of leases originated and sold during the period and a
decrease in the percentage gain on the sale of the leases as compared to the
year ended September 30, 1999.
Cost of revenues were $130.9 million for the year ended September 30, 2000
compared to $151.9 million for the year ended September 30, 1999, a decrease of
$21.0 million or 14%. For the year ended September 30, 2000, cost of revenues
for the Automotive Division decreased $11.6 million or 13%, to $77.2 million as
compared to the year ended September 30, 1999. For the year ended September 30,
2000, cost of revenues for the Hardlines and Lumber Division decreased
$9.3 million, or 15%, to $53.7 million as compared to the year ended
September 30, 1999.
Cost of systems revenues were $47.0 million for the year ended September 30,
2000 compared to $60.7 million for the year ended September 30, 1999, a decrease
of $13.7 million or 23%. Cost of systems revenues for the Automotive Division
for the year ended September 30, 2000 decreased $5.9 million to $25.5 million as
compared to the year ended September 30, 1999, due to lower system sales. Cost
of systems revenues for the Hardlines and Lumber Division for the year ended
September 30, 2000 decreased $7.7 million to $21.5 million compared to the year
ended September 30, 1999. The decrease in systems cost of sales is primarily due
to lower system sales, lower depreciation and amortization expense due to
certain fixed and intangible assets becoming fully amortized, and lower
implementation costs due to a reorganization of the implementation group. Cost
of systems revenues as a percentage of system revenues for the Automotive
Division were 77% and 63% for the year ended September 30, 2000 and 1999,
respectively. Cost of systems revenues as a percentage of systems revenues for
the Hardlines and Lumber Division were 65% and 79% for the years ended
September 30, 2000 and 1999, respectively. The percentage fluctuations are
primarily due to the factors mentioned above as well as the Hardlines and Lumber
Division shifting its system sales mix away from hardware as many existing
customers upgraded their hardware last year due to Y2K concerns.
Cost of revenues for services and finance were $83.9 million for the year ended
September 30, 2000 compared to $91.2 million for the year ended September 30,
1999, a decrease of $7.3 million or 8%. Cost of revenues for services and
finance for the Automotive Division for the year ended September 30, 2000
decreased $5.7 million to $51.7 million compared to the year ended September 30,
1999, primarily due to the factors discussed above and lower personnel costs.
Cost of revenues for services and finance for the Hardlines and Lumber Division
for the year ended September 30, 2000 decreased $1.7 million to $32.2 million
compared to the year ended September 30, 1999, primarily due to the two factors
discussed earlier and to lower personnel costs. Cost of revenues for services
and finance is down from 1999 primarily due to savings from a reorganization of
the Company's customer support organization and lower depreciation and
amortization expense due to certain fixed and intangible assets becoming fully
amortized. As a percentage of services and finance revenues, cost of revenues
for services and finance for the Automotive Division were 50% and 57% for the
year ended September 30, 2000 and 1999, respectively. As a percentage of service
and finance revenues, cost of revenues for services and finance for the
Hardlines and Lumber Division were 58% and 63% for the year ended September 30,
2000 and 1999, respectively. The decrease in cost of services and finance
revenues as a percentage of revenue for both the automotive and Hardlines and
Lumber Divisions primarily was due to increased sales of lower cost information
services products as well as the factors mentioned above.
Sales and marketing expense for the year ended September 30, 2000 decreased
$15.6 million to $50.0 million as compared to the year ended September 30, 1999.
Sales and marketing expense for the Automotive Division for the year ended
September 30, 2000 decreased $6.8 million to $30.7 million as compared to the
year ended September 30, 1999. Sales and marketing expense for the Hardlines and
Lumber Division for the year ended September 30, 2000 decreased $8.8 million to
$19.3 million as compared to the year ended September 30, 1999. The decrease in
sales and marketing expense is primarily due to reduced personnel and travel
costs driven by a reorganization of product marketing and a reduction in sales
personnel in the Automotive Service Dealer and hardlines and lumber field sales
forces. As a percentage of revenue, sales and marketing expense for the
Automotive Division was 23% and 25% for the years ended September 2000 and 1999,
respectively. As a percentage of revenue, sales and marketing expense for the
Hardlines and Lumber Division was 22% and 31% for the year ended September 2000
and 1999, respectively.
Product development expenses for the year ended September 30, 2000 decreased
$3.5 million to $11.4 million as compared to the year ended September 30, 1999.
Product development expenses for the Automotive Division for the year ended
September 30, 2000 decreased $2.1 million to $8.0 million. Product development
expenses for the Hardlines and Lumber Division for the year ended September 30,
2000 decreased $0.4 million to $3.3 million. The decreased product development
expense is primarily due to reduced personnel costs. As a percentage of revenue,
product development expenses for the Automotive Division were 6% and 7% for the
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<PAGE>
years ended September 30, 2000 and 1999, respectively. As a percentage of
revenue, product development expenses for the Hardlines and Lumber Division
remained constant at 4% for the years ended September 30, 2000 and 1999.
General and administrative expenses for the year ended September 30, 2000 were
$41.6 million compared to $38.2 million, an increase of $3.4 million or 9% from
the year ended September 30, 1999. As a percentage of revenues, general and
administrative expense was 19% and 16% for the years ended September 30, 2000
and 1999, respectively. The increase in general and administrative expenses was
primarily due to increased professional services fees from an outside consulting
firm, which was reviewing the Company's operations.
Interest expense for the year ended September 30, 2000 was $18.9 million
compared to $18.5 million, an increase of $0.4 million or 2%. The increase in
interest expense is due to an increase in the base rates, Bank Prime and LIBOR,
used in computing the interest charged to the Company and also to an increase in
the spread over the base rate charged on certain components of the Company's
Restated Senior Credit Facilities. The effect of the increase in interest rates
was partially offset by a lower average balance of indebtedness for the
comparable periods in the current fiscal year. See "Liquidity and Capital
Resource's." Other income for the year ended September 30, 2000 was $1.1 million
compared to $0.2 million, an increase of $0.9 million compared to the prior year
due to increased coop income and investment gains from the Company's funded
deferred compensation plan.
The Company recorded an income tax benefit attributable to continuing operations
of $4.7 million and $11.1 million for the years ended September 30, 2000 and
September 30, 1999, respectively. No deferred tax valuation allowance has been
provided because the Company believes it will generate sufficient taxable income
in the future.
As a result of the above factors, the Company experienced a net loss of
$23.1 million for the year ended September 30, 2000, compared to a net loss of
$37.0 million for the year ended September 30, 1999, a decrease in loss of
$13.9 million or 38%.
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Revenues for the year ended September 30, 1999 were $240.7 million compared to
$227.2 million for the year ended September 30, 1998, an increase of
$13.5 million or 6%. For the year ended September 30, 1999, revenues for the
Automotive Division increased $11.1 million, or 8%, to $150.0 million as
compared to the year ended September 30, 1998. For the year ended September 30,
1999, revenues for the Hardlines and Lumber Division increased $2.4 million, or
3%, to $90.7 million as compared to the year ended September 30, 1998. The
adoption of SOP 97-2 in October 1998 resulted in the deferral of $4.8 million in
revenues for the year ended September 30, 1999, $3.4 million and $1.4 million
from the Automotive Division and Hardlines and Lumber Division, respectively.
Systems revenues for the year ended September 30, 1999 were $86.8 million
compared to $79.9 million for the year ended September 30, 1998, an increase of
$6.9 million or 9%. Systems revenues for the Automotive Division for the year
ended September 30, 1999 increased $7.6 million to $49.8 million as compared to
the year ended September 30, 1998. Systems revenues for the Hardlines and Lumber
Division for the year ended September 30, 1999 decreased $0.8 million to
$37.0 million as compared to the year ended September 30, 1998. The Automotive
Division's increase was primarily due to increases in sales of systems to parts
sales outlets as the result of continued industry consolidation and to the
service dealer market. The Hardlines and Lumber Division's decrease was
primarily attributable to the Company's decision to focus more efforts on lower
volume but higher margin systems sales.
Customer support and information services revenues were $148.9 million for the
year ended September 30, 1999 compared to $140.0 million for the year ended
September 30, 1998, an increase of $8.9 million or 6%. Customer support and
information services revenues for the Automotive Division for the year ended
September 30, 1999 increased $4.8 million to $97.7 million as compared to the
year ended September 30, 1998. Customer support and information services
revenues for the Hardlines and Lumber Division for the year ended September 30,
1999 increased $4.1 million to $51.2 million as compared to the year ended
September 30, 1998. The Automotive Division's increase is due to the results of
operations from the ARISB Acquisition being included for a full year and
increases in information services revenues, offset by a decline in customer
support services revenues. The Hardlines and Lumber Division's increase in
revenues is due to growth in the installed base of customers paying customer
support fees and the sale of point-of-sale information and data warehouse
products.
Revenues from financing activities for the year ended September 30, 1999 were
$5.1 million compared to $7.3 million for the year ended September 30, 1998, a
decrease of $2.2 million or 30%. Revenues from financing activities for the
Automotive Division for the year ended September 30, 1999 declined $1.4 million
to $2.5 million as compared to the year ended September 30, 1998. Revenues from
financing activities for the Hardlines and Lumber Division for the year ended
September 30, 1999 declined $0.8 million to $2.6 million as compared to the year
ended September 30, 1998. The decrease in finance revenues is primarily due to
the Company's decision to eliminate lease discounting for third parties who were
not customers of the Company.
Cost of revenues were $151.9 million for the year ended September 30, 1999
compared to $143.5 million for the year ended September 30, 1998, an increase of
$8.4 million or 6%. For the year ended September 30, 1999, cost of revenues for
the Automotive Division increased $3.7 million or 4%, to $88.8 million as
13
<PAGE>
compared to the year ended September 30, 1998. For the year ended September 30,
1999, cost of revenues for the Hardlines and Lumber Division increased
$4.6 million, or 8%, to $63.1 million as compared to the year ended
September 30, 1998. The adoption of SOP 97-2 in October 1998 resulted in the
deferral of $3.4 million in cost of revenues for the year ended September 30,
1999, $2.1 million and $1.3 million from the Automotive Division and the
hardlines division, respectively.
Cost of systems revenues were $60.7 million for the year ended September 30,
1999 compared to $54.3 million for the year ended September 30, 1998, an
increase of $6.4 million or 11%. Cost of systems revenues for the Automotive
Division for the year ended September 30, 1999 increased $4.2 million to
$31.4 million as compared to the year ended September 30, 1998, due to the
increase in systems revenues. Cost of systems revenues as a percentage of
revenues for the Automotive Division was 63% and 64% for the years ended
September 30, 1999 and 1998, respectively. Cost of systems revenues for the
Hardlines and Lumber Division for the year ended September 30, 1999 increased
$2.1 million to $29.2 million, an increase of 7% compared to the year ended
September 30, 1998. Cost of systems revenues as a percentage of revenues for the
Hardlines and Lumber Division increased from 71% to 79% for the years ended
September 30, 1999 and 1998, respectively.
Cost of revenues for services and finance were $91.2 million for the year ended
September 30, 1999 compared to $89.2 million for the year ended September 30,
1998, an increase of $2.0 million or 2%. Cost of revenues for services and
finance for the Automotive Division for the year ended September 30, 1999
decreased $0.5 million to $57.4 million compared to the year ended September 30,
1998, primarily due to cost-cutting measures. As a percentage of revenues, cost
of revenues for services and finance for the Automotive Division were 62% and
59% for the years ended September 30, 1999 and 1998, respectively. Cost of
revenues for services and finance for the Hardlines and Lumber Division for the
year ended September 30, 1999 increased $2.5 million to $33.9 million compared
to the year ended September 30, 1998, primarily due to increases in revenues. As
a percentage of revenues, cost of revenues for services and finance for the
Hardlines and Lumber Division remained constant at approximately 62% for the
years ended September 30, 1999 and 1998.
Operating expenses were $118.7 million for the year ended September 30, 1999
compared to $102.2 million for the year ended September 30, 1998, an increase of
$16.5 million, or 16%. Product development expenses for the year ended
September 30, 1999 decreased $0.4 million to $15.0 million as compared to the
year ended September 30, 1998. Product development expenses for the Automotive
Division for the year ended September 30, 1999 decreased $2.0 million to
$10.1 million. Product development expenses for the Hardlines and Lumber
Division for the year ended September 30, 1999 increased $0.8 million to
$3.7 million. The Automotive Division's expenses decreased primarily due to a
reduction in personnel and a $0.6 million increase in the capitalization of
software development expenses as compared to the prior year. The Hardlines and
Lumber Division's expenses increased primarily due to additional personnel and a
$0.3 million decrease in the capitalization of software development expenses as
compared to the prior year. As a percentage of revenue, product development
expenses were 6% and 7% for the year ended September 30, 1999 and 1998,
respectively. As a percentage of revenue, product development expenses for the
Automotive Division were 7% and 9% for the year ended September 30, 1999 and
1998, respectively. As a percentage of revenue, product development expenses for
the Hardlines and Lumber Division were 4% and 3% for the year ended
September 30, 1999 and 1998, respectively. Product development expense
associated with the development of internet related products and services was
$1.1 million, an increase of $0.7 million over the prior year.
Sales and marketing expense for the year ended September 30, 1999 increased
$14.1 million to $65.6 million as compared to the year ended September 30, 1998,
an increase of 28%. Sales and marketing expense for the Automotive Division for
the year ended September 30, 1999 increased $9.5 million to $37.5 million as
compared to the year ended September 30, 1998. Sales and marketing expense for
the Hardlines and Lumber Division for the year ended September 30, 1999
increased $4.6 million to $28.1 million as compared to the year ended
September 30, 1998. The increase in sales and marketing expense is due to
additional personnel and variable marketing expenses associated with the
increased revenue and a $3.7 million adjustment to bad debt reserves taken
during September, 1999. As a percentage of automotive revenue, sales and
marketing expense for the Automotive Division was 25% and 20% for the year ended
September 1999 and 1998, respectively. As a percentage of hardlines revenue,
sales and marketing expense for the Hardlines and Lumber Division was 31% and
27% for the year ended September 1999 and 1998, respectively.
General and administrative expense for the year ended September 30, 1999 were
$38.2 million compared to $35.4 million, an increase of $2.8 million or 8%. As a
percentage of revenues, general and administrative expense was 16% for the years
ended September 30, 1999 and 1998.
Interest expense for the year ended September 30, 1999 was $18.5 million
compared to $15.9 million, an increase of $2.6 million or 16%. The increase in
interest expense is due to the increase in debt levels. Other income for the
year ended September 30, 1999 was $0.2 million compared to $0.8 million, a
decrease of $0.6 million compared to the prior year.
The Company recorded an income tax benefit attributable to continuing operations
of $8.7 million and $11.1 million for the year ended September 30, 1998 and
September 30, 1999, respectively. On February 10, 1998, the Company refinanced
its existing debt resulting in an extraordinary charge of $3.0 million, net of a
14
<PAGE>
tax benefit of $2.0 million, due to the write-off of debt issuance costs
associated with the original debt facilities. Such charge and the related tax
benefit is included in the results of operations for the year ended
September 30, 1998.
As a result of the above factors, the Company experienced a net loss of
$37.0 million for the year ended September 30, 1999, compared to a net loss of
$27.9 million for the year ended September 30, 1998, an increase in loss of
$9.1 million or 33%.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had $178.6 million in outstanding
indebtedness, a decrease of $3.2 million from September 30, 1999. The Company's
outstanding indebtedness under its Restated Senior Credit Facilities at
September 30, 2000 included $25.0 million borrowed on the Company's
$50.0 million senior secured revolving credit facility and $53.6 million of
senior secured term loans. Remaining debt consists of $100.0 million of Notes,
due in 2008, bearing interest at 9%. Total annual interest expense, based on
current debt levels and interest rates is estimated to be $18.5 million in
fiscal year 2001. The Company's Restated Senior Credit Facilities impose certain
restrictions on the Company, the most significant of which include limitations
on additional indebtedness, liens, guarantees, payment or declaration of
dividends, sale of assets, investments, capital expenditures, and transactions
with affiliates. The Company must also meet certain tests relating to financial
amounts and ratios defined in the Restated Senior Credit Facilities. At
September 30, 2000, the Company was in compliance with these restrictions.
In light of its expected financial performance, the Company negotiated Amendment
No. 5 to the credit agreement, which, among other things, provides for a
revolving credit facility of $47.5 million and modifies the financial covenants
for fiscal 2001. Based upon its current projections, management of the Company
believes it will be in compliance with the amended covenants throughout 2001. In
the event of noncompliance, the Company would need to obtain additional waivers
or amendments or to seek alternative sources of financing.
The $53.6 million term loan facility requires repaymentof $2.1 million per
quarter in fiscal year 2001. All borrowings under the Restated Senior Credit
Facilities, including the revolving credit facility, are scheduled to be repaid
by March 31, 2004. A portion of the Company's debt bears interest at floating
rates; therefore, its financial condition is and will be affected by changes in
prevailing rates.
In addition to servicing its debt obligations, the Company requires substantial
liquidity for capital expenditures and working capital needs. The Company
requires working capital as it funds its customer leasing operations and then
periodically liquidates its lease portfolio through discounting arrangements
with banks and lending institutions. At September 30, 2000, working capital was
$1.9 million compared to $12.1 million at September 30, 1999. The reduction in
working capital principally relates to improved collections on accounts
receivable which is partially offset by higher accruals for employee
compensation. For the year ended September 30, 2000, the Company's capital
expenditures were $17.2 million, which includes $11.5 million for capitalized
computer software costs and databases. The Company also spent $3.0 million on
assets related to its Internet Autoparts venture. 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 believes that cash flows from operations, together with the amounts
available under the Company's Restated Senior Credit Facilities, will be
sufficient to fund its working capital and debt service requirements (including
the funding of the customer leasing operations). The Company's ability to meet
its working capital and debt service requirements, however, is subject to future
economic conditions and to financial, business and other factors, many of which
are beyond the Company's control. If the Company is not able to meet such
requirements, it may be required to seek additional financing. There can be no
assurance that the Company will be able to obtain financing from other sources
on terms acceptable to the Company, if at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
No. 101), as amended, which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. The Company's current revenue
recognition policies and practices are materially consistent with this
statement. The standard is required to be implemented no later than the fourth
fiscal quarter of fiscal 2001.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. This statement requires
companies to record derivatives on the balance sheet as assets or liabilities
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133 will be effective
for the Company's financial statements for the year ending September 30, 2001.
Management believes that this statement will not have a material impact on the
Company's financial position or results of operations.
15
<PAGE>
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125. It is effective for transactions occurring after
March 31, 2001. This statement provides guidance for distinguishing transfers of
financial assets that are sales from transfers that are actually secured
borrowings. The current accounting practices of the Company are materially
consistent with the new standard.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
At September 30, 2000, approximately $78.6 million of the Company's long-term
debt, specifically, borrowings outstanding under its Restated Senior Credit
Facilities, bears interest at variable rates. Accordingly, the Company's net
loss and after tax cash flow are affected by changes in interest rates. Assuming
the current level of borrowings at variable rates and assuming a two percentage
point change in the 2000 average interest rate under these borrowings, it is
estimated that the Company's 2000 interest expense would have changed by
$1.6 million, resulting in a change in the Company's 2000 net loss. In the event
of an adverse change in interest rates, management would likely take actions to
further mitigate its exposure; however, due to the uncertainty of the actions
that would be taken and their possible effects, this analysis assumes no such
actions. Further, this analysis does not consider the effects of the change in
the level of overall economic activity that could exist in such an environment.
At September 30, 2000, the Company had $100 million of outstanding Notes. The
Notes bear interest at a fixed rate of nine percent and are not subject to
changes in interest rates.
Foreign Currency Risk
The majority of the Company's operations are based in the U.S. and, accordingly,
the majority of its transactions are denominated in U.S. dollars; however, the
Company does have foreign based operations where transactions are denominated in
foreign currencies and are subject to market risk with respect to fluctuations
in the relative value of currencies. Currently, the Company has operations in
Canada, the United Kingdom and Ireland and conducts transactions in the local
currency of each location.
The Company monitors its foreign currency exposure and, from time to time, will
attempt to reduce its exposure through hedging. At September 30, 2000, the
Company had no foreign currency contracts outstanding.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
Cooperative Computing Holding Company, Inc.
Audited Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditor 18
Consolidated Balance Sheets as of September 30, 1999 and 2000 19
Consolidated Statements of Operations and Comprehensive Income
(Loss)for the years ended September 30, 1998, 1999 and 2000 20
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended September 30, 1998, 1999 and 2000 21
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1999 and 2000 22
Notes to Consolidated Financial Statements 23
</TABLE>
17
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cooperative Computing Holding Company, Inc.
We have audited the accompanying consolidated balance sheets of Cooperative
Computing Holding Company, Inc. as of September 30, 1999 and 2000, and the
related consolidated statements of operations and comprehensive income (loss),
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended September 30, 2000. Our audits also include the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cooperative
Computing Holding Company, Inc. at September 30, 1999 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Austin, Texas
December 22, 2000
18
<PAGE>
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 2000
---------------------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ - $ 679
Trade accounts receivable, net of allowance for
doubtful accounts of $9,626 and $5,086 43,977 34,714
Inventories, net 9,095 3,786
Investment in leases, net 4,832 4,439
Deferred income taxes 6,608 6,772
Prepaid expenses and other current assets 6,201 4,858
---------------------------------
Total current assets 70,713 55,248
Service parts 3,664 3,813
Property and equipment, net 11,686 8,241
Long-term investment in leases 15,383 12,411
Capitalized computer software costs, net 15,435 13,901
Databases, net 13,820 11,050
Other intangibles, net 137,187 121,533
Other assets 18,915 18,987
---------------------------------
Total assets $ 286,803 $ 245,184
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable $ 17,679 $ 10,708
Payroll related accruals 11,110 13,663
Deferred revenue 10,551 11,948
Current portion of long-term debt 6,540 8,400
Accrued expenses and other current liabilities 12,687 8,598
---------------------------------
Total current liabilities 58,567 53,317
Long-term debt 175,308 170,200
Deferred income taxes 30,182 24,455
Other liabilities 10,279 8,872
---------------------------------
Total liabilities 274,336 256,844
Redeemable Convertible Class A Common Stock, including
$3,020 and $12,854 in accretion at September 30, 1999
and 2000, respectively 26,961 36,795
Commitments and contingencies - -
Stockholders' equity (deficit):
Common Stock:
Par value $0.000125; authorized 50,000,000; issued and 4 4
outstanding 35,220,000 at September 30, 1999 and 2000
Additional paid-in capital 88,994 88,994
Retained deficit (103,681) (136,399)
Other accumulated comprehensive income:
Cumulative translation adjustment 189 (1,054)
---------------------------------
Total stockholders' equity (deficit) (14,494) (48,455)
---------------------------------
Total liabilities and stockholders' equity (deficit) $ 286,803 $ 245,184
=================================
</TABLE>
See accompanying Notes.
19
<PAGE>
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000
--------------- --------------- --------------
<S> <C> <C> <C>
Revenues:
Systems $ 79,928 $ 86,755 $ 66,026
Customer support and information services 139,990 148,893 154,609
Finance 7,303 5,097 3,284
--------------- --------------- --------------
Total revenues 227,221 240,745 223,919
Cost of revenues:
Systems 54,315 60,653 47,008
Services and finance 89,201 91,213 83,873
--------------- --------------- --------------
Total cost of revenues 143,516 151,866 130,881
--------------- --------------- --------------
Gross margin 83,705 88,879 93,038
Operating expenses:
Sales and marketing 51,426 65,556 49,986
Product development 15,401 14,932 11,441
General and administrative 35,413 38,200 41,611
--------------- --------------- --------------
Total operating expenses 102,240 118,688 103,038
--------------- --------------- --------------
Operating loss (18,535) (29,809) (10,000)
Interest expense (15,868) (18,512) (18,872)
Foreign exchange gain (loss) 136 (480) 77
Other income, net 630 655 1,031
--------------- --------------- --------------
Loss before income taxes and extraordinary charge (33,637) (48,146) (27,764)
Income tax benefit: 8,731 11,120 4,691
--------------- --------------- --------------
Loss before extraordinary charge (24,906) (37,026) (23,073)
Extraordinary charge, net of income tax benefit of $1,969 3,017 - -
--------------- --------------- --------------
Net loss (27,923) (37,026) (23,073)
Accretion of redeemable convertible stock - 3,020 9,834
--------------- --------------- --------------
Net loss attributable to common stock $ (27,923) $ (40,046) $ (32,907)
=============== =============== ==============
Comprehensive income (loss):
Net loss $ (27,923) $ (37,026) $ (23,073)
Foreign currency translation adjustment (413) 189 (1,054)
--------------- --------------- --------------
Comprehensive loss $ (28,336) $ (36,837) $ (24,127)
=============== ============== ==============
</TABLE>
See accompanying notes.
20
<PAGE>
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
-------------------- Paid-in Earnings Stockholders'
Shares Amount Capital (Deficit) Equity (Deficit)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1997 35,220 $ 4 $ 88,994 $(35,299) $ 53,699
Foreign currency translation
adjustments, cumulative loss of
$290 - - - (413) (413)
Net loss - - - (27,923) (27,923)
----------------------------------------------------------------------
Balance, September 30, 1998 35,220 4 88,994 (63,635) 25,363
Foreign currency translation
adjustments, cumulative loss of
$101 - - - 189 189
Accretion on Class A Common Stock
- - - (3,020) (3,020)
Net loss - - - (37,026) (37,026)
----------------------------------------------------------------------
Balance, September 30, 1999 35,220 $ 4 88,994 $(103,492) $ (14,494)
Foreign currency translation
adjustments, cumulative loss of
$1,155 - - - (1,054) (1,054)
Accretion on Class A Common Stock
- - - (9,834) (9,834)
Net loss - - - (23,073) (23,073)
----------------------------------------------------------------------
Balance, September 30, 2000 35,220 $ 4 $ 88,994 $(137,453) $ (48,455)
=======================================================================
</TABLE>
See accompanying notes.
21
<PAGE>
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000
------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (27,923) $ (37,026) $ (23,073)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 8,337 9,445 9,074
Amortization 44,018 42,613 31,728
Provision for doubtful accounts 6,599 8,296 9,301
Extraordinary loss from early extinguishment of debt, net of
income tax benefit 3,017 - -
Other, net 1,385 648 (964)
Changes in assets and liabilities, net of effects of businesses
acquired:
Trade accounts receivable 17,455 14,499 (37)
Inventories (1,974) (3,482) 5,310
Investment in leases (1,616) (2,652) 3,365
Deferred income taxes (9,231) (12,095) (5,891)
Prepaid expenses and other assets (1,516) 1,083 3,868
Accounts payable 6,367 1,430 (6,971)
Deferred revenue 1,895 4,280 1,397
Accrued expenses and other liabilities (9,600) 2,763 (2,948)
-----------------------------------------------
Net cash provided by operating activities 2,303 804 24,159
INVESTING ACTIVITIES
Purchase of property and equipment (6,754) (5,760) (2,319)
Capitalized computer software costs and databases (13,623) (12,681) (11,472)
Purchase of service parts (2,199) (3,263) (3,459)
Acquisition of businesses, net of cash acquired (10,206) (375) -
Expenditures related to Internet Autoparts - - (3,000)
Other (1,806) (363) (106)
-----------------------------------------------
Net cash used in investing activities (34,588) (22,442) (20,356)
FINANCING ACTIVITIES
Issuance of Class A Common Stock - 25,000 -
Stock issuance costs - (1,059) -
Proceeds from long-term debt 100,000 - -
Proceeds from debt facility 240,075 140,800 82,001
Payments on long-term debt facilities (301,804) (142,270) (85,125)
Debt issuance costs (6,460) (1,992) -
-----------------------------------------------
Net cash provided by (used in) financing activities 31,811 20,479 (3,124)
(Decrease)/increase in cash and cash equivalents (474) (1,159) (679)
Cash and cash equivalents, beginning of period 1,633 1,159 -
-----------------------------------------------
Cash and cash equivalents, end of period $ 1,159 $ - $ 679
===============================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 13,484 $ 17,195 $ 18,330
Income taxes $ 344 $ 1,329 $ 1,279
Non cash financing activity:
Accretion of Class A Common Stock $ - $ 3,020 $ 9,834
</TABLE>
See accompanying notes.
22
<PAGE>
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cooperative
Computing Holding Company, Inc. ("Holding", "CCI" or the "Company"), and its
wholly owned subsidiaries. Holding has no assets or liabilities other than (1)
its investment in its wholly owned subsidiaries and (2) its Redeemable
Convertible Class A Common Stock, the net proceeds of which was contributed in
full to a subsidiary. All intercompany accounts and transactions have been
eliminated.
DESCRIPTION OF BUSINESS
CCI is a leading provider of business and information management services to the
automotive aftermarket and the hardlines and lumber industry. CCI produces and
markets complex databases and software products, and designs, develops,
manufactures, markets, services and leases computer systems. Development and
assembly facilities are located in Austin, Texas; Livermore, California; Denver,
Colorado and Newton, New Jersey. Principal markets are located in the United
States, Canada, United Kingdom, Ireland and France.
CASH EQUIVALENTS
The Company considers all investments with maturities of three months 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. Inventories are recorded net of valuation reserves of $1.8 million and
$1.6 million at September 30, 1999 and September 30, 2000, respectively.
SERVICE PARTS
Service parts used for servicing installed equipment are stated at cost and are
depreciated over a period not exceeding two years using the straight-line
method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets (two
to ten years). Leasehold improvements are amortized using the straight-line
method over the life of the lease or the estimated useful life, whichever is
shorter.
INVESTMENT IN LEASES
At the inception of a lease, the gross lease receivable, the reserve for
potential losses, the estimated residual value of the leased equipment and the
unearned lease income are recorded. The unearned lease income represents the
excess of the gross lease receivable plus the estimated residual value over the
cost of the equipment leased. Certain initial direct costs incurred in
consummating the leases, included in the investment in leases, are amortized
over the life of the lease. Lease receivables sold pursuant to agreements with
banks or lending institutions that meet the sales criteria of Statement of
Financial Accounting Standards ("SFAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities are removed from
the balance sheet and the gains are reflected in operations.
23
<PAGE>
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. Management assesses
the recoverability of its capitalized 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. Amortization of
capitalized software is included in systems cost of revenues.
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. Amortization of databases is included in services and finance
cost of revenues.
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 years ended September 30, 1998, 1999, and 2000 totaled approximately
$946,000, $1,024,000, and $1,203,000, respectively.
OTHER INTANGIBLES
Other intangibles consist of goodwill, trademarks and tradenames, and assembled
work force. Goodwill represents the excess of cost over the fair value of assets
acquired and is amortized using the straight-line method over 15 years.
Trademarks and tradenames are amortized over 15 years and assembled workforce is
amortized over 4 years. Amortization of other intangibles is included in general
and administrative expense.
LONG-LIVED ASSETS
The Company periodically reviews the carrying amounts of property, plant, and
equipment, identifiable intangible assets and excess of cost over fair value of
net assets acquired both purchased in the normal course of business and acquired
through acquisition to determine whether current events or circumstances, as
defined in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, warrant adjustments to such carrying
amounts by considering, among other things, the future cash inflows expected to
result from the use of the asset and its eventual disposition less the future
cash outflows expected to be necessary to obtain those inflows. At this time,
future cash inflows exceed future cash outflows; thus, no impairment loss has
been recognized. Management reviews the valuation and amortization periods of
excess of cost over fair value of net assets acquired on a periodic basis,
taking into consideration any events or circumstances which might result in
diminished fair value or revised useful life. No events or circumstances have
occurred to warrant a diminished fair value or reduction in the useful life of
excess of cost over fair value of net assets acquired.
REVENUE RECOGNITION
During 1999, the Company adopted Statement of Position ("SOP") 97-2, Software
Revenue Recognition, as amended. Systems revenue is recognized upon product
shipment provided persuasive evidence of an agreement exists, delivery of the
product has occurred, no significant obligations remain, the fee is fixed and
determinable, and collection is probable. For system contracts with significant
modifications or implementation, revenue is recognized using the percentage of
completion method based on installation hours. Services revenue is recognized in
the period that the services are performed. 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
Deferred income taxes are provided for all temporary differences 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.
24
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable, and other
accrued liabilities approximate fair value because of their short maturities.
Lease receivables are stated at the present value using the internal rate of
return which approximates fair value.
The Company's long-term debt consists of obligations with both variable and
fixed interest rates. The carrying value of debt obligations with variable
interest rates is considered to approximate fair value. The fair value of debt
obligations with fixed interest rates is based on the market prices for such
debt obligations. The fair value of total long-term debt at September 30, 2000
with a carrying value of $100 million is $53.6 million.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
No customer accounted for more than 10% of the Company's revenues during the
years ended September 30, 1998, 1999, and 2000.
Pursuant to agreements with banks and lending institutions for the sale of lease
receivables, the Company is contingently liable for losses in the event of
lessee nonpayment up to stated recourse limits. At September 30, 2000, the
contingent liability for leases sold was $28.4 million.
FOREIGN CURRENCY
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 December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
No. 101), as amended, which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. The Company's current revenue
recognition policies and practices are materially consistent with this
statement. The standard is required to be implemented no later than the fourth
fiscal quarter of fiscal 2001.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. This statement requires
companies to record derivatives on the balance sheet as assets or liabilities
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133 will be effective
for the Company's financial statements for the year ending September 30, 2001.
Management believes that this statement will not have a material impact on the
Company's financial position or results of operations.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125. It is effective for transactions occurring after
March 31, 2001. This statement provides guidance for distinguishing transfers of
financial assets that are sales from transfers that are actually secured
borrowings. The current accounting practices of the Company are materially
consistent with the new standard.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
presentation.
25
<PAGE>
NOTE 2. ACQUISITIONS
In March 1998, the Company acquired the assets of ADP Claims Solution Group,
Inc. ("ADP") and assumed certain liabilities of the ARISB Business (the "ARISB
Acquisition"). The $9,000,000 cash purchase price, related acquisition costs of
$199,405, and liabilities assumed of $151,443 have been allocated to the
tangible net assets acquired of $2,623,353, based on their respective fair
values at the date of acquisition. The resulting excess purchase price of
$6,727,000 was allocated to assembled network of Orion users of $4,278,000,
purchased software of $1,833,000, trademarks and trade names of $323,000, and
assembled workforce of $293,000. The acquired company is engaged in providing
inventory and business management systems for the automotive recycling industry.
The operating results of the acquired company are immaterial to the Company's
consolidated financial statements. Pro forma results of operations are not
included as they are not material.
NOTE 3. SERVICE PARTS
Service parts consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 1999
----------- ----------
(in thousands)
<S> <C> <C>
Service parts $ 15,938 $ 16,546
Less accumulated depreciation (12,274) (12,733)
----------- ----------
Total service parts $ 3,664 $ 3,813
=========== ==========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 2000
---------- ----------
(in thousands)
<S> <C> <C>
Land $ 138 $ 138
Furniture and equipment 27,912 25,848
Buildings and leasehold improvements 1,929 1,859
--------- ---------
Gross property and equipment 29,979 27,845
Less accumulated depreciation and amortization (18,293) (19,604)
--------- ---------
Total property and equipment $ 11,686 $ 8,241
========= =========
</TABLE>
NOTE 5. INVESTMENT IN LEASES
The Company, through its wholly-owned finance subsidiary and special purpose
entity, leases hardware and software products to customers under direct
financing leases. Lease receivables are generally due in monthly installments
over a period of up to five years. Investment in leases is calculated as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 2000
---------- -----------
(in thousands)
<S> <C> <C>
Total minimum lease payments receivable $ 18,963 $ 18,744
Allowance for doubtful accounts (1,975) (1,444)
Initial direct costs 303 293
Estimated unguaranteed residual value 1,337 1,579
---------- ----------
Gross investment in leases 18,628 19,172
Unearned income (5,085) (4,476)
Leases pending acceptance 6,672 2,154
---------- ----------
Total investment in leases 20,215 16,850
Short-term investment in leases (4,832) (4,439)
---------- ----------
Long-term investment in leases $ 15,383 $ 12,411
========== ==========
</TABLE>
26
<PAGE>
A substantial portion of the lease receivables are sold prior to maturity.
Accordingly, a schedule of maturities for the next five years is not indicative
of future cash collections. Most of the Company's customers are in the
automotive aftermarket and the hardlines and lumber industry.
NOTE 6. LEASE RECEIVABLES
Historically, the Company has sold lease receivables via short term lending
agreements with banks and other financial institutions. At the time of sale, the
Company records the newly-created servicing liabilities (lease servicing
obligation and recourse obligation) at their estimated fair value. Gains
resulting from the sale of lease receivables are reflected in finance revenue,
and were $4,318,000, $2,197,000, and $180,000 in 1998, 1999 and 2000. 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 lease financing agreements contain restrictive covenants which allow the
Company to sell leases only while in compliance with such covenants. In the
event of noncompliance, 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 year ended
September 30, 2000, the Company was in compliance with the covenants.
Pursuant to the agreements, the Company is contingently liable for losses in the
event of lessee nonpayment up to stated recourse limits (up to 15% 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,
2000, the Company has $3.1 million of lease receivables discounted that are
subject to the full recourse provision. Proceeds, including discounting gains,
from the sales of lease receivables were approximately $44 million, $36 million,
and $17 million in 1998, 1999, and 2000.
At September 30, 2000, the contingent liability for leases sold was
$28.4 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 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 September 30, 1998 $ 1,781 $ 5,447
Newly-created liabilities 935 9,355
Recoveries - 746
Charges and write-offs (947) (7,868)
----------- ----------
Balance at September 30, 1999 1,769 7,680
Newly-created liabilities 551 8,010
Recoveries - 365
Charges and write-offs (992) (8,464)
----------- ----------
Balance at September 30, 2000 $ 1,328 $ 6,861
=========== ==========
</TABLE>
27
<PAGE>
NOTE 7. CAPITALIZED COMPUTER SOFTWARE COSTS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
--------------------------------
(amounts in thousands)
<S> <C> <C>
Beginning balance $ 25,174 $ 15,435
Reclassification from databases to software - 1,088
Capitalized computer software costs 5,361 6,809
Amortization of computer software costs (15,100) (9,431)
------------ ------------
Ending balance $ 15,435 $ 13,901
============ ============
</TABLE>
NOTE 8. DATABASES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
-----------------------------
(amounts in thousands)
<S> <C> <C>
Beginning balance $ 16,824 $ 13,820
Reclassification from databases to software - (1,088)
Capitalized database costs 7,320 4,663
Amortization of computer software costs (10,324) (6,345)
----------- -----------
Ending balance $ 13,820 $ 11,050
=========== ===========
</TABLE>
NOTE 9. OTHER INTANGIBLES
Activity in other intangibles during the years ended September 30, 1999 and 2000
is as follows (amounts in thousands):
<TABLE>
<CAPTION>
TRADEMARKS ASSEMBLED WORK
AND TRADE FORCE FAVORABLE
GOODWILL NAMES LEASE TOTAL
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net balance at September 30, 1998 $ 124,554 $ 20,078 $ 8,253 $ 804 $ 153,689
Acquisition of assets 727 - - - 727
Adjustment of assets acquired from ADP (780) - - - (780)
Amortization (10,769) (1,494) (3,382) (804) (16,449)
----------- ----------- ----------- ---------- ------------
Net balance at September 30, 1999 113,732 18,584 4,871 - 137,187
Amortization (10,766) (1,495) (3,393) - (15,654)
----------- ----------- ----------- ---------- ------------
Net balance at September 30, 2000 $ 102,966 $ 17,089 $ 1,478 $ - $ 121,533
=========== =========== =========== ========== ============
</TABLE>
NOTE 10-. DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 2000
-----------------------------
(amounts in thousands)
<S> <C> <C>
Senior Subordinated Notes $ 100,000 $ 100,000
Term Loan Facility 60,000 53,600
Revolving Credit Facility 21,700 25,000
Other 148 -
---------- ----------
181,848 178,600
Current portion (6,540) (8,400)
---------- ----------
Long-term debt $ 175,308 $ 170,200
========== ==========
</TABLE>
28
<PAGE>
In 1998, CCI consummated a private placement offering (the "Offering") of
$100 million of 9% Senior Subordinated Notes due 2008 that were issued subject
to an exchange and registration rights agreement. CCI subsequently exchanged
those notes for identical registered 9% Senior Subordinated Notes due 2008
("Notes").
Concurrently with the consummation of the Offering, CCI (i) amended and restated
its Old Credit Facilities by entering into a new $50 million term loan facility
and a new $50 million revolving credit facility (collectively, the "Restated
Senior Credit Facilities") and (ii) used the net proceeds from the Offering and
the Restated Senior Credit Facilities to repay the Old Credit Facilities. The
refinancing of the debt resulted in an extraordinary loss of approximately
$3.0 million, net of tax, as a result of the write-off of existing financing
costs.
In 1999, CCI amended its Restated Senior Credit Facilities by adding a new
$30 million senior secured term loan B and prepaying $20 million of CCI's
existing $50 million senior secured term loan A. CCI also paid down
approximately $8.1 million of the outstanding amounts under the existing
$50 million senior secured revolving credit facility. After giving effect to the
amendment, CCI now has $110 million in senior secured credit facilities,
consisting of the new $30 million term loan B, the remaining $30 million term
loan A and the existing $50 million revolving credit facility.
The Company was in compliance with all debt covenants throughout 2000. In light
of its expected financial performance, the Company negotiated Amendment No. 5 to
the credit agreement, which, among other things, provides for a revolving credit
facility of $47.5 million and modifies the financial covenants for fiscal 2001.
Based upon its current projections, management of the Company believes it will
be in compliance with the amended covenants throughout 2001. In the event of
noncompliance, the Company would need to obtain additional waivers or amendments
or to seek alternative sources of financing.
Interest on the Notes is payable semiannually on February 1 and August 1. The
Notes are redeemable in whole or in part at the option of the Company on or
after February 1, 2003 at the redemption prices (expressed as a percentage of
the principal amount) of 104.5% in 2003, 103% in 2004, 101.5% in 2005 and 100%
in 2006 and thereafter. In addition, on or prior to February 1, 2002, CCI may
redeem up to 35% of the aggregate principal amount of the Notes with the net
cash proceeds of one or more private or public equity offerings at a redemption
price equal to 109% of the principal amount to be redeemed, together with
accrued and unpaid interest, if any, to the date of redemption, provided that at
least 65% of the originally issued aggregate principal amount of the Notes
remains outstanding after each such redemption. Upon the occurrence of a change
of control, as defined by the Notes indenture, CCI will be required to make an
offer to repurchase the Notes at a price equal to 101% of the principal amount
thereof, together with the accrued and unpaid interest, if any. In addition, if
the change of control occurs prior to February 1, 2003, CCI will have the right
to redeem the Notes at a price equal to 100% of the principal amount thereof
plus a premium, as specified by the Notes indenture.
The September 30, 2000 $53.6 million balance under the amended term loan
facility is payable in consecutive quarterly installments on the dates and in a
principal amount equal to the amount set forth below, together with all accrued
interest thereon:
<TABLE>
<CAPTION>
QUARTERS ENDING TRANCHE A QUARTERLY PRINCIPAL TRANCHE B QUARTERLY PRINCIPAL
PAYABLE PAYABLE
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
December 2000 through September 2001 $ 2,000,000 $ 100,000
December 2001 through September 2002 2,500,000 100,000
December 2002 through March 2003 3,000,000 100,000
June 2003 through December 2003 - 100,000
March 2004 - 28,300,000
</TABLE>
The revolving credit facility, which includes revolving credit notes, swing line
notes (maximum of $10 million), and letters of credit (maximum of $15 million),
provides for maximum borrowings of $50 million. Principal amounts under the
revolving credit facility are due on March 31, 2004.
The Restated Senior Credit Facilities bear interest at CCI's option either at
(i) a margin of 2% or 2.5% applied to the greater of lenders Prime Rate, the
base CD rate plus 1% or the Federal Funds Rate plus 0.5% or (ii) the eurodollar
rate plus 3% or 3.5%. The lower margins apply to Revolving Credit loans and
Tranche A term loans. The higher margins apply to the Tranche B Term Loan. Lower
margins may become available upon the attainment of certain financial ratios.
Interest on base rate loans is payable quarterly, and interest on eurodollar
loans is payable at the end of the applicable interest period or every three
months in the case of interest periods in excess of three months. A commitment
fee ranging from 0.375% to 0.5% per annum is charged on unused revolving loans
and is payable quarterly in arrears. The commitment fee at September 30, 2000
was 0.5%.
In connection with the letters of credit, CCI is required to pay a letter of
credit commission fee equal to 2.25% per annum on the amount of the letters of
credit outstanding. Each letter of credit bears a fee equal to 2.25%. As of
September 30, 2000, there was one letter of credit outstanding in the amount of
$300,000.
29
<PAGE>
Substantially all of the assets of the Company and its subsidiaries are pledged
as collateral on the Restated Senior Credit Facilities. The New Notes are
general, unsecured obligations of the Company and are subordinated in right of
payment to all existing and future senior indebtedness of the Company.
The terms of the Restated Senior Credit Facilities restrict certain activities
of the Company, the most significant of which include limitations on additional
indebtedness, liens, guarantees, payment or declaration of dividends, sale of
assets, investments, capital expenditures, and transactions with affiliates. CCI
must also meet certain tests relating to financial amounts and ratios defined in
the agreement. As of September 30, 2000, CCI was in compliance with the
financial amounts and ratios as defined in the agreement and measured quarterly.
Contractual maturities of debt, exclusive of interest, are as follows (in
thousands):
<TABLE>
<S> <C>
2001 $ 8,400
2002 10,400
2003 31,400
2004 28,400
2005 -
Thereafter 100,000
</TABLE>
NOTE 11. INCOME TAXES
Significant components of the income tax benefit attributable to continuing
operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000
------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ (150) $ (197)
State (200) (375) (683)
Foreign (300) (450) (320)
------------------------------------------------------
Total current (500) (975) (1,200)
Deferred:
Federal 8,626 10,630 5,239
State 1,074 1,465 652
Foreign - - -
------------------------------------------------------
Total deferred 9,231 12,095 5,891
------------------------------------------------------
Income Tax Benefit $ 8,731 $ 11,120 $ 4,691
======================================================
</TABLE>
A reconciliation between loss before income taxes and extraordinary charge at
the U.S. statutory rate and the benefit for income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000
---------------------------------------------
<S> <C> <C> <C>
Income tax benefit at U.S. statutory
income tax rate $ 11,773 $ 16,851 $ 9,590
State taxes, net of U.S. income tax
benefit 1,048 1,307 829
Permanent differences, primarily
goodwill (3,361) (6,293) (5,304)
Foreign losses not benefited - (293) (90)
Tax credits and other (729) (452) (334)
----------- ----------- -----------
Income tax benefit $ 8,731 $ 11,120 $ 4,691
=========== =========== ===========
</TABLE>
30
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 2000
----------------------
<S> <C> <C>
Deferred tax assets:
Inventory and sales return reserves $ 5,398 $ 4,684
Accrued expenses 4,927 5,755
Deferred income 4,061 4,913
Tax carryforwards 10,054 7,946
Depreciation 4,693 4,265
Bad debts and other 2,677 922
---------- ----------
Total deferred tax assets 31,810 28,485
Deferred tax liabilities:
Direct financing leases (38,005) (32,905)
Fixed and intangible assets (16,925) (13,117)
Other (454) (146)
---------- ----------
Total deferred tax liabilities (55,384) (46,168)
---------- ----------
Net deferred tax liabilities $ (23,574) $ (17,683)
========== ==========
</TABLE>
Deferred taxes are included in the balance sheets of the Company as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 2000
----------------------
<S> <C> <C>
Net current deferred tax asset $ 6,608 $ 6,722
Net noncurrent deferred tax liabilities (30,182) (24,455)
---------- ----------
Net deferred tax liabilities $ (23,574) $ (17,683)
========== ==========
</TABLE>
As of September 30, 2000, the Company had federal net operating loss
carryforwards of approximately $4,149,000. The net operating loss carryforwards
will begin to expire in 2012 if not utilized. At September 30, 2000, the Company
had business tax credit carryforwards of $2,110,000, and alternative minimum tax
credit carryforwards of approximately $4,204,000. The business tax credit
carryforwards expire from 2001 through 2010 if not utilized and the alternative
minimum tax credits carryforward indefinitely. Utilization of the net operating
losses and tax credit carryforwards may be subject to an annual limitation due
to the "change in ownership" provisions of the Internal Revenue Code of 1986, as
amended. The annual limitation may result in the expiration of net operating
loss and tax credit carryforwards before utilization.
Substantially all of the Company's operating income was generated from domestic
operations during 2000. 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 U.S. Internal Revenue Service has selected the Company's 1997 federal income
tax returns for examination. Management believes that the results of the
examination will not materially effect the financial position or results of
operations of the Company.
NOTE 12. REDEEMABLE CONVERTIBLE CLASS A COMMON STOCK
In 1999, Holding issued 25,000,000 shares of its Class A Common Stock, par value
$.000125 per share (the "Class A Common Stock"), for net proceeds of
$23.9 million, which were used primarily to pay amounts outstanding under CCI's
senior secured revolving credit facility. Two of Holding's existing shareholders
purchased all of the Class A Common Stock. The purchasers were Holding's
majority shareholder, Hicks, Muse, Tate & Furst Equity Fund III, L.P. ("Hicks
Muse"), and a Hicks Muse's affiliate. Another Hicks Muse affiliate received a
$1 million financial advisory fee in connection with the transaction.
31
<PAGE>
The Class A Common Stock is senior to Holding's existing common stock upon
liquidation, but votes with the existing common stock as a class. Upon
dissolution of Holding, holders of Class A Common Stock are to receive the
Stated Value (as hereinafter defined) of their shares before any distribution to
common stockholders. Once the holders of Class A Common Stock receive the
Stated Value, the remaining assets are distributed among the common stockholders
pro rata. The "Stated Value" of a share of Class A Common Stock is $1.00, plus
notional interest of 35% per annum, accrued daily and compounded annually. As
long as the Class A Common Stock is outstanding, there may be no dividends,
stock splits, or other distributions declared or paid on Holding's common stock,
as well as no redemptions or other repurchases.
Each holder of Class A Common Stock may put any of its shares to Holding, and
Holding may redeem shares of Class A Common Stock at any time for the Stated
Value of those shares, subject to certain conditions, including the ability of
the Company to make advances to Holding for such purpose. It is not anticipated
that CCI will be able to advance to Holding funds to redeem the Class A Common
Stock under the current terms of the CCI's senior secured credit facilities.
NOTE 13. COMMON STOCK OPTION PLAN
During 1998, the Company adopted the Cooperative Computing Holding Company, Inc.
1998 Stock Option Plan. The Plan provides for the grant of incentive and non-
qualified stock options to employees and key individuals associated with the
Company. The option price may not be less than the fair market value at the date
of grant as set by the Company's Board of Directors from time to time. Options
vest in varying amounts over a five year period and expire ten years from the
date of the grant. During March 2000, the Company adopted the Cooperative
Computing Holding Company, Inc. 2000 Stock Option Plan. The Plan provides for
the grant of incentive and non-qualified stock options to employees and key
individuals associated with the Company. The option price may not be less than
the fair market value at the date of grant as set by the Company's Board of
Directors from time to time. Options vest in varying amounts over a five year
period and expire ten years from the date of the grant. Information on stock
option activity is as follows:
<TABLE>
<CAPTION>
1998 OPTION PLAN 2000 OPTION PLAN
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total options outstanding at September 30, 1997
Options granted 3,211,100 $ 5.00 - $ -
Options forfeited (2,750) - - -
Options exercised - - - -
------------ ------------ ---------- ---------------
Total options outstanding at September 30, 1998 3,208,350 5.00 -
Options granted 969,850 5.00 -
Options forfeited (365,050) 5.00 -
Options exercised - - - -
------------ ------------ ---------- ------------
Total options outstanding at September 30, 1999 3,815,150 5.00 -
Options granted 339,700 5.00 3,641,000 1.00
Options forfeited (1,423,150) 5.00 (101,500) 1.00
Options exercised - 5.00 -
------------ ------------ ---------- ------------
Total options outstanding at September 30, 2000 2,729,700 $ 5.00 3,539,500 $ 1.00
============ ============ ========== ============
</TABLE>
The following is a summary of options outstanding and exercisable as of
September 30, 2000:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE WEIGHTED- NUMBER OF AVERAGE
SHARES SUBJECT REMAINING AVERAGE SHARES SUBJECT REMAINING
RANGE OF TO OPTIONS CONTRACTUAL EXERCISE TO OPTIONS CONTRACTUAL
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE LIFE (IN YEARS)
---------------- -------------- --------------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1998 Option Plan $5.00 2,729,700 8.2 $5.00 398,410 7.8
2000 Option Plan $1.00 3,539,500 9.4 $1.00 1,161,005 9.4
Combined Option Plans $1.00 and $5.00 6,269,200 8.8 $2.74 1,559,415 9.0
</TABLE>
The Company uses the intrinsic value method in accounting for its employee stock
options. Because the exercise price of the Company's employee stock options is
greater than or equal to the market price of the underlying stock, as determined
by the Board of Directors, on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net loss is required by SFAS No. 123, Accounting
for Stock Based Compensation, which also requires the information be determined
as if the Company has accounted for its employee stock options granted under the
fair value method prescribed by SFAS 123. The fair value of these options was
32
<PAGE>
estimated at the date of grant using the minimum value option pricing model with
the following assumptions for the year ended September 30, 2000:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 1999 2000
-------- ------- --------
<S> <C> <C> <C>
Risk-free interest rate 6% 6% 6%
Weighted-average expected life of the options 5 years 5 years 5 years
Dividend rate 0% 0% 0%
Assumed volatility 0% 0% 0%
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 1999 2000
--------------- --------------- --------------
<S> <C> <C> <C>
Pro forma stock-based compensation expense $ 205,000 $ 471,000 $ 179,000
Pro forma net loss (28,148,000) (37,497,000) (23,252,000)
</TABLE>
The weighted average fair value of options granted during the year ended
September 30, 2000 was $0.35.
RESERVED SHARES OF COMMON STOCK
At September 30, 2000, the Company had reserved 5,050,000 shares of its Common
Stock for issuance under the Company's 1998 Stock Option Plan and 5,000,000
shares for its 2000 Stock Option Plan and 20,000 shares of its Common Stock for
exercise of a warrant.
NOTE 14. STOCKHOLDERS' EQUITY (DEFICIT)
STOCK WARRANT
In 1997, the Company issued a warrant to purchase 20,000 shares of Common Stock,
at the then-fair value of the Common Stock of $5.00 per share, for total
proceeds of $100,000. The warrant is currently exercisable and will expire in
2004.
NOTE 15. SAVINGS AND INVESTMENT PLANS
The Company has a savings and investment plan known as the Triad Systems
Corporation Savings and Investment Plan (the "Plan") as allowed under Sections
401(k) and 401(a) of the Internal Revenue Code. The Plan provides employees with
tax deferred salary deductions and alternative investment options. Employees are
eligible to participate the first day of hire and are able to apply for and
secure loans from their account in the Plan.
The Plan provides for contributions by the Company as determined annually by the
Board of Directors. The Company matches 50% of the first 6% of compensation
contributed by each employee and the deferred amount cannot exceed 25% of the
annual aggregate salaries of those employees eligible for participation. Highly
compensated executive participants are limited to a maximum of 10%.
Contributions to the Plan are allocated among eligible participants in the
proportion of their salaries to the total salaries of all participants and
amounted to $1,663,000, $1,613,000, and $1,429,000 in 1998, 1999, and 2000,
respectively.
NOTE 16. COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has guaranteed various debt obligations under agreements with
certain affiliated companies. At September 30, 2000, these guarantees totaled
$771,000. No material loss is anticipated by reason of such agreements and
guarantees.
33
<PAGE>
OPERATING LEASES
The Company rents office facilities and certain office equipment under non-
cancelable operating lease agreements. Certain lease agreements contain renewal
options and rate adjustments. The Company leases office space from a company
owned by two of the Company's stockholders. Rental payments are $145,300 per
month. Rental expense related to all operating leases was $7,889,000,
$8,161,000, and $7,865,000 in 1998, 1999, and 2000, respectively. Future minimum
rental commitments under all non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
2001 7,488,000
2002 5,081,000
2003 3,018,000
2004 2,925,000
2005 2,874,000
Thereafter 1,298,000
</TABLE>
LEGAL MATTERS
The Company is involved in litigation arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the resolution of these matters will not have a material adverse effect on the
Company's results of operations or financial position.
NOTE 17. RELATED PARTY TRANSACTIONS
In 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. In fiscal 1998, in connection with the ARISB
Acquisition the Company paid a fee of $135,000 for services provided under the
agreement.
Additionally, the Company entered into a ten-year Monitoring and Oversight
Agreement with the affiliate, pursuant to which the Company will pay the
affiliate an annual fee of no less than $350,000 for services provided to the
Company. The fee is due in quarterly installments, and upon the acquisition of
another business by the Company, the minimum fee is increased by an amount equal
to 0.2% of the consolidated annual net sales of the acquired entity for the
trailing twelve-month period. During fiscal 1997 the Company prepaid the annual
fee and is amortizing the amount over the service period. Cash paid in fiscal
1998, 1999 and 2000 were $408,898, $299,236, and $376,706, respectively.
The Company leased office space from a corporation which is wholly owned by two
stockholders of the Company. The rental payments for such facility were
$540,000, $540,000, and $540,000 in fiscal 1998, 1999 and 2000, respectively.
The Company leased an airplane for general corporate use from a corporation
which is wholly owned by a stockholder. Lease payments totaled $465,430,
$475,514, and $68,611 in fiscal 1998, 1999, and 2000, respectively. Subsequent
to September 30, 1999, the Company terminated such lease.
NOTE 18. SEGMENT REPORTING
The Company's business operations are organized into two divisions, automotive
and hardlines and lumber, as shown below. Additionally, a breakdown by
geographic area of total revenues and total assets is disclosed. The Americas
geographic area covers the U.S. and Canada. The Europe geographic area covers
the United Kingdom, Ireland and France.
34
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 1999 2000
------------------------------------------
<S> <C> <C> <C>
Systems Revenues:
Automotive $ 42,168 $ 49,784 $ 33,036
Hardlines and lumber 37,760 36,971 32,990
------------ ------------ ------------
Total systems revenues 79,928 86,755 66,026
Customer support and information services revenues:
Automotive 92,908 97,700 100,582
Hardlines and lumber 47,082 51,193 54,027
------------ ------------ ------------
Total customer support and information services revenues 139,990 148,893 154,609
Finance revenues:
Automotive 3,860 2,536 1,824
Hardlines and lumber 3,443 2,561 1,460
------------ ------------ ------------
Total finance revenues: 7,303 5,097 3,284
Systems costs of revenues:
Automotive 27,181 31,436 25,473
Hardlines and lumber 27,134 29,217 21,535
------------ ------------ ------------
Total systems cost of revenues 54,315 60,653 47,008
Services and finance cost of revenues
Automotive 57,871 57,356 51,675
Hardlines and lumber 31,330 33,857 32,198
------------ ------------ ------------
Total services and finance cost of revenues 89,201 91,213 83,873
Sales and marketing:
Automotive 27,965 37,502 30,678
Hardlines and lumber 23,461 28,054 19,308
------------ ------------ ------------
Total sales and marketing 51,426 65,556 49,986
Product development:
Automotive 12,120 10,124 8,005
Hardlines and lumber 2,883 3,658 3,291
Corporate 398 1,150 145
------------ ------------ ------------
Total product development 15,401 14,932 11,441
General and administrative 35,413 38,200 41,611
Interest expense (15,868) (18,512) (18,872)
Other income, net 766 175 1,108
------------ ------------ ------------
Loss before income taxes and extraordinary charge $ (33,637) $ (48,146) $ (27,764)
============ ============ ============
Revenues:
Americas $ 220,071 $ 234,691 $ 218,052
Europe 7,150 6,054 5,867
------------ ------------ ------------
Total revenues $ 227,221 $ 240,745 $ 223,919
============ ============ ============
Assets:
Americas $ 294,284 $ 281,765 $ 240,537
Europe 6,565 5,038 4,647
------------ ------------ ------------
Total assets $ 300,849 $ 286,803 $ 245,184
============ ============ ============
</TABLE>
35
<PAGE>
NOTE 19. UNAUDITED QUARTERLY RESULTS
The Company's unaudited quarterly results (in thousands) for 1999 and 2000 are
presented below:
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------------------------------------------------------
<S> <C> <C> <C> <C>
2000
----
Total Revenues $ 58,237 $ 57,481 $ 55,598 $ 52,603
Gross Margin 20,414 22,272 25,682 24,670
Net Loss (7,597) (5,541) (4,128) (5,807)
1999
----
Total Revenues $ 55,931 $ 58,574 $ 62,479 $ 63,761
Gross margin 20,883 20,950 24,545 22,501
Net income (loss) (7,038) (7,424) (6,352) (16,212)(1)
</TABLE>
(1) In the fourth quarter of 1999, the Company recorded additional bad debt
reserves of approximately $7.5 million due to a change in the Company's
method of analyzing its allowance for receivables and investments in
leases.
36
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the names, ages and positions of the respective directors
and executive officers of the Company and Holding as of December 15, 2000. All
directors hold office until the next annual meeting of stockholders of the
Company or Holding, as the case may be, and until their successors are duly
elected and qualified. Please refer to "Certain Relationships and Related
Transactions-Stockholder Agreement" for information concerning certain
agreements relating to the election of directors of the Company. All officers
hold office until the next annual meeting of directors of the Company or
Holding, as the case may be, and until their successors are duly elected and
qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------- ----- ----------------------------------------------
<S> <C> <C>
Glenn E. Staats 56 Chairman of the Board and Chief Executive
Officer of Holding and the Company
Preston W. Staats 58 Vice Chairman of the Board of Holding and the
Company
Michael A. Aviles 40 President and Chief Operating Officer of
Holding and the Company
Paul D. Stone 39 Senior Vice President and Chief Administrative
Officer of Holding and the Company
Edgar M. Frandle 60 Chief Information Officer of the Company
Thomas O. Hicks 54 Director of Holding and the Company
Jack D. Furst 41 Director of Holding and the Company
Joe Colonnetta 39 Director of Holding and the Company
A. Laurence Jones 47 Director of Holding and the Company
James R. Porter 64 Director of the Company
</TABLE>
Mr. Glenn Staats founded Old CCI in 1976 and has been Chief Executive Officer
and a director of the Company since February 1997. Mr. Staats also served as
President of the Company from February 1997 until June 1999, at which time he
became Chairman of the Board. Mr. Staats has a Ph.D. in Engineering from the
University of Texas at Austin. Prior to founding Old CCI, Mr. Staats was a
Director of Graduate Studies in the College of Engineering at the University of
Missouri - Columbia. Mr. Staats is the brother of Preston W. Staats.
Mr. Preston Staats joined the Company in 1977 and has been Vice Chairman of the
Board since June 1999 and a director of the Company since February 1997. Mr.
Staats also served as Executive Vice President and Chief Operating Officer from
February 1997 until June 1999. Mr. Staats has a Ph.D. in Electrical Engineering
from Rice University in Houston, Texas. Prior to joining the Company, Mr. Staats
was a Nuclear Submarine Officer in the U.S. Navy and a private sector business
consultant. Mr. Staats is the brother of Glenn E. Staats.
Mr. Aviles joined the Company as President and Chief Operating Officer in
June 1999. Prior to joining the Company, Mr. Aviles served as President and CEO
of Foster Grant Group, a marketer and distributor of consumer eyewear. Mr.
Aviles also served as Vice President, General Manager, of FOOTACTION USA, an
athletic specialty retailer, and as a Senior Manager with KPMG Peat Marwick. Mr.
Aviles has an M.B.A. from Stanford University, a B.B.A. from Pace University and
is a Certified Public Accountant in the State of New York.
Mr. Stone joined the Company as Senior Vice President and Chief Administrative
Officer in October 1999. Prior to joining the Company, Mr. Stone served as Chief
Financial Officer and Executive Vice President of Capstar Broadcasting from
January 1997 to September 1999. Prior to joining Capstar Broadcasting (currently
Clear Channel Communications), he was an Executive Vice President and the Chief
Financial Officer of GulfStar Communications, Inc. from April 1996 until
January 1997. Prior to January 1997, Mr. Stone was Vice President and Controller
of Hicks Muse for six years. Mr. Stone is a Certified Public Accountant in the
state of Texas.
Mr. Frandle has been Chief Information Officer of the Company since
February 1998. Prior to joining the Company, Mr. Frandle served as Vice
President of Information Technology of AmeriData Corp., a value added computer
reseller, from December 1992 to November 1995 and as Vice President of
37
<PAGE>
Information Technology of OutBoard Marine Corporation from November 1995 to
January 1997. Mr. Frandle has both a B.A. and M.B.A. from Minnesota Metropolitan
State University.
Mr. Hicks has been a director of Holding and the Company since February 1997.
Mr. Hicks has been Chairman and Chief Executive Officer of Hicks Muse since co-
founding the firm in 1989. Prior to forming Hicks Muse, Mr. Hicks co-founded
Hicks & Haas Incorporated in 1983 and served as its Co-Chairman and Co-Chief
Executive Officer through 1989. Mr. Hicks also serves as a director of several
portfolio companies in which Hicks Muse has invested, including CEI Citicorp
Holdings, S.A., AMFM Inc. (currently Clear Channel Communications), Home
Interiors & Gifts, Inc., International Home Foods, Inc., LIN Television Corp.,
Olympus Real Estate Corporation, Teligent, Inc., Triton Energy Limited,
Viasystems Group Inc. and Sybron International Corporation. Mr. Hicks is also
the Chairman of the Board and owner of the Dallas Stars Hockey Club, a member of
the National Hockey League, and the Texas Rangers baseball team, a member of
Major League Baseball.
Mr. Furst has been a director of Holding and the Company since February 1997.
Mr. Furst has served as a Partner and Principal of Hicks Muse since 1989, the
year in which it was formed. Mr. Furst has approximately 20 years of experience
in leveraged acquisitions and private investments. Mr. Furst is involved in all
aspects of Hicks Muse's business and has been actively involved in originating,
structuring and monitoring its investments. Prior to joining Hicks Muse, Mr.
Furst served as a Vice President and subsequently a Partner of Hicks & Haas from
1987 to 1989. From 1984 to 1986, Mr. Furst was a Merger and
Acquisitions/Corporate Finance Specialist for The First Boston Corporation in
New York. Before joining First Boston, Mr. Furst was a Financial Consultant at
PricewaterhouseCoopers. Mr. Furst serves on the Boards of Directors of American
Tower Corporation, Triton Energy Limited, Home Interiors & Gifts, Inc., Hedstrom
Holdings, Inc., International Wire Holding Company, LLS Corp. and Viasystems
Group, Inc.
Mr. Colonnetta has been a director of Holding and the Company since June 1999.
Mr. Colonnetta has served as a Principal of Hicks Muse since January 1999. From
1995 to 1998, Mr. Colonnetta served as a Managing Principal of a management
affiliate of Hicks Muse. From 1994 to 1995, Mr. Colonnetta was an Operating
Partner and Chief Executive Officer of Triangle FoodService and StarMark Foods.
From 1989 to 1994, Mr. Colonnetta was the Chief Financial Officer of TRC, a
company specializing in repositioning and growing food-related companies. Mr.
Colonnetta is also a director of Home Interiors & Gifts, Inc., Regal Cinemas,
Inc. and the Grand Union Company.
Mr. Jones has been a director of Holding and the Company since July 1997. He is
currently President and Chief Executive Officer of MessageMedia, Inc. From
January 1998 until February 1999 Mr. Jones served as an Operating Affiliate of
McCown DeLeeuw & Co. From August 1993 to August 1997, Mr. Jones served as the
Chief Executive Officer of Neodata Services Inc., a provider of marketing
services. Prior to his employment by Neodata Services Inc., Mr. Jones served as
Chief Executive Officer of GovPX, a provider of U.S. Treasury data and pricing
services from 1991 to August 1993. Mr. Jones has an M.B.A. from Boston College.
He also serves as Chairman of the Board of SARCOM Inc., and as a director of
Exabyte, Inc. and RSP/EMS Manufacturing.
Mr. Porter has served as a director of the Company since September 1985. 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. He served as President and
Chief Executive Officer of Triad from September 1985 to February 1997. Mr.
Porter also serves as a director of Silicon Valley Bank, FirstWave Technologies,
Inc., Cardone Industries, Inc. and Cellular Technical Services.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the cash and noncash compensation earned by the
Chief Executive Officer of the Company and the four other most highly
compensated executive officers of the Company and Holding during the fiscal
years ended September 30, 1998, 1999, and 2000. The Chief Executive Officer and
such executive officers are collectively referred to as the "Named Executive
Officers."
38
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL
FISCAL ----------------------------- OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS(1) COMPENSATION ($)
--------------------------------------------- ------- ----------- ---------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Glenn E. Staats 2000 345,516 179,587(5) - -
Chairman of the Board and Chief Executive 1999 342,441 80,855(5) - -
Officer of Holding and the Company(4) 1998 321,532 58,777(5) - -
Michael A. Aviles 2000 350,000 3,678,000(2) 300,000 114,683(3)
President and Chief Operating Officer 1999 87,500 7,131(2) 500,000 436(3)
of Holding and the Company 1998 - -
Preston W. Staats 2000 233,412 3,000(6) - -
Vice Chairman of the Board of Holding 1999 231,409 55,599(6) - -
and the Company 1998 217,279 40,630(6) - -
Paul D. Stone 2000 215,000 88,507(7) 600,000 -
Senior Vice President and Chief 1999 - - - -
Administrative Officer of Holding and the Company 1998 - - - -
Edgar M. Frandle 2000 177,816 91,507(8) 125,000
Chief Information Officer of the Company 1999 172,478 41,195(8) - 84,822(3)
1998 103,385 56,350(8) 60,000 -
</TABLE>
------------
(1) Represents grants of options to purchase shares of Holding's common stock.
See "1998 Stock Option Plan" and "2000 Stock Option Plan."
(2) Includes a 401(k) matching contribution of $2,756 and $3,000 for fiscal
years 1999 and 2000.
(3) Represents relocation expenses.
(4) Mr. Glenn E. Staats resigned as President of Holding and the Company in
June 1999. Mr. Staats continues to serve as Chairman of the Board and
Chief Executive Officer of Holding and the Company.
(5) Includes a 401(k) matching contribution of $3,089 and $3,000 for fiscal
years 1998 and 1999, respectively.
(6) Includes 401(k) matching contribution of $4,188, $3,000, and $3,000 for
fiscal years 1998, 1999, and 2000, respectively
(7) Includes a 401(k) matching contribution of $3,000 for fiscal year 2000.
(8) Includes 401(k) matching contribution of $4,188, $3,000, and $3,000 for
fiscal years 1998, 1999, and 2000, respectively.
EMPLOYMENT AGREEMENTS
Pursuant to an employment agreement with the Company, Michael A. Aviles is
employed as the President and Chief Operating Officer of the Company for an
initial term ending September 30, 2002 at an annual base compensation of
$350,000, plus a quarterly bonus of $43,750. In addition, the agreement provides
for a special cash incentive of $5 million, which can be earned during the
initial term upon the achievement of certain economic milestones or upon a
change of control of the Company. The agreement also requires the grant of a
stock option to Mr. Aviles to purchase 500,000 shares of the common stock of
Holding at an exercise price of $5.00 per share, which option vests in three
equal annual installments commencing in June 2000 or upon the change of control
of the Company.
Pursuant to an employment agreement with the Company, Paul D. Stone is employed
as a Senior Vice President and Chief Administrative Officer of the Company. The
employment agreement is terminable by either the Company or Mr. Stone upon prior
written notice to the other party. Pursuant to the agreement, Mr. Stone shall
receive an annual base salary of $215,000 for the first year of his employment
and $265,000 for each year thereafter, plus a performance-based quarterly bonus.
In addition, the agreement requires the grant of a stock option to Mr. Stone to
purchase 300,000 shares of the common stock of Holding at an exercise price of
$5.00 per share, which were granted in fiscal 2000.
The Stockholders Agreement (as defined in "Certain Relationships and Related
Transactions-Stockholder Agreement") 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,
knowledge and skills solely to the business and interest of Holding and shall
39
<PAGE>
discharge the duties and assume the responsibilities assigned to each of them
from time to time by the Chief Executive Officer and Board of Directors of
Holding. No other terms of their employment with Holding or the Company is set
forth in the Stockholders Agreement.
Other than as described above, the Company does not currently have employment
agreements or other binding employment arrangements with any Named Executive
Officer.
1998 STOCK OPTION PLAN
The Plan
The Cooperative Computing Holding Company, Inc. 1998 Stock Option Plan, as
amended (the "1998 Plan"), pursuant to which options may be granted to key
employees and eligible non-employees of Holding and its subsidiaries (including
the Company) for the purchase of shares of Holding's common stock, par value
$.000125 per share ("Holding Common Stock").
The employees and non-employees eligible for options under the 1998 Plan are
those persons who the Board of Directors (or a committee thereof) (in either
case, the "Committee") identifies as having a direct and significant effect on
the performance or financial development of Holding and its subsidiaries. The
1998 Plan provides that, notwithstanding the foregoing, no grants of options may
be made under the 1998 Plan to any officer or employee who received "founder's
shares" or any officer or employee who is a member of Holding's Board of
Directors. A total of 5,050,000 shares of Holding Common Stock are available in
respect of options granted under the 1998 Plan, and the maximum number of shares
that may be granted to any employee or eligible non-employee in respect of
options granted under the 1998 Plan is 500,000. Generally, options granted under
the 1998 Plan may not have a term in excess of ten years from the date the
option is granted.
Although the Committee has discretion in determining the terms of any option, it
is expected that options will generally vest and become exercisable over a five-
year period beginning on the last day of the fiscal year in which the option was
granted, such that 0% would become vested on the first anniversary of the end of
the fiscal year of the date of grant, 10% would become vested on the second
anniversary, 20% would become vested on the third anniversary, 30% would become
vested on the fourth anniversary, 65% would become vested on the fifth
anniversary, and 100% would become vested on the sixth anniversary.
Notwithstanding the foregoing, in the event of a Public Offering (as defined in
the 1998 Plan) all options that were not exercisable at the time of the Public
Offering will vest ratably over a period of years equal to five minus the number
of complete years of vesting that had occurred prior to the Public Offering.
The Committee has the right, but not the obligation, to accelerate the vesting
of any outstanding options upon the occurrence of, or the entering into of an
agreement providing for, a Change of Control (as defined in the 1998 Plan). Both
incentive stock options and nonqualified stock options may be granted under the
1998 Plan.
Holding has the right, under certain circumstances, to repurchase from any
optionee at the Fair Market Value (as defined in the 1998 Plan) any options held
by such optionee or any shares of Holding Common Stock issued on exercise of any
such options. The circumstances under which Holding may exercise this option
generally include (i) the termination of the optionee's employment or other
relationship with the Company, (ii) the occurrence of a Change of Control, or
(iii) Holding engages in a transaction (such as a merger or share exchange)
whereby such optionee would receive securities and such optionee is not
qualified as an "accredited investor" within the meaning of the Securities Act
of 1933, as amended. Holding's purchase option terminates on the consummation of
a Public Offering. In addition to the foregoing, if an optionee's employment or
other relationship terminates as a result of the death of such optionee, the
estate of such optionee or other person who inherits the right to exercise the
option or the shares of Holding Common Stock issued on exercise of options
granted under the 1998 Plan, shall be entitled to require the Company to
purchase, for Fair Market Value, all or any portion of the optionee's options or
shares of Holding Common Stock issued on exercise of such options. A deceased
optionee's repurchase, or "put," right may be exercised at any time prior to the
first anniversary of the optionee's death.
The Board of Directors may amend, modify, suspend or terminate the 1998 Plan
without the approval of Holding's stockholders, except that, without stockholder
approval, the Board of Directors will not have the power or authority to
increase the number of shares of Holding Common Stock that may be issued
pursuant to the exercise of options under the 1998 Plan, decrease the minimum
exercise price of any incentive stock option or modify requirements relating to
eligibility with respect to incentive options.
40
<PAGE>
2000 STOCK OPTION PLAN
The Plan
The Cooperative Computing Holding Company, Inc. 2000 Stock Option Plan, as
amended (the "2000 Plan"), pursuant to which options may be granted to key
employees and eligible non-employees of Holding and its subsidiaries (including
the Company) for the purchase of shares of Holding common stock, par value
$.000125 per share ("Holding Common Stock").
The employees and non-employees eligible for options under the 2000 Plan are
those persons who the Board of Directors (or a committee thereof) (in either
case, the "Committee") identifies as having a direct and significant effect on
the performance or financial development of Holding and its subsidiaries. A
total of 5,000,000 shares of Holding Common Stock are available in respect of
options granted under the 2000 Plan, and the maximum number of shares that may
be granted to any employee or eligible non-employee in respect of options
granted under the 2000 Plan is 500,000. Generally, options granted under the
2000 Plan may not have a term in excess of ten years from the date the option is
granted.
Although the Committee has discretion in determining the terms of any option, it
is expected that options will generally vest and become exercisable over a five-
year period from the grant date. One fifth of the shares of Common Stock
underlying the stock option grant shall vest and become exercisable on the first
anniversary of the date of grant; and an additional one-fifth of the shares of
Common Stock underlying the stock option grant shall vest and become exercisable
on the second anniversary of the date of grant; and an additional one-fifth of
the shares of Common Stock underlying the stock option grant shall vest and
become exercisable on the third anniversary of the date of grant; and an
additional one-fifth of the shares of Common Stock underlying the stock option
grant shall vest and become exercisable on the fourth anniversary of the date of
grant and remain exercisable until the stock option expires; and the final one-
fifth of the shares of Common Stock underlying the stock option grant shall vest
and become exercisable on the fifth anniversary of the date of grant and remain
exercisable until the stock option expires. Notwithstanding the foregoing, in
the event of a Public Offering (as defined in the 2000 Plan) all options that
were not exercisable at the time of the Public Offering will vest ratably over a
period of years equal to five minus the number of complete years of vesting that
had occurred prior to the Public Offering.
The Committee has the right, but not the obligation, to accelerate the vesting
of any outstanding options upon the occurrence of, or the entering into of an
agreement providing for, a Change of Control (as defined in the 2000 Plan). Both
incentive stock options and nonqualified stock options may be granted under the
2000 Plan.
Holding has the right, under certain circumstances, to repurchase from any
optionee at the Fair Market Value (as defined in the 2000 Plan) any options held
by such optionee or any shares of Holding Common Stock issued on exercise of any
such options. The circumstances under which Holding may exercise this option
generally include (i) the termination of the optionee's employment or other
relationship with the Company, (ii) the occurrence of a Change of Control, or
(iii) Holding engages in a transaction (such as a merger or share exchange)
whereby such optionee would receive securities and such optionee is not
qualified as an "accredited investor" within the meaning of the Securities Act
of 1933, as amended. Holding's purchase option terminates on the consummation of
a Public Offering. In addition to the foregoing, if an optionee's employment or
other relationship terminates as a result of the death of such optionee, the
estate of such optionee or other person who inherits the right to exercise the
option or the shares of Holding Common Stock issued on exercise of options
granted under the 2000 Plan, shall be entitled to require the Company to
purchase, for Fair Market Value, all or any portion of the optionee's options or
shares of Holding Common Stock issued on exercise of such options. A deceased
optionee's repurchase, or "put," right may be exercised at any time within 180
days of the optionee's death.
The Board of Directors may amend, modify, suspend or terminate the 2000 Plan
without the approval of Holding's stockholders, except that, without stockholder
approval, the Board of Directors will not have the power or authority to
increase the number of shares of Holding Common Stock that may be issued
pursuant to the exercise of options under the 2000 Plan, decrease the minimum
exercise price of any incentive stock option or modify requirements relating to
eligibility with respect to incentive options.
41
<PAGE>
Option Grants
The following Named Executive Officers were granted options during the 2000
fiscal year.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------
Potential Realizable Value at
Number of Percentage of Assumed Annual Rates of Stock
Securities Total Options Price Appreciation for Option
Underlying Granted to Term (1)
Options Employees in Exercise Expiration -----------------------------
Name Granted Fiscal Year Price Date 5% 10%
----------------------------- ------------ ------------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Michael Aviles 300,000 7.6% $1.00 2/16/2010 188,670 478,110
Paul Stone 300,000 7.6% 1.00 2/16/2010 188,670 478,110
Paul Stone 300,000 7.6% 5.00 2/16/2010 - -
Edgar Frandle 125,000 3.1% 1.00 2/16/2010 78,613 199,213
A. Laurence Jones 100,000 2.5% 1.00 2/16/2010 62,890 159,370
James Porter 100,000 2.5% 1.00 2/16/2010 62,890 159,370
</TABLE>
(1) The dollar amounts set forth under these columns are the result of
calculations at the five percent and ten percent assumed rates set by the
Securities and Exchange Commission. These assumed annual rates of
appreciation would result in a stock price in ten years of $1.63 and
$2.59, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation decisions are made by the Board of Directors of the Company.
Messrs. Glenn and Preston Staats served both as officers and directors of the
Company during 2000. Messrs. Glenn and Preston Staats are expected to continue
to serve in such capacities in 2001.Mr. Porter retired as an employee of the
Company in February 1998 and no longer participates in the day-to-day management
of the Company.
Directors who are officers, employees or otherwise an affiliate of Holding or
the Company receive no compensation for their services as directors. Each
director of Holding and the Company who is not also an officer, employee or an
affiliate of Holding or the Company receives a fee of $3,000 for each meeting of
the Board of Directors at which the director is present. Directors of Holding
and the Company are entitled to reimbursement of their reasonable out-of-pocket
expenses in connection with their travel to and attendance at meetings of the
Board of Directors or committees thereof. Additionally, in consideration for his
services as a director, Holding issued to Mr. A. Laurence Jones a warrant to
purchase 20,000 shares of Holding Common Stock at an exercise price of $5.00 per
share. Mr. Jones and Mr. Porter were each granted 100,000 options in fiscal year
2000, at an exercise price of $1.00 per share.
42
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
All of the issued and outstanding shares of capital stock of the Company are
held by Holding. The following table sets forth as of September 30, 2000,
certain information regarding the beneficial ownership of the voting securities
of Holding by each person who beneficially owns more than five percent of
Holding Common Stock, and by the directors and certain executive officers of
Holding and the Company, individually, and by the directors and executive
officers of Holding and the Company as a group.
<TABLE>
<CAPTION>
SHARES OF
HOLDING CLASS A SHARES OF
COMMON STOCK HOLDING COMMON STOCK
---------------- -----------------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME AND ADDRESS SHARES CLASS SHARES CLASS
------------------------------------------------- -------------- ----------- --------------------- -----------
<S> <C> <C> <C> <C>
Hicks Muse Parties (1)........................... 25,000,000 100% 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%
Michael A. Aviles............................... - - 149,900(3) *
Paul D. Stone................................... - - 99,900(3) *
Edgar M. Frandle................................ - - 53,625(3) *
Thomas O. Hicks (1).............................. 25,000,000 100% 19,200,000 53.9%
Jack D. Furst (1)................................ 25,000,000 100% 19,200,000 53.9%
Joe Colonnetta (1)............................... 25,000,000 100% 19,200,000 53.9%
A. Laurence Jones............................... - - 73,300(2) *
James R. Porter................................. - - 33,300(3) *
All executive officers and directors as a group
(ten persons)............................... 25,000,000(1) 100% 35,610,025(1) (2) (4) 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, David B. Deniger and Dan H. Blanks are principals and
minority stockholders of Hicks Muse and as such may be deemed to share
with Mr. Hicks the power to vote or dispose of Holding Common Stock held
by Fund III and HM3 Coinvestors, L.P. Each of Messrs. Hicks, Muse, Tate,
Furst, Stuart, Levitt, 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
the exercise of a currently exercisable warrant and 33,300 shares of
Holding Common stock issuable to Mr. Jones upon the exercise of currently
exercisable stock options.
(3) Represents shares of Holding Common Stock issuable upon the exercise of
currently exercisable stock options.
(4) Includes 327,525 shares of Holding Common Stock issuable to executive
officers of the Company upon the exercise of currently exercisable stock
options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Monitoring and Oversight Agreement
In conjunction with the Triad Acquisition, Holding and the Company entered into
a ten-year agreement (the "Monitoring and Oversight Agreement") with Hicks, Muse
& Co. Partners, L.P., an affiliate of Hicks Muse ("Hicks Muse Partners"),
pursuant to which Holding and the Company pay Hicks Muse Partners an annual fee
payable quarterly for oversight and monitoring services to Holding and the
Company. The annual fee is adjustable on January 1 of each calendar year to an
amount equal to the (i) sum of (A) the fee in effect at the beginning of the
immediately preceding calendar year plus (B) the aggregate amount of all
Acquisition Increments (as defined) with respect to such immediately preceding
calendar year, multiplied by (ii) the percentage increase in the Consumer Price
Index during the immediately preceding calendar year, but in no event less than
$350,000. Upon the acquisition by the Company or any of its subsidiaries of
another entity or business, the fee is increased by an amount equal to 0.2% of
the consolidated annual net sales of the acquired entity or business and its
subsidiaries for the trailing twelve-month period (an "Acquisition Increment").
43
<PAGE>
Thomas O. Hicks and Jack D. Furst and Joe Colonnetta, 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 2000, the Company paid Hicks Muse Partners a fee of $370,292 for services
under the Monitoring and Oversight Agreement.
Financial Advisory Agreement
In conjunction with the Triad Acquisition, Holding and the Company entered into
a ten-year agreement (the "Financial Advisory Agreement") pursuant to which
Hicks Muse Partners receives a fee equal to 1.5% of the "Transaction Value" (as
defined) for each "Add-on Transaction" (as defined) in which Holding or the
Company is involved. The term "Transaction Value" means the total value of the
Add-on Transaction, including, without limitation, the aggregate amount of the
funds required to complete the Add-on Transaction, including the amount of any
indebtedness, preferred stock or similar items assumed (or remaining
outstanding). The term "Add-on Transaction" means any respective subsidiaries,
and any other person or entity, excluding, however, any acquisition that does
not involve the use of (or any waiver or consent under) any debt equity
financing and in which neither Hicks Muse Partners nor any other person or
entity provides financial advisory investment on banking or similar services. In
addition, Holding and the Company, jointly and severally, have agreed to
indemnify Hicks Muse Partners, its affiliates, and their respective directors,
officers, controlling persons, agents and employees from and against all claims,
liabilities, losses, damages, expenses and fees related to or arising out of or
in connection with the services rendered by Hicks Muse Partners under the
Financial Advisory Agreement and not resulting primarily from the bad faith,
gross negligence, or willful misconduct of Hicks Muse Partners. The Financial
Advisory Agreement makes available the resources of Hicks Muse Partners
concerning a variety of financial and operational matters. The Company does not
believe that the services that have been and will continue to be provided by
Hicks Muse Partners pursuant to the Financial Advisory Agreement could otherwise
be obtained by Holding and the Company without the addition of personnel or the
engagement of outside professional advisors. In the Company's opinion, the fees
provided for under the Financial Advisory Agreement reasonably reflect the
benefits received and to be received by Holding and the Company. In fiscal 2000,
the Company paid no fees to Hicks Muse Partners for services provided by Hicks
Muse Partners under the Financial Advisory Agreement.
Issuance of Class A Common Stock
On May 27, 1999, Holding issued 25,000,000 shares of its Class A Common Stock,
par value $.000125 per share (the "Class A Common Stock"), to Hicks, Muse, Tate
& Furst Equity Fund III, L.P. and HM3 Coinvestors, L.P. for net proceeds of
$23.9 million, which were contributed to the Company and used primarily to pay
amounts outstanding under the Company's senior secured revolving credit
facility. Hicks Muse Partners received a $1 million financial advisory fee in
connection with the transaction.
The Class A Common Stock is senior to Holding's existing common stock upon
liquidation, but votes with the existing common stock as a single class. Upon
dissolution of Holding, holders of Class A Common Stock are to receive the
Stated Value (as hereinafter defined) of their shares before any distribution to
common stockholders. Once the holders of Class A Common Stock receive the Stated
Value, the remaining assets are distributed among the common stockholders pro
rata. The "Stated Value" of a share of Class A Common Stock is $1.00, plus
notional interest of 35% per annum, accrued daily and compounded annually. As
long as the Class A Common Stock is outstanding, there may be no dividends,
stock splits, or other distributions declared or paid on Holding's common stock,
as well as no redemptions or other repurchases.
Each holder of Class A Common Stock may put any of its shares to Holding, and
Holding may redeem shares of Class A Common Stock at any time, for the Stated
Value of those shares, subject to certain conditions, including the ability of
the Company to make advances to Holding for such purpose. It is not anticipated
that the Company will be able to advance to Holding funds to redeem the Class A
Common Stock under the current terms of the Company's senior secured credit
facilities.
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
44
<PAGE>
the HMC Group (as defined therein) ("drag-along rights") and granting the
parties thereto the right to include a portion of their shares of Holding Common
Stock in certain sales in which other holders may engage ("tag-along rights").
All parties to the Stockholders Agreement agreed that (i) the HMC Group is
entitled to designate four individuals to the Board of Directors of Holding and
the Company so long as the HMC Group owns at least ten percent of the voting
capital stock of Holding or one individual so long as the HMC Group owns at
least five percent but less than ten percent of the voting capital stock of
Holding; (ii) Messrs. Glenn and Preston Staats are entitled to designate two
individuals to the Board of Directors of Holding and the Company so long as
Messrs. Glenn and Preston Staats together own at least ten percent of the voting
capital stock of Holding or one individual so long as Messrs. Glenn and Preston
Staats together own at least five percent but less than ten percent of the
voting capital stock of Holding; and (iii) any remaining positions on the Board
of Directors of Holding and the Company would be independent directors mutually
acceptable to Hicks Muse and the HMC Group, and Messrs. Glenn and Preston
Staats. In addition, all parties to the Stockholders Agreement agreed to vote
any shares that they may vote on any particular matter that comes before the
Company's stockholders as a separate class or series, on such matter as holders
of a majority of the outstanding shares of Holding Common Stock voted thereon.
Lease of Corporate Offices
The Company leased office space from a corporation that is wholly owned by
Messrs. Glenn and Preston Staats. In fiscal 2000, the rental payments for such
facility were $540,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements - See index to Consolidated Financial
Statements in Item 8 hereof.
(2) Financial Statements Schedules - See Schedule II - Valuation and
Qualifying Accounts.
All other schedules have been omitted because they are not
applicable, not required under the instructions, or the information
requested is set forth in the consolidated financial statements or
related notes thereto.
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
2.1 - Agreement and Plan of Merger, dated as of October 17, 1996, among Cooperative
Computing, Inc., CCI Acquisition Corp. and Triad Systems Corporation. (1)
2.2 - First Amendment to Agreement and Plan of Merger, dated as of January 15, 1997. (1)
2.3 - Second Amendment to Agreement and Plan of Merger, dated as of February 19, 1997. (1)
3.1 - Restated Certificate of Incorporation of the Company. (1)
3.2 - Certificate of Amendment of Certificate of Incorporation of the Company. (1)
3.3 - Amended and Restated Bylaws of the Company. (2)
4.1 - Indenture, dated as of February 10, 1998, between the Company and Norwest Bank
Minnesota, National Association. (1)
4.2 - Form of Note. (1)
10.1 - Credit Agreement, dated as of February 27, 1997, as amended and restated as of
February 10, 1998, among the Company, Holding, the several banks and other financial
institutions parties thereto, and The Chase Manhattan Bank (the "Credit Agreement"). (1)
10.2 - First Amendment to the Credit Agreement, dated as of June 30, 1998. (3)
10.3 - Second Amendment to the Credit Agreement, dated as of February 12, 1999. (4)
10.4 - Third Amendment to the Credit Agreement, dated as of May 25, 1999. (5)
10.5 - Fourth Amendment to the Credit Agreement, dated as of December 21, 1999. (6)
10.6 - Fifth Amendment to the Credit Agreement, dated as of December 22, 2000. *
10.7 - Guarantee and Collateral Agreement, dated as of February 27, 1997, as amended and
restated as of February 6, 1998, made by the Company; Holding, and certain of their
subsidiaries in favor of the Chase Manhattan Bank. (1)
10.8 - Loan and Security Agreement, dated as of January 1, 1997, between CCI/Triad Financial
Holding Corporation and Heller Financial, Inc. (1)
10.9 - Amendment, dated March 31, 1999, among the Registrant, Triad Systems Financial
Corporation, CCI/Triad Financial Holding Corporation, as Borrower, and Heller Financial
Leasing, Inc. (5)
45
<PAGE>
10.10 - Master Loan and Security Agreement, dated as of June 1, 1998, between CCI/Triad
Financial Holding Corporation and NationsCredit Commercial Corporation (the "NCC
Agreement").(6)
10.11 - Amendment No. 1 to the NCC Agreement, dated as of September 28, 1999.(6)
10.12 - Loan and Security Agreement, dated as of January 1, 1997, between CCI/Triad Financial
Holding Corporation and Metlife Capital Corporation. (1)
10.13 - Loan and Security Agreement, dated as of March 1, 1997, between CCI/Triad Financial
Holding Corporation and Sanwa Business Credit Corporation. (1)
10.14 - Loan and Security Agreement, dated as of September 25, 1997, between Triad Systems
Financial Corporation and Mellon U.S. Leasing, A Division of Mellon Leasing Corporation.
(1)
10.15 - Purchase Agreement, dated as of February 1, 1999, between Triad Systems Financial
Corporation and Mellon US Leasing, A Division of Mellon Leasing Corporation. (4)
10.16 - Loan and Security Agreement, dated as of July 1, 1999, between CCI/Triad Financial
Holding Corporation and IFC Credit Corporation.(6)
10.17 - First Amendment to the IFC Agreement, dated as of September 23, 1999. (6)
10.18 - Project Lease Agreement, dated as of August 1, 1988, between 3055 Triad Dr. Corp. and
the Company. (1)
10.19 - First Amendment to Project Lease Agreement, effective as of February 26, 1997. (1)
10.20 - Lease Agreement, dated as of January 11, 1992, by and between Computerized Properties,
Inc. and the Company. (1)
10.21 - Agreement between the Industrial Development Authority and Triad Systems Ireland
Limited, Triad Systems Corporation and Tridex Systems Limited. (1)
10.22 - Supplemental Agreement between the Industrial Development Authority and Triad Systems
Ireland Limited, Triad Systems Corporation and Tridex Systems Limited. (1)
10.23 - Real Estate Distribution Agreement, dated February 26, 1997, among the Company, 3055
Triad Dr. Corp., 3055 Management Corp., and Triad Park, LLC. (1)
10.24 - Assignment and Assumption Agreement, dated February 27, 1997, between the Company and
Triad Park, LLC. (1)
10.25 - Assignment and Assumption Agreement, dated February 27, 1997, between the Company and
Triad Park, LLC. (1)
10.26 - Warrant of Cooperative Computing Holding Company, Inc., dated September 10, 1997,
issued to A. Laurence Jones. (1)
10.27 - Stockholders Agreement, dated as of May 26, 1999, among the Company, Holdings and the
stockholders signatory thereto.(6)
10.28 - Monitoring and Oversight Agreement, dated as of February 27, 1997, among Holding, the
Company, and Hicks, Muse & Co. Partners, L.P. (1)
10.29 - Financial Advisory Agreement, dated as of February 27, 1997, among Holding, the
Company, and Hicks, Muse & Co. Partners, L.P. (1)
10.30 - Asset Purchase Agreement, dated as of November 20, 1997, between ADP Claims Solutions
Group, Inc. and the Company, dated as of November 20, 1997. (1)
10.31 - Employment Agreement, dated as of June 14, 1999, between the Company and Michael A.
Aviles. (5)
10.32 - Employment Agreement Amendment, dated as of June 27, 2000, between the Company and
Michael A. Aviles. (7)
10.33 - Stock Option Agreement, dated June 14, 1999, between Holding and Michael A. Aviles.
(6)
10.34 - Employment Agreement, dated effective as of October 1, 1999, between the Company and
Paul D. Stone. (6)
10.35 - Cooperative Computing Holding Company, Inc. 1998 Stock Option Plan, as amended. (5)
10.36 - Cooperative Computing Holding Company, Inc. 2000 Stock Option Plan. (8)
10.37 - Form of Non-Qualified Stock Option Agreement for Eligible Employees. (2)
21 - List of Subsidiaries. (1)
27 - Financial Data Schedule.*
</TABLE>
----------------
* Filed herewith.
1. Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-49389) filed on April 3, 1998.
2. Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended September 30, 1998.
3. Incorporated by reference to Pre-Effective Amendment No.1 to the
Registrant's Registration Statement on Form S-1 (File No. 333-49389)
filed on July 8, 1998.
46
<PAGE>
4. Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the three months ended March 31, 1999.
5. Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the three months ended June 30, 1999.
6. Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended September 30, 1999.
7. Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the three months ended June 30, 2000.
8. Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the three months ended March 31, 2000.
(b) Reports on Form 8-K.
No Reports on Form 8-K have been filed during the three months ended
September 30, 2000.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 27th day of
December, 2000.
<TABLE>
<S> <C>
COOPERATIVE COMPUTING, INC.
By: /s/ PAUL D. STONE
--------------------------------
Paul D. Stone
Senior Vice President and
Chief Administrative Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------ ----------------------------- ----------------------
<S> <C> <C> <C>
/s/ MICHAEL A. AVILES President and Chief Operating December 27, 2000
---------------------------- Officer (Principal Executive
Michael A. Aviles Officer
/s/ PAUL D. STONE Senior Vice President and December 27, 2000
---------------------------- Chief Administrative Officer
Paul D. Stone (Principal Accounting and
Financial Officer)
/s/ GLENN E. STAATS Chairman of the Board and December 27, 2000
---------------------------- Chief Executive Officer and
Glenn E. Staats a Director
/s/ PRESTON W. STAATS Vice Chairman of the Board December 27, 2000
---------------------------- and a Director
Preston W. Staats
/s/ THOMAS O. HICKS Director December 27, 2000
----------------------------
Thomas O. Hicks
/s/ JACK D. FURST Director December 27, 2000
----------------------------
Jack D. Furst
/s/ JOE COLONNETTA Director December 27, 2000
----------------------------
Joe Colonnetta
/s/ A. LAURENCE JONES Director December 27, 2000
----------------------------
A. Laurence Jones
JAMES R. PORTER Director December 27, 2000
----------------------------
James R. Porter
</TABLE>
48
<PAGE>
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------------------------------------------------- ---------- ----------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1998:
Allowance for doubtful accounts 5,468 6,599 5,966 6,101
Inventory valuation 2,070 561 647 1,984
Allowance for losses in investment in leases 730 3,355 3,365 720
YEAR ENDED SEPTEMBER 30, 1999:
Allowance for doubtful accounts 6,101 8,296 4,771 9,626
Inventory valuation 1,984 218 400 1,802
Allowance for losses in investment in leases 720 3,825 2,570 1,975
YEAR ENDED SEPTEMBER 30, 2000:
Allowance for doubtful accounts 9,626 9,301 13,841 5,086
Inventory valuation 1,802 1,287 1,488 1,601
Allowance for losses in investment in leases 1,975 1,040 1,571 1,444
</TABLE>
49
