SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2003
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 333-49389
Activant Solutions Inc.
(Exact name of Registrant as specified in its charter)
| Delaware | 94-2160013 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 804 Las Cimas Parkway Austin, Texas | 78746 | |
| (Address of principal executive offices) | (Zip Code) | |
(512) 328-2300
(Registrant’s telephone number, including area code)
Indicate by check 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class |
Outstanding at February 10, 2004 | |
| Common Stock | 1,000 shares |
INDEX
| PAGE | ||
| 3 | ||
| 4 | ||
| 4 | ||
| ACTIVANT SOLUTIONS INC. |
||
| Consolidated Balance Sheets as of September 30, 2003 and December 31, 2003 |
4 | |
| 5 | ||
| 6 | ||
| 7 | ||
| ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 16 | |
| ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
19 | |
| 19 | ||
| 20 | ||
| 20 | ||
| 20 | ||
| ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
20 | |
| 20 | ||
| 20 | ||
| 21 | ||
2
INFORMATION SET FORTH IN THIS QUARTERLY REPORT ON FORM 10-Q 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) LOSS OR OBSOLESCENCE OF THE PROPRIETARY TECHNOLOGY ON WHICH THE COMPANY DEPENDS; (2) CHANGES IN THE MARKETS IN WHICH THE COMPANY COMPETES INCLUDING THE MANNER IN WHICH AUTOPARTS OR HARDWARE AND LUMBER ARE SOURCED, SOLD, DISTRIBUTED OR INVENTORIED, AND CHANGES IN ECONOMIC CONDITIONS IN THESE MARKETS GENERALLY; (3) CLAIMS BY THIRD PARTIES THAT THE COMPANY IS INFRINGING ON THEIR INTELLECTUAL PROPERTY RIGHTS; (4) LOSS OF THE COMPANY’S EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL; (5) INCREASED COMPETITION OR FAILURE TO EFFECTIVELY COMPETE; (6) LOSS OF KEY CUSTOMERS OR INCREASE IN ATTRITION RATES WITH RESPECT TO REVENUE MANAGEMENT VIEWS AS RECURRING; (7) MANUFACTURING DEFECTS OR ERRORS IN THE COMPANY’S SOFTWARE; (8) PROLONGED UNFAVORABLE GENERAL ECONOMIC AND MARKET CONDITIONS; (9) FAILURE TO RECOUP THE COST OF INVESTMENT IN NEW BUSINESSES INTO WHICH THE COMPANY MAY EXPEND AND (10) INCREASES IN THE COMPANY’S COST OF BORROWINGS OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL. 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 “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” AND APPEAR ELSEWHERE IN THIS QUARTERLY 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.
3
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| September 30, 2003 |
December 31, 2003 |
|||||||
| (Unaudited) | ||||||||
| ASSETS: |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 10,215 | $ | 18,876 | ||||
| Trade accounts receivable, net of allowance for doubtful accounts of $7,748 and $7,607 at September 30, 2003 and December 31, 2003, respectively |
40,152 | 41,022 | ||||||
| Inventories, net |
3,546 | 3,113 | ||||||
| Investment in leases, net |
2,115 | 1,911 | ||||||
| Deferred income taxes |
10,527 | 11,238 | ||||||
| Prepaid income taxes |
3,587 | — | ||||||
| Prepaid expenses and other current assets |
2,485 | 2,780 | ||||||
| Total current assets |
72,627 | 78,940 | ||||||
| Service parts, net |
1,520 | 1,506 | ||||||
| Property and equipment, net |
5,748 | 5,140 | ||||||
| Long-term investment in leases |
1,854 | 1,259 | ||||||
| Capitalized computer software costs, net |
7,711 | 7,007 | ||||||
| Databases, net |
7,672 | 7,231 | ||||||
| Goodwill |
87,159 | 87,159 | ||||||
| Other assets |
17,994 | 17,030 | ||||||
| Total assets |
$ | 202,285 | $ | 205,272 | ||||
| LIABILITIES AND STOCKHOLDER’S DEFICIT: |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 9,679 | $ | 9,476 | ||||
| Payroll related accruals |
14,860 | 11,954 | ||||||
| Deferred revenue |
15,870 | 16,592 | ||||||
| Current portion of long-term debt |
310 | 298 | ||||||
| Accrued income taxes |
— | 1,355 | ||||||
| Accrued expenses and other current liabilities |
10,694 | 6,931 | ||||||
| Total current liabilities |
51,413 | 46,606 | ||||||
| Long-term debt |
172,990 | 172,967 | ||||||
| Deferred income taxes and other liabilities |
14,544 | 15,304 | ||||||
| Total liabilities |
238,947 | 234,877 | ||||||
| Stockholder’s deficit: |
||||||||
| Common Stock: |
||||||||
| Par value $.01, authorized, issued and outstanding, 1,000 shares at September 30, 2003 and December 31, 2003 |
— | — | ||||||
| Additional paid-in capital |
83,155 | 83,155 | ||||||
| Retained deficit |
(119,421 | ) | (112,206 | ) | ||||
| Other accumulated comprehensive income: |
||||||||
| Cumulative translation adjustment |
(396 | ) | (554 | ) | ||||
| Total stockholder’s deficit |
(36,662 | ) | (29,605 | ) | ||||
| Total liabilities and stockholder’s deficit |
$ | 202,285 | $ | 205,272 | ||||
See accompanying notes
4
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands)
| Three Months Ended December 31, |
||||||||
| 2002 |
2003 |
|||||||
| Revenues: |
||||||||
| Systems |
$ | 17,713 | $ | 20,987 | ||||
| Services and finance |
39,940 | 35,714 | ||||||
| Total revenues |
57,653 | 56,701 | ||||||
| Cost of revenues: |
||||||||
| Systems |
10,025 | 11,875 | ||||||
| Services and finance |
17,546 | 15,037 | ||||||
| Total cost of revenues |
27,571 | 26,912 | ||||||
| Gross profit |
30,082 | 29,789 | ||||||
| Operating expenses: |
||||||||
| Sales and marketing |
7,300 | 8,426 | ||||||
| Product development |
3,727 | 3,928 | ||||||
| General and administrative |
6,757 | 6,782 | ||||||
| Total operating expenses |
17,784 | 19,136 | ||||||
| Operating income |
12,298 | 10,653 | ||||||
| Interest expense |
(3,458 | ) | (5,032 | ) | ||||
| Equity loss in affiliate |
(7 | ) | — | |||||
| Foreign exchange loss |
— | (67 | ) | |||||
| Gain on sale of assets |
— | 6,270 | ||||||
| Other income, net |
222 | 93 | ||||||
| Income before income taxes |
9,055 | 11,917 | ||||||
| Income tax expense |
3,563 | 4,702 | ||||||
| Net income |
$ | 5,492 | $ | 7,215 | ||||
| Comprehensive income: |
||||||||
| Net income |
$ | 5,492 | $ | 7,215 | ||||
| Foreign currency translation adjustment |
43 | (158 | ) | |||||
| Comprehensive income |
$ | 5,535 | $ | 7,057 | ||||
See accompanying notes
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| Three Months Ended December 31, |
||||||||
| 2002 |
2003 |
|||||||
| OPERATING ACTIVITIES |
||||||||
| Net income |
$ | 5,492 | $ | 7,215 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation |
1,564 | 1,409 | ||||||
| Amortization |
3,211 | 2,747 | ||||||
| Deferred income taxes |
(787 | ) | 500 | |||||
| Equity loss from affiliate |
7 | — | ||||||
| Equity income from partnerships |
(87 | ) | (50 | ) | ||||
| Lease loss provision |
— | (153 | ) | |||||
| Provision for doubtful accounts |
1,347 | 1,634 | ||||||
| Gain on sale of assets |
— | (6,270 | ) | |||||
| Other, net |
33 | (115 | ) | |||||
| Changes in assets and liabilities: |
||||||||
| Trade accounts receivable |
(4,153 | ) | (3,818 | ) | ||||
| Inventories |
210 | 433 | ||||||
| Investment in leases |
729 | 952 | ||||||
| Prepaid expenses and other assets |
(813 | ) | 3,806 | |||||
| Accounts payable |
(223 | ) | (203 | ) | ||||
| Deferred revenue |
1,278 | 1,349 | ||||||
| Accrued expenses and other liabilities |
1,225 | (5,496 | ) | |||||
| Net cash provided by operating activities |
9,033 | 3,940 | ||||||
| INVESTING ACTIVITIES |
||||||||
| Purchase of property and equipment |
(991 | ) | (575 | ) | ||||
| Capitalized computer software costs and databases |
(2,261 | ) | (1,526 | ) | ||||
| Purchase of service parts |
(476 | ) | (414 | ) | ||||
| Proceeds from sale of assets |
— | 7,212 | ||||||
| Equity distributions from partnerships |
41 | 42 | ||||||
| Net cash used in investing activities |
(3,687 | ) | 4,739 | |||||
| FINANCING ACTIVITIES |
||||||||
| Proceeds from debt facility |
1,210 | — | ||||||
| Payment on long-term debt and long-term debt facilities |
(3,120 | ) | (18 | ) | ||||
| Net cash used in financing activities |
(1,910 | ) | (18 | ) | ||||
| Net change in cash and cash equivalents |
3,436 | 8,661 | ||||||
| Cash and cash equivalents, beginning of period |
398 | 10,215 | ||||||
| Cash and cash equivalents, end of period |
$ | 3,834 | $ | 18,876 | ||||
| Supplemental disclosures of cash flow information |
||||||||
| Cash paid during the period for: |
||||||||
| Interest |
$ | 718 | $ | 7,794 | ||||
| Income taxes |
$ | 4,133 | $ | 193 | ||||
See accompanying notes
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Activant Solutions Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 2003 may not be indicative of the results for the full fiscal year ending September 30, 2004.
2. LEASE RECEIVABLES
Activity in the following servicing and recourse obligation liability accounts (recorded in other liabilities in the Company’s balance sheet) was as follows (in thousands):
| LEASE SERVICING OBLIGATION |
RECOURSE OBLIGATION |
|||||||
| Balance at September 30, 2003 |
$ | 142 | $ | 3,170 | ||||
| Lease loss provision |
— | (153 | ) | |||||
| Recoveries |
— | 100 | ||||||
| Charges and write-offs |
(48 | ) | (470 | ) | ||||
| Balance at December 31, 2003 |
$ | 94 | $ | 2,647 | ||||
3. INCOME TAXES
The Company recorded income tax expense for the three months ended December 31, 2003 at an effective rate of 39.5%, which is based on the Company’s anticipated results for the full fiscal year. The Company’s income tax expense differs from the amount computed by applying the statutory rate to income before income taxes due to the impact of permanent differences, such as meals and entertainment expense, and amortization of certain acquired intangibles.
4. COMMON STOCK OPTION PLAN
During the quarter ended December 31, 2003, Activant Solutions Holdings Inc. (“Holdings”), the Company’s parent company, approved the grant of 5,000 options to the employees of the Company at an exercise price equal to the then estimated fair market value of $1.88 per share under the Activant Solutions Holdings Inc. 2000 Stock Option Plan. Holdings also approved the grant of 5,500 options to the employees of the Company at an exercise price equal to the then estimated fair market value of $1.88 per share under the Activant Solutions Holdings Inc. 2001 Stock Option Plan.
The Company uses the intrinsic value method in accounting for employee stock options. Because the exercise price of the employee stock options is greater than or equal to the market price of the underlying stock, as determined by Holding’s Board of Directors, on the date of grant, no compensation expense was recognized.
The Company’s pro forma information follows (amounts in thousands):
| Three months ended December 31, | ||||||
| 2002 |
2003 | |||||
| Net income reported |
$ | 5,492 | $ | 7,215 | ||
| Pro forma stock-based compensation expense, net of tax |
50 | 68 | ||||
| Pro forma net income (loss) |
$ | 5,442 | $ | 7,147 | ||
7
5. SALE OF ASSETS
On October 1, 2003, the Company sold the assets of its Automotive Recycling Division (“ARD”) to Used Car-Parts.com. The agreement included the sale of ARD’s software, systems, Hollander Interchange License and other assets and the assumption of certain liabilities of ARD. The ARD group had more than 1,200 customers in the United States and Canada, using three products: Orion, Checkmate and Compass. The total purchase price was $6.7 million plus net working capital of $0.5 million, resulting in a gain of $6.3 million. The total revenue generated by those assets was $8.2 million for the fiscal year ended September 30, 2003 and $2.1 million for the three months ended December 31, 2002.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), which clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN 46 requires variable interest entities (VIE) to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE activities or entitled to receive a majority of the entity’s residual returns or both. A company that consolidates a VIE is called the primary beneficiary of that entity. FIN 46 also requires disclosures about VIE that a company is not required to consolidate but in which it has a significant variable interest. In December 2003, the FASB completed its deliberations regarding the proposed modification to FIN 46 and issued Interpretation Number 46R, Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51 (“FIN 46R”). The decisions reached included a deferral of the effective date and provisions for additional scope exceptions for certain types of variable interests. Application of FIN 46R is required in financial statements of public entities that have interests in VIE or potential VIE commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004. We are continuing to review our variable interests and the outcome of this review will determine whether there is a need to consolidate additional entities.
8
7. SEGMENT REPORTING
The Company’s business operations are organized into the Automotive Group and the Industry Solutions Group, as shown below. The Automotive Group included the Company’s ARD operations until such operations were sold on October 1, 2003, as disclosed in Note 5 above. See Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” A breakdown by geographic area of total revenues and total assets is also disclosed. The Americas geographic area covers the United States and Canada. The Europe geographic area covers the United Kingdom, Ireland and France.
| Three Months Ended December 31, |
||||||||
| 2002 |
2003 |
|||||||
| (In thousands) | ||||||||
| Systems revenues: |
||||||||
| Automotive Group |
$ | 5,016 | $ | 4,272 | ||||
| Industry Solutions Group |
12,697 | 16,715 | ||||||
| Total systems revenues: |
17,713 | 20,987 | ||||||
| Services and finance revenues: |
||||||||
| Automotive Group |
24,795 | 22,716 | ||||||
| Industry Solutions Group |
15,145 | 12,998 | ||||||
| Total services and finance revenues: |
39,940 | 35,714 | ||||||
| Systems costs of revenues: |
||||||||
| Automotive Group |
3,128 | 3,294 | ||||||
| Industry Solutions Group |
6,897 | 8,581 | ||||||
| Total systems costs of revenues: |
10,025 | 11,875 | ||||||
| Services and finance cost of revenues: |
||||||||
| Automotive Group |
10,618 | 9,115 | ||||||
| Industry Solutions Group |
6,928 | 5,922 | ||||||
| Total services and finance cost of revenues: |
17,546 | 15,037 | ||||||
| Sales and marketing: |
||||||||
| Automotive Group |
3,213 | 3,535 | ||||||
| Industry Solutions Group |
4,087 | 4,891 | ||||||
| Total sales and marketing: |
7,300 | 8,426 | ||||||
| Product development: |
||||||||
| Automotive Group |
2,749 | 2,554 | ||||||
| Industry Solutions Group |
978 | 1,374 | ||||||
| Total product development: |
3,727 | 3,928 | ||||||
| General and administrative |
6,757 | 6,782 | ||||||
| Interest expense |
(3,458 | ) | (5,032 | ) | ||||
| Other income (expense), net |
215 | 6,296 | ||||||
| Income before income taxes |
$ | 9,055 | $ | 11,917 | ||||
| Revenues: |
||||||||
| Americas |
$ | 56,362 | $ | 55,202 | ||||
| Europe |
1,291 | 1,499 | ||||||
| Total revenues |
$ | 57,653 | $ | 56,701 | ||||
| Assets: |
||||||||
| Americas |
$ | 187,201 | $ | 202,070 | ||||
| Europe |
4,491 | 3,202 | ||||||
| $ | 191,692 | $ | 205,272 | |||||
9
8. GUARANTOR CONSOLIDATION
The Senior Notes are guaranteed by the Company’s existing, wholly-owned domestic subsidiaries Triad Systems Financial Corporation, Triad Data Corporation, CCI/TRIAD Gem, Inc., Triad Systems Corporation and CCI/ARD, Inc. The Company’s other subsidiaries, (the “Non-Guarantors”), are not guaranteeing the Senior Notes. The following tables set forth consolidating financial information of Activant Solutions Inc., the Guarantors and Non-Guarantors for the balance sheets as of December 31, 2003 and September 30, 2003, the statements of operations for the quarters ended December 31, 2003 and December 31, 2002, and the statements of cash flows for the quarters ended December 31, 2003 and December 31, 2002.
Consolidating Balance Sheet as of December 31, 2003
(in thousands)
| Guarantor |
||||||||||||||||||||
| Principal Operations |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Assets |
||||||||||||||||||||
| Current assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 16,769 | $ | (118 | ) | $ | 2,225 | $ | — | $ | 18,876 | |||||||||
| Trade accounts receivable, net of allowance for doubtful accounts |
37,794 | — | 3,228 | — | 41,022 | |||||||||||||||
| Intercompany receivable |
— | 44,908 | — | (44,908 | ) | — | ||||||||||||||
| Inventories, net |
3,005 | — | 108 | — | 3,113 | |||||||||||||||
| Investment in leases, net |
— | 1,766 | 145 | — | 1,911 | |||||||||||||||
| Deferred income taxes |
11,238 | — | — | — | 11,238 | |||||||||||||||
| Prepaid income taxes |
— | — | — | — | — | |||||||||||||||
| Prepaid expenses and other current assets |
1,459 | 1,317 | 4 | — | 2,780 | |||||||||||||||
| Total current assets |
70,265 | 47,873 | 5,710 | (44,908 | ) | 78,940 | ||||||||||||||
| Service parts, net |
1,449 | — | 57 | — | 1,506 | |||||||||||||||
| Property and equipment, net |
4,950 | — | 190 | — | 5,140 | |||||||||||||||
| Long-term investment in leases |
— | 795 | 464 | — | 1,259 | |||||||||||||||
| Capitalized computer software costs, net |
7,007 | — | — | — | 7,007 | |||||||||||||||
| Databases, net |
7,231 | — | — | — | 7,231 | |||||||||||||||
| Goodwill |
87,159 | — | — | — | 87,159 | |||||||||||||||
| Intercompany non-trade |
— | — | — | — | — | |||||||||||||||
| Investments in subs |
45,363 | — | 807 | (46,170 | ) | — | ||||||||||||||
| Other assets |
17,001 | 189 | (160 | ) | — | 17,030 | ||||||||||||||
| Total assets |
$ | 240,425 | $ | 48,857 | $ | 7,068 | $ | (91,078 | ) | $ | 205,272 | |||||||||
| Liabilities and stockholder’s equity (deficit) |
||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||
| Accounts payable |
$ | 9,084 | $ | 33 | $ | 359 | $ | — | $ | 9,476 | ||||||||||
| Intercompany payables |
73,510 | — | 4,498 | (78,008 | ) | — | ||||||||||||||
| Payroll related accruals |
11,923 | — | 31 | — | 11,954 | |||||||||||||||
| Deferred revenue |
16,079 | 127 | 386 | — | 16,592 | |||||||||||||||
| Current portion of long-term debt |
— | 298 | — | — | 298 | |||||||||||||||
| Accrued income taxes |
2,350 | — | (995 | ) | — | 1,355 | ||||||||||||||
| Accrued expenses and other current liabilities |
6,484 | 264 | 183 | — | 6,931 | |||||||||||||||
| Total current liabilities |
119,430 | 722 | 4,462 | (78,008 | ) | 46,606 | ||||||||||||||
| Long-term debt, net of discount |
172,554 | 413 | — | — | 172,967 | |||||||||||||||
| Deferred tax liabilities and other liabilities |
13,960 | 1,840 | (496 | ) | — | 15,304 | ||||||||||||||
| Total liabilities |
305,944 | 2,975 | 3,966 | (78,008 | ) | 234,877 | ||||||||||||||
| Stockholder’s equity (deficit): |
||||||||||||||||||||
| Common stock: |
— | 104 | 5,495 | (5,599 | ) | — | ||||||||||||||
| Additional paid-in capital |
83,155 | 6,300 | 3 | (6,303 | ) | 83,155 | ||||||||||||||
| Retained earnings (deficit) |
(148,593 | ) | 39,478 | (2,825 | ) | (266 | ) | (112,206 | ) | |||||||||||
| Other accumulated comprehensive income (loss): |
||||||||||||||||||||
| Cumulative translation adjustment |
(81 | ) | — | 429 | (902 | ) | (554 | ) | ||||||||||||
| Total stockholder’s equity (deficit) |
(65,519 | ) | 45,882 | 3,102 | (13,070 | ) | (29,605 | ) | ||||||||||||
| Total liabilities and stockholder’s equity (deficit) |
$ | 240,425 | $ | 48,857 | $ | 7,068 | $ | (91,078 | ) | $ | 205,272 | |||||||||
10
Consolidating Balance Sheet as of September 30, 2003
(in thousands)
| Guarantor |
||||||||||||||||||||
| Principal Operations |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Assets |
||||||||||||||||||||
| Current assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 8,400 | $ | (169 | ) | $ | 1,984 | $ | — | $ | 10,215 | |||||||||
| Trade accounts receivable, net of allowance for doubtful accounts |
36,413 | — | 3,739 | — | 40,152 | |||||||||||||||
| Intercompany receivable |
— | 45,977 | — | (45,977 | ) | — | ||||||||||||||
| Inventories, net |
3,432 | — | 114 | — | 3,546 | |||||||||||||||
| Investment in leases, net |
— | 1,934 | 181 | — | 2,115 | |||||||||||||||
| Deferred income taxes |
10,527 | — | — | — | 10,527 | |||||||||||||||
| Prepaid income taxes |
2,775 | — | 812 | — | 3,587 | |||||||||||||||
| Prepaid expenses and other current assets |
982 | 1,450 | 53 | — | 2,485 | |||||||||||||||
| Total current assets |
62,529 | 49,192 | 6,883 | (45,977 | ) | 72,627 | ||||||||||||||
| Service parts, net |
1,412 | — | 108 | — | 1,520 | |||||||||||||||
| Property and equipment, net |
5,567 | — | 181 | — | 5,748 | |||||||||||||||
| Long-term investment in leases |
— | 1,292 | 562 | — | 1,854 | |||||||||||||||
| Capitalized computer software costs, net |
7,711 | — | — | — | 7,711 | |||||||||||||||
| Databases, net |
7,672 | — | — | — | 7,672 | |||||||||||||||
| Goodwill |
87,159 | — | — | — | 87,159 | |||||||||||||||
| Investments in subs |
45,362 | — | 759 | (46,121 | ) | — | ||||||||||||||
| Other assets |
17,620 | 348 | 26 | — | 17,994 | |||||||||||||||
| Total assets |
$ | 235,032 | $ | 50,832 | $ | 8,519 | $ | (92,098 | ) | $ | 202,285 | |||||||||
| Liabilities and stockholder’s equity (deficit) |
||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||
| Accounts payable |
$ | 9,470 | $ | 15 | $ | 194 | $ | — | $ | 9,679 | ||||||||||
| Intercompany payables |
74,657 | — | 4,767 | (79,424 | ) | — | ||||||||||||||
| Payroll related accruals |
14,702 | — | 158 | — | 14,860 | |||||||||||||||
| Deferred revenue |
15,273 | 148 | 449 | — | 15,870 | |||||||||||||||
| Current portion of long-term debt |
— | 310 | — | — | 310 | |||||||||||||||
| Accrued expenses and other current liabilities |
10,127 | 359 | 208 | — | 10,694 | |||||||||||||||
| Total current liabilities |
124,229 | 832 | 5,776 | (79,424 | ) | 51,413 | ||||||||||||||
| Long-term debt, net of discount |
172,489 | 501 | — | — | 172,990 | |||||||||||||||
| Deferred tax liabilities and other liabilities |
12,691 | 2,323 | (470 | ) | — | 14,544 | ||||||||||||||
| Total liabilities |
309,409 | 3,656 | 5,306 | (79,424 | ) | 238,947 | ||||||||||||||
| Stockholder’s equity (deficit): |
||||||||||||||||||||
| Common stock: |
— | 104 | 5,495 | (5,599 | ) | — | ||||||||||||||
| Additional paid-in capital |
83,155 | 6,300 | 3 | (6,303 | ) | 83,155 | ||||||||||||||
| Retained earnings (deficit) |
(157,192 | ) | 40,772 | (2,735 | ) | (266 | ) | (119,421 | ) | |||||||||||
| Other accumulated comprehensive income (loss): |
||||||||||||||||||||
| Cumulative translation adjustment |
(340 | ) | — | 450 | (506 | ) | (396 | ) | ||||||||||||
| Total stockholder’s equity (deficit) |
(74,377 | ) | 47,176 | 3,213 | (12,674 | ) | (36,662 | ) | ||||||||||||
| Total liabilities and stockholder’s equity (deficit) |
$ | 235,032 | $ | 50,832 | $ | 8,519 | $ | (92,098 | ) | $ | 202,285 | |||||||||
11
Consolidating Statement of Operations for the Three Months Ended December 31, 2003
(in thousands)
| Guarantor |
||||||||||||||||||||
| Principal Operations |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Revenues: |
||||||||||||||||||||
| Systems |
$ | 20,678 | $ | — | $ | 311 | $ | (2 | ) | $ | 20,987 | |||||||||
| Services and finance |
32,768 | 290 | 2,656 | — | 35,714 | |||||||||||||||
| Total revenues |
53,446 | 290 | 2,967 | (2 | ) | 56,701 | ||||||||||||||
| Cost of revenues: |
||||||||||||||||||||
| Systems |
11,650 | — | 227 | (2 | ) | 11,875 | ||||||||||||||
| Services and finance |
13,440 | — | 1,597 | — | 15,037 | |||||||||||||||
| Total cost of revenues |
25,090 | — | 1,824 | (2 | ) | 26,912 | ||||||||||||||
| Gross profit |
28,356 | 290 | 1,143 | — | 29,789 | |||||||||||||||
| Operating expenses: |
||||||||||||||||||||
| Sales and marketing |
8,127 | (160 | ) | 459 | — | 8,426 | ||||||||||||||
| Product development |
3,876 | — | 52 | — | 3,928 | |||||||||||||||
| General and administrative |
4,446 | 1,725 | 611 | — | 6,782 | |||||||||||||||
| Total operating expenses |
16,449 | 1,565 | 1,122 | — | 19,136 | |||||||||||||||
| Operating income |
11,907 | (1,275 | ) | 21 | — | 10,653 | ||||||||||||||
| Interest expense |
(5,021 | ) | (19 | ) | 8 | — | (5,032 | ) | ||||||||||||
| Equity loss in affiliate |
— | — | — | — | — | |||||||||||||||
| Foreign exchange gain (loss) |
9 | — | (76 | ) | — | (67 | ) | |||||||||||||
| Gain on sale of assets |
6,270 | — | — | — | 6,270 | |||||||||||||||
| Other income, net |
86 | — | 7 | — | 93 | |||||||||||||||
| Income (loss) before income taxes |
13,251 | (1,294 | ) | (40 | ) | — | 11,917 | |||||||||||||
| Income tax expense |
4,652 | — | 50 | — | 4,702 | |||||||||||||||
| Net income (loss) |
$ | 8,599 | $ | (1,294 | ) | $ | (90 | ) | $ | — | $ | 7,215 | ||||||||
12
Consolidating Statement of Operations for the Three Months Ended December 31, 2002
(in thousands)
| Guarantor |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Principal Operations |
Guarantor Subsidiaries |
||||||||||||||||||
| Revenues: |
|||||||||||||||||||
| Systems |
$ | 17,371 | $ | — | $ | 342 | $ | — | $ | 17,713 | |||||||||
| Services and finance |
37,115 | 530 | 2,295 | — | 39,940 | ||||||||||||||
| Total revenues |
54,486 | 530 | 2,637 | — | 57,653 | ||||||||||||||
| Cost of revenues: |
|||||||||||||||||||
| Systems |
9,822 | — | 203 | — | 10,025 | ||||||||||||||
| Services and finance |
16,065 | — | 1,481 | — | 17,546 | ||||||||||||||
| Total cost of revenues |
25,887 | — | 1,684 | — | 27,571 | ||||||||||||||
| Gross profit |
28,599 | 530 | 953 | — | 30,082 | ||||||||||||||
| Operating expenses: |
|||||||||||||||||||
| Sales and marketing |
6,983 | 36 | 281 | — | 7,300 | ||||||||||||||
| Product development |
3,658 | — | 69 | — | 3,727 | ||||||||||||||
| General and administrative |
4,796 | 1,703 | 258 | — | 6,757 | ||||||||||||||
| Total operating expenses |
15,437 | 1,739 | 608 | — | 17,784 | ||||||||||||||
| Operating income |
13,162 | (1,209 | ) | 345 | — | 12,298 | |||||||||||||
| Interest expense |
(3,424 | ) | (29 | ) | (5 | ) | — | (3,458 | ) | ||||||||||
| Equity loss in affiliate |
(7 | ) | — | — | — | (7 | ) | ||||||||||||
| Foreign exchange gain (loss) |
2 | — | (2 | ) | — | — | |||||||||||||
| Other income, net |
209 | — | 13 | — | 222 | ||||||||||||||
| Income (loss) before income taxes |
9,942 | (1,238 | ) | 351 | — | 9,055 | |||||||||||||
| Income tax expense |
3,278 | — | 285 | — | 3,563 | ||||||||||||||
| Net income (loss) |
$ | 6,664 | $ | (1,238 | ) | $ | 66 | — | $ | 5,492 | |||||||||
13
Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2003
(In thousands)
| Guarantor |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Principal Operations |
Guarantor Subsidiaries |
||||||||||||||||||
| Operating activities |
|||||||||||||||||||
| Net income (loss) |
$ | 8,599 | $ | (1,294 | ) | $ | (90 | ) | $ | — | $ | 7,215 | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|||||||||||||||||||
| Depreciation |
1,364 | — | 45 | — | 1,409 | ||||||||||||||
| Amortization |
2,747 | — | — | — | 2,747 | ||||||||||||||
| Deferred income taxes |
500 | — | — | — | 500 | ||||||||||||||
| Equity income from partnerships |
(50 | ) | — | — | — | (50 | ) | ||||||||||||
| Lease loss provision |
— | (153 | ) | — | — | (153 | ) | ||||||||||||
| Doubtful accounts |
1,194 | — | 440 | — | 1,634 | ||||||||||||||
| Gain on sale of assets |
(6,270 | ) | — | — | — | (6,270 | ) | ||||||||||||
| Other, net |
(120 | ) | — | 5 | — | (115 | ) | ||||||||||||
| Changes in assets and liabilities: |
|||||||||||||||||||
| Accounts receivable |
(3,889 | ) | — | 71 | — | (3,818 | ) | ||||||||||||
| Inventories |
427 | — | 6 | — | 433 | ||||||||||||||
| Investment in leases |
— | 818 | 134 | — | 952 | ||||||||||||||
| Prepaid expenses and other assets |
2,467 | 292 | 1,047 | — | 3,806 | ||||||||||||||
| Intercompany transactions |
(731 | ) | 1,069 | (338 | ) | — | — | ||||||||||||
| Accounts payable |
(386 | ) | 18 | 165 | — | (203 | ) | ||||||||||||
| Deferred revenue |
1,433 | (21 | ) | (63 | ) | — | 1,349 | ||||||||||||
| Accrued expenses and other liabilities |
(3,740 | ) | (578 | ) | (1,178 | ) | — | (5,496 | ) | ||||||||||
| Net cash provided by operating activities |
3,545 | 151 | 244 | — | 3,940 | ||||||||||||||
| Investing activities |
|||||||||||||||||||
| Purchase of property and equipment |
(549 | ) | — | (26 | ) | — | (575 | ) | |||||||||||
| Computer software costs and databases |
(1,526 | ) | — | — | — | (1,526 | ) | ||||||||||||
| Purchase of service parts |
(437 | ) | — | 23 | — | (414 | ) | ||||||||||||
| Proceeds from sale of assets |
7,212 | — | — | — | 7,212 | ||||||||||||||
| Equity distributions from partnerships |
42 | — | — | — | 42 | ||||||||||||||
| Net cash used in investing activities |
4,742 | — | (3 | ) | — | 4,739 | |||||||||||||
| Financing activities |
|||||||||||||||||||
| Proceeds from debt facility |
— | — | — | — | — | ||||||||||||||
| Payment on long-term debt and long term debt facilities |
82 | (100 | ) | — | — | (18 | ) | ||||||||||||
| Net cash used in financing activities |
82 | (100 | ) | — | — | (18 | ) | ||||||||||||
| Change in cash and cash equivalents |
8,369 | 51 | 241 | — | 8,661 | ||||||||||||||
| Cash and cash equivalents, beginning |
8,400 | (169 | ) | 1,984 | — | 10,215 | |||||||||||||
| Cash and cash equivalents, ending |
$ | 16,769 | $ | (118 | ) | $ | 2,225 | $ | — | $ | 18,876 | ||||||||
14
Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2002
(In thousands)
| Guarantor |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Principal Operations |
Guarantor Subsidiaries |
||||||||||||||||||
| Operating activities |
|||||||||||||||||||
| Net income (loss) |
$ | 6,664 | $ | (1,238 | ) | $ | 66 | $ | — | $ | 5,492 | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|||||||||||||||||||
| Depreciation |
1,535 | — | 29 | — | 1,564 | ||||||||||||||
| Amortization |
2,747 | — | 464 | — | 3,211 | ||||||||||||||
| Deferred income taxes |
(787 | ) | — | — | — | (787 | ) | ||||||||||||
| Equity loss from affiliate |
7 | — | — | — | 7 | ||||||||||||||
| Equity gain from partnerships |
(73 | ) | — | (14 | ) | — | (87 | ) | |||||||||||
| Lease loss provision |
— | — | — | — | — | ||||||||||||||
| Doubtful accounts |
1,306 | — | 41 | — | 1,347 | ||||||||||||||
| Other, net |
36 | — | (3 | ) | — | 33 | |||||||||||||
| Changes in assets and liabilities: |
|||||||||||||||||||
| Accounts receivable |
(3,985 | ) | — | (168 | ) | — | (4,153 | ) | |||||||||||
| Inventories |
256 | — | (46 | ) | — | 210 | |||||||||||||
| Investment in leases |
— | 607 | 122 | — | 729 | ||||||||||||||
| Prepaid expenses and other assets |
(1,017 | ) | 193 | 11 | — | (813 | ) | ||||||||||||
| Intercompany transactions |
(938 | ) | 778 | 160 | — | — | |||||||||||||
| Accounts payable |
(313 | ) | 37 | 53 | — | (223 | ) | ||||||||||||
| Deferred revenue |
1,309 | (31 | ) | — | — | 1,278 | |||||||||||||
| Accrued expenses and other liabilities |
1,969 | (226 | ) | (518 | ) | — | 1,225 | ||||||||||||
| Net cash provided by operating activities |
8,716 | 120 | 197 | — | 9,033 | ||||||||||||||
| Investing activities |
|||||||||||||||||||
| Purchase of property and equipment |
(991 | ) | — | — | — | (991 | ) | ||||||||||||
| Computer software costs and databases |
(2,117 | ) | — | (144 | ) | — | (2,261 | ) | |||||||||||
| Purchase of service parts |
(486 | ) | — | 10 | — | (476 | ) | ||||||||||||
| Equity distributions from partnerships |
41 | — | — | — | 41 | ||||||||||||||
| Net cash used in investing activities |
(3,553 | ) | — | (134 | ) | — | (3,687 | ) | |||||||||||
| Financing activities |
|||||||||||||||||||
| Proceeds from debt facility |
1,210 | — | — | — | 1,210 | ||||||||||||||
| Payment on long-term debt and long term debt facilities |
(3,000 | ) | (120 | ) | — | — | (3,120 | ) | |||||||||||
| Net cash used in financing activities |
(1,790 | ) | (120 | ) | — | — | (1,910 | ) | |||||||||||
| Change in cash and cash equivalents |
3,373 | — | 63 | — | 3,436 | ||||||||||||||
| Cash and cash equivalents, beginning |
(157 | ) | — | 555 | — | 398 | |||||||||||||
| Cash and cash equivalents, ending |
$ | 3,216 | $ | — | $ | 618 | $ | — | $ | 3,834 | |||||||||
9. SUBSEQUENT EVENTS
On January 29, 2004, the Company’s wholly-owned subsidiary Triad Systems Financial Corporation (“TSFC”) sold a portion of its owned lease portfolio for proceeds of $1.8 million which approximates its net book value. Except for certain contractual representations and warranties, the sale of the leases was made on a non-recourse basis.
15
Item 2. 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 unaudited historical consolidated financial statements and notes thereto, which are included elsewhere herein.
General
The Company is a leading provider of business management solutions designed for companies with complex products in high-service distribution environments. Customers include manufacturers, wholesale distributors and retailers in such industry segments as automotive parts, hardware, lumber, agribusiness, nurseries, plumbing, paint, building and electrical supply. The Company’s business management solutions include advanced software, professional services, information content, network connectivity and supply chain analytics. The revenues associated with software support, information databases and maintenance services are generally recurring in nature and represented approximately 63% of total revenues in the three months ended December 31, 2003.
Revenues. The Company derives revenue primarily from two sources: systems revenue, and services and finance revenue. Systems revenue includes the software licenses to use the Company’s proprietary enterprise software and related hardware equipment, as well as systems training and installation. Services and finance revenue generally consists of revenue generated by maintenance, service and finance of such systems and revenue from the sale of information databases, system connectivity and supply chain services.
Cost of revenues. Cost of systems revenue primarily includes computer hardware and peripherals purchased from third parties, the labor and overhead associated with assembling, installing and training customers on the Company’s systems and the amortization of capitalized software costs. Cost of services revenue primarily includes personnel costs associated with the maintenance and service of systems, personnel costs associated with data entry into the Company’s information databases, bad debt expense, the amortization of capitalized databases and telecommunication and facility costs.
Sales and marketing expense. Sales and marketing expense primarily consists of personnel costs associated with the Company’s sales and marketing efforts, bad debt expense related to the Company’s accounts and lease receivables and telecommunication and facility costs.
Product development expense. Product development expense primarily consists of personnel costs and contract services associated with the development and maintenance of the Company’s software and databases in addition to telecommunication and facility expenses.
General and administrative expense. These costs include departmental costs for executive, legal, administrative services, finance, telecommunications, facilities and information technology.
Other income (expense). Other income (expense) includes income from partnerships, which are being accounted for under the equity method, and the Company’s 401(e) deferred compensation plan.
Historical Results of Operations
Three Months Ended December 31, 2003 Compared to Three Months ended December 31, 2002
Revenues for the three months ended December 31, 2003 were $56.7 million, a decrease of $1.0 million, or 2%, from the $57.7 million recorded in the prior year’s period. Automotive Group revenues for the first quarter were $27.0 million, a decrease of $2.8 million, or 9%, as compared to the quarter ended December 31, 2002. The decrease in the Automotive Group revenues was primarily due to the October 1, 2003 sale of ARD. The Industry Solutions Group’s revenues were $29.7 million for the three months ended December 31, 2003, an increase of $1.8 million, or 7%.
Systems revenues for the three months ended December 31, 2003 were $21.0 million, compared to $17.7 million for the three months ended December 31, 2002, an increase of $3.3 million, or 18%. Systems revenues for the Automotive Group for the three months ended December 31, 2003 decreased $0.7 million to $4.3 million, as compared to last year.
16
The revenue decrease was primarily due to higher sales of jobber systems in the previous year as a result of promotional programs. Systems revenues for the Industry Solutions Group for the three months ended December 31, 2003 increased $4.0 million to $16.7 million, an improvement of 32%, as compared to the three months ended December 31, 2002. The revenue increase was due to increased sales of add-on products to the current customer base and increased sales of new software solutions to new customers.
Services and finance revenues were $35.7 million for the three months ended December 31, 2003, compared to $39.9 million for the three months ended December 31, 2002, a decrease of $4.2 million, or 11%. For the three months ended December 31, 2003, services and finance revenues for the Automotive Group decreased $2.1 million, or 8%, to $22.7 million, while the Industry Solutions Group’s revenues decreased $2.1 million, or 14%, to $13.0 million, as compared to the three months ended December 31, 2002. The decrease in the Automotive Group revenues was primarily due to the October 1, 2003 sale of ARD. The decrease in the Industry Solutions Group revenues was largely due to the termination of certain primary sources of point of sale data in fiscal year 2003 causing lower information product sales to manufacturers in the quarter ended December 31, 2003 compared to the quarter ended December 31, 2002. We do not expect to be able to replace this point of sale data.
Cost of revenues was $26.9 million for the three months ended December 31, 2003, compared to $27.6 million for the three months ended December 31, 2002, a decrease of $0.7 million, or 2%. For the three months ended December 31, 2003, cost of revenues for the Automotive Group decreased $1.4 million, or 10%, to $12.4 million. For the quarter ended December 31, 2003, cost of revenues for the Industry Solutions Group increased $0.7 million, or 5%, to $14.5 million as compared to the three months ended December 31, 2002.
Cost of systems revenues was $11.9 million for the three months ended December 31, 2003, compared to $10.0 million for the three months ended December 31, 2002, an increase of $1.9 million, or 18%. Cost of systems revenues for the Automotive Group for the three months ended December 31, 2003 increased $0.2 million, or 5%, to $3.3 million compared to the three months ended December 31, 2002. Cost of systems revenues as a percentage of systems revenues for the Automotive Group was 77% and 62% for the three months ended December 31, 2003 and 2002, respectively. The increase in the cost of systems revenues was primarily due to the increased depreciation and amortization costs, coupled with a lower sales volume in the three months ended December 31, 2003. Cost of systems revenues for the Industry Solutions Group for the three months ended December 31, 2002 increased $1.7 million to $8.6 million compared to the three months ended December 31, 2002, an increase of 24%. The increase in cost of systems revenue was mainly due to the increase in systems sales. Cost of systems revenue as a percentage of systems for the Industry Solutions Group was 51% and 54% for the three months ended December 31, 2003 and 2002, respectively. The improved gross profit was chiefly due to a higher margin mix of products in the quarter ended December 31, 2003.
Cost of revenues for services and finance was $15.0 million for the three months ended December 31, 2003, compared to $17.5 million for the three months ended December 31, 2002, a decrease of $2.5 million, or 14%. Cost of revenues for services and finance for the Automotive Group for the three months ended December 31, 2003 decreased $1.5 million to $9.1 million, or 14%, compared to the three months ended December 31, 2002. Cost of revenues for services and finance for the Automotive Group was down primarily due to the sale of ARD. Cost of revenues for services and finance for the Industry Solutions Group for the three months ended December 31, 2003 decreased $1.0 million to $5.9 million, compared to the three months ended December 31, 2002. Cost of revenues of services and finance for the Industry Solutions Group was lower in the three months ended December 31, 2003 primarily due to lower information services costs. As a percentage of the Automotive Group’s services and finance revenues, cost of revenues for services and finance for the Automotive Group was 40% and 43% for the three months ended December 31, 2003 and 2002, respectively. As a percentage of the Industry Solutions Group’s services and finance revenues, cost of revenues for services and finance for the Industry Solutions Group was unchanged at 46% for the three months ended December 31, 2003 and 2002.
Sales and marketing expense for the three months ended December 31, 2003 increased $1.1 million, or 15%, to $8.4 million, as compared to the three months ended December 31, 2002. Sales and marketing expense for the Automotive Group for the three months ended December 31, 2003 increased $0.3 million to $3.5 million, as compared to the three months ended December 31, 2002. As a percentage of the Automotive Group’s revenue, sales and marketing expense for the Automotive Group was 13% and 11% for the three months ended December 31, 2003 and 2002, respectively. The increase in sales and marketing expense in the Automotive Group was mainly due to higher personnel costs arising from increased head count focused on selling new products and services in the three months ended December 31, 2003.
17
Sales and marketing expense for the Industry Solutions Group for the three months ended December 31, 2003 increased $0.8 million to $4.9 million, as compared to the three months ended December 31, 2002. As a percentage of Industry Solutions Group revenue, sales and marketing expense for the Industry Solutions Group was 16% and 15% for the three months ended December 31, 2003 and 2002, respectively. The increase in sales and marketing expense in the Industry Solutions Group was primarily due to higher commission expense related to the increased systems revenue.
Product development expenses for the three months ended December 31, 2003 increased $0.2 million, or 5%, to $3.9 million, as compared to the three months ended December 31, 2002. As a percentage of revenue, product development expense was 7% and 6% for the three months ended December 31, 2003 and December 31, 2002, respectively. Product development expenses for the Automotive Group for the three months ended December 31, 2003 decreased $0.2 million, or 7%, to $2.5 million. As a percentage of Automotive Group revenue, product development expenses for the Automotive Group remained at 9% for the three months ended December 31, 2003 and 2002, respectively. Product development expenses for the Industry Solutions Group for the three months ended December 31, 2003 increased $0.4 million, or 40%, to $1.4 million for the three months ended December 31, 2003, primarily due to additional personnel hired to focus on the development of new products and services. As a percentage of Industry Solutions Group revenue, product development expense for the Industry Solutions Group was 5% and 4% for the three months ended December 31, 2003 and 2002.
General and administrative expense for the three months ended December 31, 2003 was $6.8 million, unchanged from the three months ended December 31, 2002. As a percentage of revenues, general and administrative expense was 12% for both the three months ended December 31, 2003 and 2002.
Interest expense for the three months ended December 31, 2003 was $5.0 million compared to $3.5 million for the three months ended December 31, 2002, an increase of $1.6 million, or 46%. The increase in interest expense in the quarter ended December 31, 2003 was primarily due to the issuance of the Senior Notes in June 2003. See “Liquidity and Capital Resources.”
Other income (expense), net for the three months ended December 31, 2003 was $6.3 million compared to $0.2 million for the three months ended December 31, 2002, an increase of $6.1 million, due primarily to the $6.3 million gain on the sale of ARD.
As a result of the above factors, the Company realized net income of $7.2 million for the three months ended December 31, 2003, compared to net income of $5.5 million for the three months ended December 31, 2002, an increase of $1.7 million, or 31%.
Liquidity and Capital Resources
As of December 31, 2003, the Company had $173.3 million in outstanding indebtedness. The $173.3 million of indebtedness was comprised of $155.1 million in Senior Notes due 2011, net of the $1.9 million discount, $17.5 million of Senior Subordinated Notes due 2008 and $0.7 million of debt related to lease financing that matures in varying amounts over the next three years. The Company’s Amended and Restated Credit Agreement provides for maximum borrowings of $15.0 million and matures in June 2006. As of December 31, 2003, there were no borrowings under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement bears interest at floating rates; therefore, the Company’s financial condition is and will be affected by changes in prevailing rates.
The Company’s Amended and Restated Credit Agreement imposes 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. Under the Amended and Restated Credit Agreement, the Company is obligated to meet certain tests relating to certain financial amounts and ratios as defined in the Amended and Restated Credit Agreement. At December 31, 2003, the Company was in compliance with these covenants.
On October 1, 2003, the Company sold the assets of its Automotive Recycling Division (“ARD”) to Used Car-Parts.com. The agreement included the sale of ARD’s software, systems, Hollander Interchange License and other assets and the assumption of certain liabilities of ARD. The ARD group had more than 1,200 customers in the United States and Canada, using three products: Orion, Checkmate and Compass. The total purchase price was $6.7 million
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plus net working capital of $0.5 million, resulting in a gain of $6.3 million. The total revenue generated by those assets was $8.2 million for the fiscal year ended September 30, 2003 and $2.1 million for the three months ended December 31, 2002.
In addition to servicing its debt obligations, the Company requires substantial liquidity for capital expenditures and working capital needs. At December 31, 2003, working capital was $32.3 million compared to $21.2 million at September 30, 2003. The increase in working capital principally relates to an increase in cash, primarily from the $7.2 million in proceeds relating to the sale of ARD. For the three months ended December 31, 2003, and December 31, 2002, the Company’s capital expenditures were $2.5 million and $3.7 million, respectively, which included $1.5 million and $2.3 million, respectively, for capitalized computer software and databases costs.
From time to time, the Company intends to pursue acquisition candidates, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. The Company expects to fund future cash acquisitions primarily with cash flow from operations and borrowing, including the unborrowed portion of the credit facility or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There can be no assurance that acquisition funds will be available at terms acceptable to the Company.
The Company believes that cash flows from operations, together with the amounts available under its Amended and Restated Credit Agreement, will be sufficient to fund its working capital and debt service requirements. 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Reference is made to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003. There have been no material changes in the quarter ended December 31, 2003.
Item 4 Controls and Procedures.
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Principal Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures within 90 days of the filing date of this quarterly report on Form 10-Q. Based on those evaluations, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these internal controls subsequent to the date of their evaluation.
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The Company is a party to various legal proceedings and administrative actions, which arise in the ordinary course of business, except as noted below. 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 conditions or cash flows.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
By consent of the sole stockholder of the Company in lieu of an annual meeting, the following were reelected directors of the Company on October 23, 2003: Michael A. Aviles, Peter Brodsky, Jack D. Furst, A. Laurence Jones and James R. Porter.
None
Item 6. Exhibits and Reports on Form 8-K.
| (a) | Exhibits |
10.43 Portfolio Purchase Agreement, dated as of January 29, 2004, between Triad Systems Financial Corporation, Activant Solutions Inc. and GreatAmerica Leasing Corporation.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Michael A. Aviles.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Greg Petersen.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Michael A. Aviles.
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Greg Petersen.
| (b) | Reports on Form 8-K |
No reports on Form 8-K have been filed during the three months ended December 31, 2003.
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Pursuant to the requirements 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 10th day of February, 2004.
| ACTIVANT SOLUTIONS INC. | ||
| By: |
/s/ GREG PETERSEN | |
| Greg Petersen | ||
| Senior Vice President and Chief Financial Officer | ||
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