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EX-31.2 - EX-31.2 - ACTIVANT SOLUTIONS INC /DE/ | d70368exv31w2.htm |
EX-12.1 - EX-12.1 - ACTIVANT SOLUTIONS INC /DE/ | d70368exv12w1.htm |
EX-32.2 - EX-32.2 - ACTIVANT SOLUTIONS INC /DE/ | d70368exv32w2.htm |
EX-21.1 - EX-21.1 - ACTIVANT SOLUTIONS INC /DE/ | d70368exv21w1.htm |
EX-31.1 - EX-31.1 - ACTIVANT SOLUTIONS INC /DE/ | d70368exv31w1.htm |
EX-32.1 - EX-32.1 - ACTIVANT SOLUTIONS INC /DE/ | d70368exv32w1.htm |
EX-10.16 - EX-10.16 - ACTIVANT SOLUTIONS INC /DE/ | d70368exv10w16.htm |
EX-10.15 - EX-10.15 - ACTIVANT SOLUTIONS INC /DE/ | d70368exv10w15.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2009 |
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to |
Commission File Number 333-49389
Activant Solutions Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
94-2160013 (I.R.S. Employer Identification No.) |
|
7683 Southfront Road Livermore, CA (Address of principal executive offices) |
94551 (Zip Code) |
(925) 449-0606
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act: Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act: Yes þ No o
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 o No þ Although
Activant Solutions Inc. is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act, the company has filed all Exchange Act reports for the preceding 12 months.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
o No o Activant Solutions
Inc. is not currently required to submit and post Interactive Data Files pursuant to Rule 405 of
Regulation S-T.
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 registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
No public trading market exists for the common stock, par value $0.01 per share, of Activant
Solutions Inc. The aggregate market value of the common stock held by non-affiliates of the
registrant was zero as of March 31, 2009, the last business day of the registrants most recently
completed second fiscal quarter. All of the outstanding shares of common stock, par value $0.01 per
share, of Activant Solutions Inc. are held by Activant Group Inc., the registrants parent company.
Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date.
Class | Outstanding at December 14, 2009 | |
Common Stock, par value $0.01 per share | 10 shares |
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K
into which the document is incorporated: (1) any annual report to security holders; (2) any proxy
or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the
Securities Act of 1933. None
ACTIVANT SOLUTIONS INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED SEPTEMBER 30, 2009
FOR THE YEAR ENDED SEPTEMBER 30, 2009
INDEX
Page | ||||||||
Forward-Looking Statements | 1 | |||||||
Use of Trademarks and Tradenames | 1 | |||||||
PART I | 2 | |||||||
Item 1. |
2 | |||||||
Item 1A.
|
10 | |||||||
Item 1B.
|
18 | |||||||
19 | ||||||||
Item 3.
|
19 | |||||||
Item 4.
|
19 | |||||||
PART II | 20 | |||||||
Item 5.
|
20 | |||||||
21 | ||||||||
22 | ||||||||
Item 7A.
|
42 | |||||||
Item 8.
|
43 | |||||||
Item 9.
|
76 | |||||||
Item 9A.
|
76 | |||||||
Item 9B.
|
76 | |||||||
PART III | 77 | |||||||
Item 10.
|
77 | |||||||
Item 11.
|
80 | |||||||
Item 12.
|
92 | |||||||
Item 13.
|
94 | |||||||
Item 14.
|
97 | |||||||
PART IV | 98 | |||||||
Item 15.
|
98 | |||||||
SIGNATURES | 100 | |||||||
EXHIBIT INDEX | 101 | |||||||
EX-10.15 | ||||||||
EX-10.16 | ||||||||
EX-12.1 | ||||||||
EX-21.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
Table of Contents
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act). Words and phrases such as
anticipate, believe, estimate, expect, is likely, predict, will be, will continue,
intend, plan, and variations of such words or phrases and similar expressions are intended to
identify such forward-looking statements. In particular, statements about our expectations,
beliefs, plans, objectives, assumptions or future events or performance contained in this report
under the headings Risk Factors, Managements Discussion and Analysis of Financial Condition and
Results of Operations and Business are forward-looking statements. We have based these
forward-looking statements on our current expectations about future events. While we believe these
expectations are reasonable, these forward-looking statements are inherently subject to risks and
uncertainties, many of which are beyond our control. Our actual results may differ materially from
those suggested by these forward-looking statements for various reasons, including those discussed
in this report under the headings Risk Factors and Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Given these risks and uncertainties, you are cautioned not to place undue reliance on the
forward-looking statements included in this report. The forward-looking statements included in
this report are made only as of the date hereof. Except as required by law, we do not undertake and
specifically decline any obligation to update any such statements or to publicly announce the
results of any revisions to any of such statements to reflect future events or developments.
USE OF TRADEMARKS AND TRADENAMES
Several trademarks and tradenames appear in this Annual Report on Form 10-K. Activant, the Activant
stylized logo design, A-DIS, J-CON, VISTA, AConneX, PartExpert, Activant Eagle, Activant
Cover-to-Cover, Activant iNet, Activant Vision, ePartExpert, ePartInsight, Interchange, Labor
Expert, BuyerAssist, Speedware, Prophet 21 and Eagle are registered trademarks of ours. Other
trademarks of ours include Activant Eclipse, Activant Integrated Service Estimator, Activant
Prelude, Activant LaborExpert, Activant BuyerAssist, Activant Silk Dimensions Canada, Activant B2B
Seller, Activant Catalyst, Activant Prism, Activant Service Intervals Plus, Activant ECS Pro,
Activant Price Updating, Acclaim, Array, DISC, D2K, FasPac, ISE, SDI, StanPak, Turns, Trading
Partner Connect, Ultimate, Series 12, Eclipse for Automotive, CSD, IDW, IDX, LOADSTAR, Activant
iNet, Version 2, 4GL, XL, Dimensions, TPW, and CommerceCenter. Windows is either a registered
trademark or tradename of Microsoft Corporation in the United States and/or other countries. Other
trademarks and tradenames are used in this report, which identify other entities claiming the marks
and names of their products. We disclaim proprietary interest in such marks and names of others.
1
Table of Contents
PART I
ITEM 1 BUSINESS
On May 2, 2006, Activant Group Inc. (formerly known as Lone Star Holding Corp.), a Delaware
corporation, or Activant Group, Lone Star Merger Corp., or Merger Sub, and Activant Solutions
Holdings Inc., or Holdings, consummated a merger, whereupon Holdings became wholly owned by
Activant Group, which in turn is wholly owned by investment funds affiliated with Hellman &
Friedman LLC, or Hellman & Friedman, Thoma Cressey Bravo, Inc., or Thoma Cressey, and JMI Equity,
and certain members of our management. Following the merger, on May 2, 2006, Holdings merged with
and into Activant Solutions Inc., with Activant Solutions Inc. continuing as the surviving
corporation and wholly-owned subsidiary of Activant Group. These mergers are referred to as the
mergers and the transactions related to the mergers are referred to collectively as the
transactions. The transaction was treated as a purchase and thus the assets and liabilities were
recorded at their fair value as of the closing date. Activant Group was incorporated on March 7,
2006 for the purpose of acquiring Holdings and did not have any operations prior to May 2, 2006
other than in connection with the Holdings acquisition. Activant Solutions Inc., or Activant, was
incorporated in 1972 under the name of Triad Systems Corporation. In 1997, it merged into CCI
Acquisition Corp., becoming a Delaware corporation named Cooperative Computing, Inc., and in
October 2003, it changed its name to Activant Solutions Inc. Unless the context otherwise requires,
references in this report to we, our, us and the Company refer to Activant Solutions Inc.
and its consolidated subsidiaries.
Overview
We are a leading provider of business management solutions to distribution and retail businesses.
With over 35 years of operating history, we have developed substantial expertise in serving
businesses in three primary vertical markets: hardlines and lumber, wholesale distribution and the
automotive parts aftermarket. The vertical markets we serve have the shared characteristic of
being complex distribution and retail businesses with advanced inventory management needs. Using a
combination of proprietary software and extensive expertise in these vertical markets, we provide
complete business management solutions consisting of tailored systems, product support, content,
supply chain products and services and professional services designed to meet the unique
requirements of our customers. Our fully integrated systems and services include point-of-sale,
inventory management, general accounting, e-commerce, warehouse automation, and data that enable
our customers to manage their day-to-day business operations. We believe our solutions allow our
customers to increase sales, boost productivity, operate more cost efficiently, improve inventory
turns and enhance trading partner relationships.
We have built a large base of over 14,000 customers on product support, operating in approximately
30,000 business locations. In addition, our electronic automotive parts and applications catalog
is used in approximately 27,000 business locations (a subset of which includes certain product
support customers). We have developed strategic relationships with many well-known and influential
market participants in each of our primary vertical markets, such as Ace Hardware, True Value
Company and Do it Best Corp. in the hardlines and lumber vertical market, Netplus and NISSCO for
the wholesale distribution vertical market, and the Aftermarket Auto Parts Alliance, Inc. in the
automotive parts aftermarket. In addition, we have licensing agreements with many well-known
participants in each of the vertical markets we serve, including the Industry Data Exchange
Association in the wholesale distribution vertical market and OReilly Automotive, Inc. in the
automotive parts aftermarket. No single customer represents more than 10% of our total sales.
Based on number of customers and revenues, we believe we have a leading position in the United
States serving the hardlines, lumber and automotive parts aftermarket sectors. We also believe we
are one of the leading providers of business management solutions to the domestic wholesale
distribution vertical market.
Market Opportunity
We focus our products and services on customers that operate in three primary vertical markets:
hardlines and lumber, wholesale distribution and the automotive parts aftermarket. We believe that
these businesses are increasingly taking advantage of information technology to more effectively
manage their operations.
We have identified a number of common factors driving this demand for technology solutions within
our vertical market customers:
| Need for turnkey business management solutions with vertical specific functionality. We
believe that software applications from vendors such as Intuit Inc., Microsoft Corporation,
Oracle Corporation, The Sage Group plc and SAP AG, with a broad, general or horizontal
approach, do not adequately address the needs of businesses that have specific functionality
requirements. In addition, our typical customer generally does not have a large dedicated
technology team to integrate and manage information technology solutions across multiple
vendors. As a result, these businesses prefer a single vendor to provide and support a large
portion of their information technology infrastructure, which includes software and product
support and professional services and may extend to hardware, network management and content
and supply chain services. |
| Complex supply chains. Our customers operate in markets that may have multi-level supply
chains consisting of OEMs, service dealers, contractors, builders and other professional
installers and do it yourself users that purchase parts or products from local |
2
Table of Contents
or regional stores and distributors. These businesses, in turn, may be connected to one or more
warehouses or distributors, which, in turn, are connected to manufacturers. Many of these
connections are now Internet-based to facilitate e-commerce. Businesses with complex supply
chains require more sophisticated, tailored systems and services to operate efficiently. |
| Inventory management. Our customers operate in complex distribution and retail
environments and manage, market and sell large quantities of diverse types of products,
requiring them to manage extensive inventory. Their ability to track and manage that
inventory more efficiently can improve their operational and financial performance. |
| Need for modern technology. Many of the systems currently in use in the vertical markets
that we serve are older, character-based or in-house systems with limited extensibility or
flexibility. These businesses will need to replace their older systems over time with more
modern, comprehensive business management solutions. |
| High customer service requirements. Our customers seek to differentiate themselves in
their respective marketplaces by providing a high degree of customer service and value added
services. Our systems and services are specifically designed to facilitate this level of
customer service. For example, professional contractors expect on-time delivery of complex
orders to their building sites, the ability to charge the orders to their account and the
ability to receive a credit for any unused materials. In order to meet these high service
requirements, businesses in the vertical markets we serve are increasingly adopting more
advanced and industry tailored business management solutions. |
Our Business Model
We are a leading provider of business management solutions to wholesale and retail distribution
businesses. With over 35 years of operating history, we have developed substantial expertise in
serving businesses with complex distribution and retail requirements in three primary vertical
markets: hardlines and lumber, wholesale distribution and the automotive parts aftermarket. For
reporting purposes, we consider each of these vertical markets separate segments. The segments are
determined in accordance with how our management views and evaluates our business and based on the
criteria as outlined in the authoritative guidance that addresses segment disclosures. See Note 13
to our consolidated financial statements for additional information. For the year ended September
30, 2009, our Hardlines and Lumber, Wholesale Distribution, and Automotive segments accounted for
approximately 36.2%, 41.4% and 19.8%, respectively, of our revenues. We also derive revenue from
our productivity tools business, which we include in Other.
| The hardlines and lumber vertical market consists of independent hardware retailers;
home improvement centers; paint, glass and wallpaper stores; farm supply stores; retail
nurseries and garden centers; independent lumber and building material dealers; pharmacies;
and other specialty retailers, primarily in the United States. |
||
Retailers are often affiliated with cooperatives, distributors and buying groups, such as Ace
Hardware Corp., Do it Best Corp., True Value Company, Orgill, Inc., and Lumbermens
Merchandising Corporation, that enable members to compete through optimized product
assortment, buying power and brand and member wide customer loyalty programs and promotions,
along with the incorporation of best business practices. These cooperatives, distributors
and buying groups also influence the information technology buying decisions of their large
groups of members. We work to ensure that these key influencers are aware of and recommend
our products and services. National chains that are generally larger than our customers,
such as The Home Depot, Inc., Lowes Home Centers, Inc. and Menard, Inc., generally utilize
advanced information technology solutions within their businesses. Their adoption of
advanced technology often creates demand within our hardware and lumber market for similar
solutions. |
|||
| The wholesale distribution vertical market consists of distributors of a range of
products including electrical supply; plumbing; medical supply; heating and air
conditioning; tile; industrial machinery and equipment; industrial supplies; fluid power;
janitorial and sanitation products; paper and packaging; fasteners; petroleum and service
establishment equipment vendors, primarily in North America. The business of wholesale
distributors revolves around tracking and managing product inventory and servicing
customers with high service level requirements, requiring product knowledge and
availability, flexible delivery schedules, returns management and complex invoicing. In
addition, wholesale distributors operate in multiple locations. The ability to manage
these operations with a single inventory management system is essential to the success of
their business. Wholesale distributors are increasingly using more sophisticated
information technology systems to improve inventory turns, increase sales, reduce carrying
and other operating costs and improve customer service. |
||
| The automotive parts aftermarket consists of customers involved in the manufacture,
distribution, sale, and installation of new and remanufactured parts used in the
maintenance and repair of automobiles and light trucks, and includes manufacturers,
warehouse distributors, parts stores, professional installers in North America, the United
Kingdom and Ireland as well as several chains in North America. |
||
Participants in the automotive parts aftermarket are required to manage large quantities of
data. There are over 5.5 million different stock keeping units, or SKUs, available to parts
sellers. As a result, most automotive parts aftermarket participants require comprehensive
inventory management systems and catalogs to keep track of these parts. In addition,
consumer demand for same-day repair service and the need to quickly turn repair bays
encourages professional installers to require |
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Table of Contents
prompt delivery of required parts from their
suppliers. Therefore, the ability of either a warehouse distributor or parts store to
identify the required part, access information about its part availability or the
availability of an alternative part, identify the price of the part,
enable auto-generated electronic order- and
supply related communications with its customer, and then promptly supply the required part is
critical to its success. |
| Other primarily consists of our productivity tools business, which is involved with
software migration services and application development tools. |
Products and Services
Using a combination of proprietary software and extensive expertise in these vertical markets, we
provide complete business management solutions consisting of tailored systems, product support, and
content and supply chain services designed to meet the unique requirements of our customers. Our
fully integrated systems and services include point-of-sale, inventory management, e-commerce,
general accounting, warehouse automation and enhanced data management that enable our customers to
manage their day-to-day operations. Our products and services consist of the following business
management solutions:
| Systems, which is comprised primarily of proprietary software applications; professional
services; training; and may include forms and paper products; and third-party software,
hardware and peripherals. |
||
| Services, which is comprised primarily of product support and content and supply chain
services. Product support services are comprised of customer support activities, including
hardware, software and network support through our advice line, software updates,
preventive and remedial on-site maintenance and depot repair services. Our content services
are comprised of proprietary database and data management products such as our
comprehensive electronic automotive parts and applications catalog and point-of-sale
business analysis data. Supply chain services are comprised of connectivity services,
e-commerce, networking and security monitoring management solutions. We generally provide
our services on a subscription basis, and accordingly, revenues are generally recurring in
nature. |
Systems
We offer systems consisting of proprietary vertical specific software applications,
implementation
and training and third-party software. These systems may include hardware and peripherals. Our products
provide in-store, retail, distributor and warehouse based solutions with fully integrated
applications that help manage the workflows and data relating to a customers typical sales
transactions and automate and streamline a customers inventory, sales and distribution operations.
These applications include order management and fulfillment, barcode scanning and processing,
inventory control, pricing, purchasing, accounts receivables and payables, special order
processing, quote and bid processing, vendor and manufacturer communications, payroll, general
ledger and credit and debit card authorization. The selling price of our products depends on a
variety of factors, including the number of locations and users and the product requirements of the
customer.
In addition, we offer add-on modules to our customers to enhance the capabilities of our products.
The modular design of our add-on modules, such as business intelligence, credit card signature
capture and delivery tracking, provides our customers with flexibility to deploy or implement our
offerings individually or incrementally.
When we sell and license a new system or add-on module, our professional services team works to
minimize disruption during the conversion process and to help optimize our customers use of the
product by training them to use the primary and specialized features of the software. In addition,
we integrate most of our products with hardware components and software products of third-party
vendors prior to distributing the products to our customers. We primarily use Dell Inc.s industry
standard server and workstation hardware to power our software solutions. In addition, we offer
hardware solutions from International Business Machines Corporation and Hewlett-Packard Company for
certain of our solutions.
The following outlines our current system offerings:
| Activant Catalyst. Our Activant Catalyst product is designed for large multi-location
lumber operations. |
| Activant Eagle. Our Activant Eagle product is designed for many specialty retailers,
including hardware and home center, automotive jobbers, pharmacies, ranch and home stores,
lumber and building materials, and lawn and garden centers. |
| Activant Eclipse. Our Activant Eclipse product is a fully integrated, real-time business
management solution targeted for, but not limited to, plumbing and electrical wholesale
distributors. |
| Activant ECS Pro. Activant ECS Pro is a comprehensive distribution management system for
lumber and building materials suppliers targeted primarily to the needs of the production
builder market. |
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Table of Contents
| Activant Prelude. The Activant Prelude product fully integrates a distributors operations.
The solution allows immediate transfer of information between departments and permits flexible
on-line inquiry into virtually any kind of information. |
| Activant Prism. Activant Prism is a proven, easy-to-use distribution management system
designed to meet the needs of both single store and multi-location jobber and distributor
businesses in the automotive parts aftermarket. |
| Activant Prophet 21. Our Activant Prophet 21 product, formerly known as CommerceCenter, is
designed for distributors across multiple segments of the wholesale distribution vertical
market including but not limited to industrial, electrical, fastener, fluid power petroleum
supply, tile and floor covering, heating and air conditioning, and medical supply, and
janitorial supply. |
| Activant Silk/Dimensions Canada. Our Activant Silk/Dimensions Canada products are designed
for small and medium sized stores across multiple vertical markets within Canada, including
hardware and home center, lumber and building materials and its sub-verticals. |
| Activant Vision. Our Activant Vision product is designed for, and targeted to, local,
regional and national warehouse distributors in the automotive parts aftermarket and office
product market. |
In addition to our current system offerings, we also service, maintain and earn product support
revenues from additional legacy systems. Although we do not actively market and sell these legacy
systems, we do from time-to-time respond to specific customer requests for such systems. We have
also developed upgrade and conversion paths to our primary system offerings for the customers on
our legacy products.
We also offer business products, including standard and custom third-party record keeping and sales
forms and other office supplies, to our existing customer base. These forms and supplies include
purchase order forms, checks, invoices, ink, toner and ribbons that are compatible with our
software and hardware systems.
Services Product Support
We provide comprehensive maintenance and customer support for each of our products. Our customers
are principally independent businesses that require a high level of service, training and customer
support to train users and to maintain their systems. We offer a broad set of professional and
support services to businesses in our vertical markets. Our product support offerings include:
| Access to Software Updates. We provide our product support customers with periodic
software updates, which, among other things, provide bug fixes, selected functionality
enhancements and efficiency improvements. |
| Help Desk Support. Our team of software and applications specialists provides customers
with telephonic and web-based troubleshooting and other support related to our software and
hardware products. This team provides technical and industry specific support for our systems
through real-time diagnostics, access to our extensive knowledge base and assistance in
optimizing our customers usage of our systems for their businesses. We offer our customers
several service plan options to accommodate their support needs and requirements for their
businesses. In addition, our product development team is available to address the most
complex systems issues. |
| Nationwide Hardware and Networking Specialists. Our field service team can be dispatched
throughout North America to diagnose and repair hardware and software on-site. We believe
that this team of service professionals provides us with a competitive advantage. Because
these services are provided on-site, the customer often develops a working relationship with
its hardware and networking specialist. |
| Server and Peripheral Repair. We support server and peripheral repair via overnight
exchange and other programs from our repair facility and through outsourced peripheral repair
services. |
We offer web-based and email product support that allows customers direct access to a call tracking
system, online product training courses and an online knowledge base. These features allow
customers to request support services, review specific calls or their entire call history, increase
employee system knowledge through online coursework or search a knowledge base to obtain ready
answers to questions. Virtually all new systems customers subscribe to product support and
generally continue to subscribe as long as they use the system. Product support subscriptions vary
from a monthly to an annual basis depending on the product, and the subscription fees vary by
platform, system size, number of users and configuration. In addition, we offer seminars and
workshops to assist customers in understanding the capabilities of their systems. We strive to
provide comprehensive information technology support to small and medium sized business customers
to build customer relationships, enhance customer satisfaction and maximize customer retention
rates.
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Services Content and Supply Chain
Our content and supply chain products and services include database services with information and
reports related to point-of-sale activity, and connectivity services. These services are specific
to the retail and wholesale trade vertical markets we serve and complement our systems offerings.
We provide electronic catalogs, related repair information and reports based on point-of-sale
activity through a variety of data services. These proprietary database products and services
generate recurring revenues through periodic (generally monthly) subscription fees and
differentiate our products from those of our competitors. We offer data services to our automotive
parts aftermarket customers, including warehouse distributors, manufacturers and parts stores and
professional installers. Our principal content and supply chain products and services are:
| Activant AConneX. We offer Internet-based communication services that connect the
automotive parts aftermarket, ranging from manufacturers through warehouse distributors and
parts stores to professional installers. Activant AConneX, uses the Internet to allow
communication between and among our software systems and other companies software systems.
The Activant AConneX service provides a communication link for transmission of parts orders
from professional installers through e-store services and creates a parts trading network
among parts stores and warehouse distributors. In addition, we offer an electronic data
interchange interface between warehouse distributors and manufacturers. |
| Activant ePartInsight. Our Activant ePartInsight service provides data hub capability that
allows large buying groups to access inventory and sales information throughout the buying
group simultaneously, which allows better visibility into product sales and inventory trends.
This data warehouse product can be connected to our entire automotive parts aftermarket
warehouse distributor and parts store products as well as third-party software. |
| Activant Integrated
Service Estimator (ISE). ISE is an integrated web-based estimating
tool that provides an estimating function for service chains. It is available as a module that can be
integrated via web services with tire shop and lube management systems. ISE provides access
to our parts, labor and service jobs databases. |
| Activant PartExpert/Activant ePartExpert and related products. Our electronic automotive
parts and application catalog provides access to a database of over 300 million unique
automobile part applications for approximately 7,000 automotive parts aftermarket product
lines. These products are designed to increase productivity and accuracy in parts selection
and handling. Our automotive systems are integrated with Activant PartExpert. For our
Activant PartExpert product, we acquire, enter, clean, standardize and format data from over
900 nationally branded automotive parts manufacturers in an original, creative and unique
manner. This data comes from manufacturers in paper or electronic format. We generally
produce catalog updates on compact discs or DVDs approximately 10 to 12 times per year or make
them available via online access. Related products include Activant Interchange,
Cover-to-Cover, LaborExpert, ItemExpert, Service Intervals Plus, and BuyerAssist. |
| Activant Price Updating. Our pricing distribution and updating services provide automated
and timely automotive aftermarket part price information updating. These services are
targeted primarily at warehouse distributors and parts stores. We acquire, enter, clean,
standardize and format data from manufacturers and distributors with custom pricing, then
securely distribute price updates via telecommunication or compact discs. |
| Activant Vista. Our Activant Vista offering is targeted for manufacturers in all three of
the vertical markets we serve. Information provided by the Activant Vista service gives
manufacturers insight into how a specific product or brand is performing against its
competitors and the market in general based upon actual point-of-sale information provided
from our systems customers and consumer market surveys and through collaboration with other
sources of industry sales data. We provide this data to our customers in a variety of formats. |
| IDW and IDX. Our IDW and IDX offerings are targeted at the wholesale distribution vertical
market. They enable electrical parts manufacturers and warehouse distributors to exchange
product information, purchase orders and related documents using electronic data interchange
and Internet technologies. |
| Networking Support & Security Monitoring. Our Networking Support & Security Monitoring
offerings are targeted primarily at the hardlines and lumber vertical market and the
automotive parts aftermarket, but are applicable to all of our three vertical markets. These
offerings provide network installation, provisioning, troubleshooting and problem resolution,
firewall installation and configuration and virus protection services. |
| Trading Partner Connect. Our Trading Partner Connect offering is an Internet trading
network that streamlines the commercial process between distributors, their manufacturers
and/or suppliers, and end users, thereby extending geographic reach of a distributor,
increasing sales and improving customer service while helping to reduce operating costs.
Through the Trading Partner Connect offering, distributors can access millions of items,
helping to enable them to compete on a larger scale and improve customer service.
Distributors further benefit from reduced costs related to electronic data interchange and
surplus inventory. The Trading Partner Connect product also provides distributors with a
web-based storefront designed to give end users online |
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customer service as well as ordering
capabilities 24 hours a day, seven days a week. The Trading Partner Connect product offers
several components, including B2B Marketplace, B2B Buyer, B2B Alliance, B2B Gateway and B2B
Seller. |
In addition to systems, product support and content and supply chain offerings, we offer our
customers migration tools and services. Within our Productivity Tools business, we provide our
customers with legacy migration and modernization professional services as well as proprietary and
third party migration automation and application development software tools. We are one of the
leading providers of legacy migration services for applications and databases residing on the
Hewlett-Packard e3000. Hewlett-Packard
Company announced that it is ending support for this platform in 2010. This may result in an
increase in our migration business as customers may be looking to migrate prior to the end of life
of this platform.
Competitive Strengths
We believe that the following factors have contributed to the strength of our systems revenues and
our high customer retention rate.
| Provide a Turnkey Business Management Solution to the Vertical Markets We Serve. Using a
combination of proprietary software and extensive expertise in the vertical markets we serve,
we provide complete solutions and services for our customers. Our solutions and services
provide tailored systems, product support, professional services, and content and data
services that are designed to meet the unique requirements of our customers and enable them to
interact with us as a single vendor for their business management solutions. |
| Leading Market Position in the Vertical Markets We Serve. With over 35 years of operating
history, we have developed substantial expertise in serving businesses with complex
distribution and retail requirements. Based on the number of our customers and our revenues,
we believe we have a leading position in the United States serving the hardlines, lumber and
automotive parts aftermarket markets. We also believe we are one of the leading providers of
business management solutions to the wholesale distribution vertical market in the United
States. |
| Large Base of Customers with High Retention. We have built a large base of over 14,000
product support customers operating in approximately 30,000 business locations. Our
electronic automotive parts applications catalog is used in approximately 27,000 business
locations (a subset of which includes certain product support customers). In our experience,
our systems and services are integral to the operations of our customers businesses and
switching from our systems generally requires a great deal of time and expense and may present
a significant operating risk for our customers. As a result, we have historically had high
levels of customer retention. |
| Relationships with Well-Known Market Participants. We have developed strategic
relationships with many well-known market participants in the hardlines and lumber vertical
market and the automotive parts aftermarket, including Ace Hardware Corp., Do it Best Corp.,
True Value Company and the Aftermarket Auto Parts Alliance, Inc. In addition, we have
licensing agreements with many well-known participants in each of the vertical markets we
serve, including HD Supply Support Services Inc., the Industry Data Exchange Association and
OReilly Automotive, Inc. |
| Flexible Systems Offerings. Depending on our customers size, complexity of business and
technology requirements, we offer a range of systems offerings. For example, we offer our
Activant Eagle product that, while still tailored to the vertical markets it is designed to
serve, provides more standard functionality for customers with lower complexity of operations
and technology needs. We also offer a higher-end business management solution for customers
with more complex operations and technology needs. By providing flexible systems offerings,
we are able to access a broader segment of the addressable market in each of the vertical
markets we serve. In addition, the modular design of our add-on modules provides our
customers with flexibility to deploy all of our add-on offerings at once or to implement our
offerings individually or incrementally. |
| Large Base of Recurring Subscription Revenues. Product support and content and supply
chain services revenues comprise nearly all of our services revenues. These revenues are
generally recurring in nature since they are derived primarily from subscriptions to our
support and maintenance services, our electronic automotive parts and applications catalog,
databases, connectivity and other services. Services revenues accounted for approximately
67.1% of our total revenues for the year ended September 30, 2009. We believe that the
generally recurring nature of our product support and content and supply chain revenues
provides us with a more predictable and stable stream of revenues relative to systems revenues
that are primarily one-time purchases. Virtually all new systems customers subscribe to
product support and generally continue to subscribe as long as they use the system. |
Sales and Marketing
We have dedicated sales and marketing groups for each of the hardlines and lumber, wholesale
distribution and automotive parts aftermarket verticals. Our sales and marketing strategy is to
provide relevant business expertise to target customers by using sales representatives with strong
industry specific knowledge.
Within these vertical markets, we use a combination of field sales, inside sales, value added
resellers and national account programs. We seek to ally with large customers or groups of
customers and leverage these program groups to assist us in selling to their members. Incentive
pay is a significant portion of the total compensation package for all sales representatives and
sales managers. Our field sales
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teams generally focus on identifying and selling to new customers
as well as identifying and selling to existing customers that are migrating from one of our legacy
systems to one of our primary system offerings, while our inside sales team focuses on selling
upgrades and new software applications to our installed base of customers.
Our marketing approach is to develop strategic relationships with many of the well-known market
participants in the vertical markets that we serve, including, Ace Hardware Corp., True Value
Company and Do it Best Corp. cooperatives for the hardlines and lumber vertical market, NetPlus
Alliance and NISSCO for the wholesale distribution market, and the Aftermarket Auto Parts Alliance,
Inc. for the automotive parts aftermarket. In addition, we have agreements with many of the
well-known participants in the vertical markets we
serve, including the Industry Data Exchange Association and OReilly Automotive, Inc. This strategy
includes obtaining endorsements, warehouse distributor relationships and other alliances. The goal
of these programs is to enhance the productivity of the field sales team and to create leveraged
selling opportunities as well as offer maximum benefits to our customers by allowing them to
implement broad based common business practices.
Product Development
Our product development strategy combines innovation and the introduction of new technology with
our commitment to the long-term support of the unique needs of our customers. We seek to enhance
our existing product lines, offer streamlined upgrade and migration options for our existing
customers and develop compelling new products for our existing customer base and prospective new
customers.
Our customer base includes long-term customers using our older, character-based systems, as well as
those who have upgraded to our recently developed products running on Microsoft Windows, Linux, AIX
and several UNIX platforms. A large portion of our current installed customer base is using older
character-based systems, especially in the automotive parts aftermarket. We believe there is a
significant opportunity for us to migrate these customers to our current generation of systems
offerings running on more modern technology platforms. We have developed our current generation of
products to provide an efficient migration path for customers operating older systems while
preserving existing functionality and offering significant advantages in ease of use and new
e-commerce capabilities.
In the development of our software, we use industry standard tools such as .Net, Java, Microsoft
and Progress toolsets and a variety of open source based technologies.
We also leverage a set of key technology relationships with third-party vendors to offer or
facilitate a complete turnkey business management solution to our customers. We have relationships
with several third-party vendors, including (1) Dell Inc., International Business Machines
Corporation, Hewlett-Packard Company and Motorola, Inc. (Symbol Technologies) for hardware
platforms, (2) Microsoft Corporation for tools, operating systems and databases, (3) Progress
Software Corporation for development tools, (4) Sterling Commerce, Inc. and Inovis, Inc. for
electronic data interchange and (5) SonicWALL, Inc. for security solutions.
Intellectual Property
We have approximately 268 registered copyrights, 69 registered trademarks and 6 issued patents in
the United States. We attempt to protect our intellectual property in a number of ways. First, we
distribute, or enable access to, our proprietary software and database products through licensing
agreements, which require licensees to acknowledge our ownership of the software and databases and
the confidential nature of our proprietary information, and grant limited usage rights. Secondly,
all of our personnel are required to assign to us all rights of such personnel to inventions,
patents, works of authorship and confidential information developed in conjunction with their
employment relationship and agree to keep confidential our proprietary information. Finally, we
require that third parties receiving our confidential information execute a non-disclosure
agreement.
While we believe that our ability to maintain and protect our intellectual property rights is
important to our success, we also believe that our business as a whole is not materially dependent
on any particular patent, trademark, license or other intellectual property right. Legal
protections for some information products may be limited and technical means may not be available
to protect against unauthorized use, access, display, reproduction or distribution. We may not be
able to adequately protect our technology and competitors may develop similar technology
independently.
Customers
For the year ended September 30, 2009, no single customer accounted for more than 10% of our total
revenues.
Competition
The vertical markets we serve are highly fragmented and served by many competitors. In the
vertical markets we serve, we primarily compete against smaller software companies with solutions
for a single vertical market or with proprietary systems developed by or for industry participants.
The key factors influencing customers technology purchase decisions in the vertical markets we
serve include, among others: ability to provide a turnkey business management solution with
vertical specific functionality, depth of vertical expertise, pricing, level of services offered,
credibility and scale of the technology vendor and connectivity with chosen industry trading
partners.
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Many of our smaller competitors offer solutions that contain fewer features and compete
by pricing their products and services below our prices, which over time may impact our pricing and
profit margins.
In the hardlines and lumber vertical market, we compete primarily with smaller, niche-focused
companies, many of which target specific geographic regions. Some of our competitors in this
vertical market include Spruce Computer Systems, Inc., eCommerce Industries, Inc. (ECi),
Distribution Management Systems Inc. (DMSi), and Progressive Solutions, Inc.
We compete with several other vertically focused software providers in the wholesale distribution
vertical market, including a division of Infor Global Solutions, Inc. and Sage Software. Other
competitors include vertically focused software vendors in the building
material, distribution and manufacturing markets, as well as independent software vendors, software
tool developers and vendors and database vendors in other markets.
In the automotive parts aftermarket, we compete primarily with smaller software and content
companies that operate regionally or in a specific niche of the market and with proprietary systems
developed by or for industry participants. Some of our competitors in this vertical market include
Autologue Computer Systems, Inc., in systems, and WHI Solutions, Inc., in systems and content and
data services. Genuine Parts Company (NAPA) and General Parts, Inc. (GPI) each offer its own
branded solution to its respective company owned and independently affiliated stores.
Several large software companies have made public announcements regarding the attractiveness of
various markets we serve and their intention to expand their focus in these markets, including
Intuit Inc., Microsoft Corporation, Oracle Corporation, The Sage Group plc, and SAP AG. As a
result, we expect competition with these large software companies may increase in the future.
Currently, these large software companies rarely compete directly with us except on larger or
nationally focused opportunities.
Suppliers
We purchase materials, supplies, product components, and products as well as license third-party
software from a large number of vendors, generally all of which are competitively priced and
readily available, however we do rely on single suppliers or a limited number of suppliers for some
of the products included in our business management solutions. For example, Dell Inc. is our single
supplier of industry standard server and workstation hardware used in some of our business
management solutions.
Employees
We have over 1,700 employees as of September 30, 2009. None of our employees are represented by
unions. We have not experienced any labor problems resulting in a work stoppage and believe we
have good relations with our employees.
Joint Venture
We own approximately 46% of the outstanding common stock of Internet Autoparts, Inc., or Internet
Autoparts, a joint venture among us and some of our key customers and other investors, which was
formed in May 2000. Internet Autoparts provides the automotive parts aftermarket with an
Internet-based parts ordering and communications platform linking automotive service providers with
wholesale distributors and other trading partners in the automotive parts aftermarket.
We granted certain non-exclusive, perpetual, non-transferable licenses to Internet Autoparts in
connection with our investment in Internet Autoparts. Internet Autoparts agreed, subject to
certain exceptions, not to compete with us in the businesses in which we are engaged. In addition,
we agreed, subject to certain exceptions, not to compete with Internet Autoparts in the business of
selling new or rebuilt automotive parts over the Internet to professional installers and consumers.
Internet Autoparts utilizes our web-based parts catalog, ePartExpert, and has access to our
Internet communications gateway, AConneX, which provides ready communications among its various
business platforms and third-party management systems. Our AconneX offering is available for
licensing to third-party management systems in addition to Internet Autoparts. The licenses
granted to Internet Autoparts provide for the payment to us of royalties based upon a percentage of
net sales made by Internet Autoparts using the licensed technology. We have no commitment to
invest additional funds in Internet Autoparts, although, we are obligated to provide service and
support for our AConneX offering.
Segment Reporting
See Note 13 under the notes to our consolidated financial statements.
Available
Information
All of
our reports are filed with the Securities and Exchange Commission
(SEC), including annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, and are accessible through the SEC website
(http://www.sec.gov) as soon as reasonably practicable after
we electronically file such material. The public may read and copy
any materials that we file with the SEC at the SECs Public
Reference Room at 100 F Street, NE, Room 1580,
Washington, DC 20549.
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ITEM 1A RISK FACTORS
Any of the following risks could materially and adversely affect our business, financial condition
or results of operations. The risks described below are not the only risks facing us. Additional
risks and uncertainties not currently known to us or those we currently view to be immaterial may
also materially adversely affect our business, financial condition or results of operations.
General economic and market conditions (including tight credit markets) have negatively affected
our customers and our business, and could continue to negatively affect our customers and
materially adversely affect our results of operations and liquidity.
The current economic conditions and tight credit markets have had a significant negative impact on
businesses around the world, including ours. Although we believe that cash provided by operations
and available borrowing capacity under our senior secured credit facility will provide us with
sufficient liquidity through the current credit crisis, the impact of these conditions on our
customers cannot be predicted and may be quite severe, including an inability or unwillingness to
acquire new systems or add-on products or to continue their subscription to our services at their
current level or at all. These and other economic factors, such as consumer demand, unemployment,
inflation levels and the availability of credit could have a material adverse effect on demand for
our products and services and on our financial condition and operating results. We sell our systems
and services to a large number of small and medium sized businesses. These businesses have been and
are more likely to be impacted by unfavorable general economic and market conditions than larger
and better capitalized companies. Furthermore, the businesses of our customers in the hardlines and
lumber vertical market are affected by trends in the new housing and home improvements market, and
our customers in the wholesale distribution vertical market are affected by trends in commercial
construction and industrial production markets, which have been significantly adversely impacted by
the recession and the downturn in the housing industry and may be further harmed in the future by
an increase in interest rates or a further decline in the general economy. Moreover, the economic
recession presents additional risks and uncertainties that could negatively affect our business,
results of operations and financial condition, including the following:
| the demand for our products and services, and information technology
generally, may decline as businesses may postpone, reduce or cancel spending in response to
tighter credit, negative financial news, declines in income or asset values or economic
uncertainty; |
||
| our customers may choose to defer payments or fail to pay amounts
owed to us, even though they may have no contractual right to do so; |
||
| adverse economic conditions may promote consolidation in the
industries in which our customers operate with such customer consolidation leading to
reduced demand for our products and services by particular customers and, more generally,
greater pricing pressure and pressure to renegotiate existing contracts, replacement of our
products in our installed base with competing products, and cancellations and reductions of
previously planned customer purchases; |
||
| we may experience increased pricing competition for our products and
services; |
||
| significant currency fluctuations could negatively affect our
revenues, specifically those derived internationally; |
||
| the counterparty to the interest rate swap applicable to our senior
secured term loan could fail to perform its obligations in accordance with the terms of our
agreement; and |
||
| we may determine that the carrying value of our goodwill or
amortizable intangible assets is not recoverable as a result of a decline in our future cash
flows or slower growth rates in our industry, which could result in a significant impairment
charge to reduce the carrying value of these assets. |
We may be negatively affected by the recent turmoil in U.S. and global capital and credit markets.
We must maintain liquidity to fund our working capital, service our outstanding indebtedness and
finance investment opportunities, such as the acquisitions of Silk Systems, Inc. (Silk Systems)
in May 2007 and Eclipse Distribution Management System business (Eclipse) from Intuit Inc. in
August of 2007. Without sufficient liquidity, we could be forced to curtail our operations or we
may not be able to pursue new business opportunities. The principal sources of our liquidity are
funds generated from operating activities, available cash and cash equivalents, and borrowings
under our senior secured credit facility.
The capital and credit markets have been experiencing extreme volatility and disruption during the
past 18 months. These market conditions have, to a degree, affected our ability to borrow under
our senior secured credit facility. On September 15, 2008, Lehman Brothers Holdings Inc. (Lehman
Brothers) and on November 1, 2009, CIT Group Inc. (CIT), filed petitions under Chapter 11 of the
U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. A
Lehman Brothers subsidiary, Lehman Commercial Paper Inc. (Lehman CPI) and a CIT subsidiary, The
CIT Group/Equipment Financing, Inc. (CIT Financing), are lenders under our senior secured credit agreement, having
provided commitments of $7.0 million and $7.5 million, respectively, under the revolving credit
facility, of which $1.8 million and $1.9 million, respectively, were outstanding as of September
30, 2009. In October of 2009, we
subsequently repaid the $10.0 million remaining outstanding principal balance on the revolving
credit facility. Although we have made
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no request for funding under the revolving credit facility
since the filing of the bankruptcy petitions by Lehman Brothers or CIT, it is uncertain, whether
Lehman CPI or CIT Financing will participate in any future requests for funding or whether another
lender might assume their commitments.
Moreover, the commercial lending market during much of the past 18 months, and particularly since
the Lehman Brothers bankruptcy, has experienced unprecedented levels of contraction, with a limited
number of new loans being originated or refinancings taking place. It is unlikely based on the
current lending environment that we could at this time access significant additional capital in the
credit markets on terms acceptable to us. It is unclear at this point when that situation will
change. Even if the credit markets improve, the availability of financing will depend on a variety
of factors, such as economic and market conditions, the availability of credit and our credit
ratings, as well as the possibility that lenders could develop a negative perception of our company
or the vertical markets that we serve. We may not be able to successfully obtain any necessary
additional financing on favorable terms, or at all.
Our substantial indebtedness could adversely affect our business.
We have a substantial amount of indebtedness totaling $522.9 million as of September 30, 2009. We
have additional borrowing under the senior secured credit facility of $19.1 million or $30.0
million, depending upon whether Lehman CPI or CIT Financing will participate
in any future requests for funding or whether another lender might assume their commitment, as well
as letters of credit of a maximum of $5.0 million.
At September 30, 2009, our total debt consisted of $398.6 million aggregate principal amount
outstanding of term loans due 2013, $114.3 million of 9.5% senior subordinated notes due 2016 and
$10.0 million of borrowings under our revolving credit facility due 2011. In October of 2009, we
subsequently repaid the $10.0 million remaining outstanding principal balance on the revolving
credit facility. Our substantial indebtedness has important consequences, including:
| requiring a substantial portion of cash flow from operations to be dedicated to the
payment of principal and interest on our indebtedness, therefore reducing our ability to
use our cash flow to fund our operations, capital expenditures and future business
opportunities; |
||
| exposing us to the risk of increased interest rates as certain of our borrowings,
including borrowings under our senior secured credit facilities, will be at variable rates
of interest; |
||
| restricting us from making strategic acquisitions or causing us to make non-strategic
divestitures; |
||
| increasing our vulnerability to general adverse economic and industry conditions; |
||
| limiting our ability to obtain additional financing to fund future working capital,
capital expenditures, other general corporate requirements and acquisitions; |
||
| limiting our flexibility in planning for, or reacting to, changes in our business and
the industry; |
||
| placing us at a competitive disadvantage compared to our competitors with less
indebtedness; and |
||
| placing us at risk of failure to comply with our covenants and defaulting on our debt
obligations, thereby leading to an impairment of our liquidity. |
In addition, our senior secured credit agreement and the indenture governing the senior
subordinated notes permit us to incur substantial additional indebtedness in the future. If new
indebtedness were added to our and our subsidiaries current debt levels, the risks described above
would intensify.
We may be unable to service our indebtedness.
Our ability to make scheduled payments on or to refinance our obligations with respect to our
indebtedness depends on our financial and operating performance, which are affected by general
economic, financial, competitive, business and other factors beyond our control. Our business may
not generate sufficient cash flow from operations and future borrowings may not be available to us
under our senior secured credit facility in an amount sufficient to enable us to service our debt
or to fund our other liquidity needs. If we are unable to meet our debt obligations or fund our
other liquidity needs, we may need to restructure or refinance all or a portion of our debt or sell
certain of our assets on or before the maturity of our debt. We may not be able to restructure or
refinance any of our debt on commercially reasonable terms, if at all, which could cause us to
default on our debt obligations and impair our liquidity. Any refinancing of our indebtedness
could be at higher interest rates and may require us to comply with more onerous covenants that
could further restrict our business operations.
Our operations are substantially restricted by the terms of our indebtedness, which could adversely
affect us, and in the event of a default, if not waived or cured, all of our borrowings could
become immediately due and payable.
Our senior secured credit agreement and the indenture governing our senior subordinated notes
contain a number of significant covenants. These covenants limit our ability and the ability of
our restricted subsidiaries to, among other things:
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| incur additional indebtedness and issue additional preferred stock; |
||
| make capital expenditures and other investments; |
||
| merge, consolidate or dispose of our assets or the capital stock or assets of any
restricted subsidiary; |
||
| engage in sale-leaseback transactions; |
||
| pay dividends, make distributions or redeem capital stock; |
||
| materially change our line of business; |
||
| enter into transactions with our affiliates; and |
||
| grant liens on our assets or the assets of our restricted subsidiaries. |
Our senior secured credit agreement requires us to meet certain financial tests, including
covenants that require us to satisfy a maximum total leverage ratio of consolidated total debt to
adjusted EBITDA (consolidated earnings before interest, taxes, depreciation and amortization,
further adjusted to exclude unusual items and other adjustments permitted in calculating covenant
compliance under the indenture governing the senior subordinated notes and our senior secured
credit facilities) and a minimum interest coverage ratio of adjusted EBITDA to consolidated
interest expense, and other financing conditions tests, which become increasingly stringent over
the term of the senior secured credit facility. See Item 7 Managements Discussion and
Analysis of Financial Condition and Results of OperationsCovenant Compliance. Based on our plan
for fiscal year 2010, we currently anticipate that we will be able to meet or exceed these
financial tests and covenants during this period. This expectation is based on our cost and
revenue expectations for fiscal year 2010, which include certain cost cutting initiatives. Should
the current economic conditions cause our business or our vertical markets to deteriorate beyond
our expectations or should our cost cutting initiatives prove insufficient we may not be able to
satisfy these financial tests and covenants.
The failure to comply with any of these covenants or tests would cause a default under our senior
secured credit facilities. A default, if not waived or cured, could result in acceleration of the
outstanding indebtedness under our senior secured credit facilities and our senior subordinated
notes, in which case our debt would become immediately due and payable. In addition, a default or
acceleration of indebtedness under our senior secured credit facilities or our senior subordinated
notes could result in a default or acceleration of other indebtedness we may incur in the future
with cross-default or cross-acceleration provisions. If this occurs, we may not be able to pay our
debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be
available on terms that are acceptable to us, particularly given the current crisis in the debt
market in which the general availability of credit is substantially reduced and the cost of
borrowing is generally higher with more restrictive terms. Furthermore, if we are required to
amend our senior secured credit agreement, we may be required to pay significant amounts to obtain
a waiver or the lenders thereunder may require that interest rates applicable to our loans increase
as a condition to agreeing to any such amendment. Either such event could harm our financial
condition.
In order to help ensure compliance with our covenants under our senior secured credit facilities we
may take additional actions in the future to modify our operations or capital structure, including
implementing additional cost cutting initiatives. In addition, in the event a default of the
financial tests required by our senior secured credit facilities occurs, we may (but no more than
two times in four fiscal quarters) cure the default by raising equity capital from our existing
investors in an amount sufficient to pass, but not to exceed, the financial test. While we believe
that these additional remedies provide us with some additional flexibility in maintaining
compliance with our tests and covenants, they do not assure us that we will not find ourselves in
violation of these tests and covenants. If repayment under our senior secured credit agreement is
accelerated, we cannot assure you that we would have sufficient assets or access to credit to repay
our indebtedness.
If we cannot successfully anticipate or respond to our customers needs and requirements, our
revenues could decline significantly and our operating results could be materially adversely
affected.
The business management solutions industry is characterized by technological advances, adoption of
evolving industry standards in computer hardware and software technology and new product
introductions. Our future success will depend in part on our ability to:
| maintain and enhance our systems and services; |
||
| successfully anticipate or respond to our customers needs and requirements, including
with regard to advancements in user interface, connectivity and ease of use requirements;
and |
||
| develop and market our electronic automotive parts and applications catalog and other
products and services in order to meet changing customer needs. |
We may not be able to effectively respond to the changing technological requirements of the
vertical markets we serve. To the extent we determine that new software and hardware technologies
are required to remain competitive or our customers demand more advanced offerings, the
development, acquisition and implementation of these technologies are likely to require significant
capital investments by us and significant time for development, integration and implementation.
Capital may not be available for these purposes and
investments in technologies may not timely meet market requirements or result in commercially
viable products. In addition, we may
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not be able to maintain our electronic automotive parts and
applications catalog or introduce new versions or releases in a timely manner, and we may not be
able to implement these new versions or releases in a manner that will meet the needs of our
customers and maintain their proprietary nature. In the event we are not able to respond to
changing technological requirements in the vertical markets we serve or our customers needs, our
revenues could decline significantly, and our operating results could be materially adversely
affected.
If we do not develop new relationships and maintain our existing relationships with key customers
and/or well-known market participants, our revenues could decline significantly and our operating
results could be materially adversely affected.
We have developed strategic relationships with many well-known market participants in the hardlines
and lumber, wholesale distribution and automotive parts aftermarket verticals. For example, we are
a preferred and/or a recommended business management solutions provider for the members of the Ace
Hardware Corp., True Value Company and Do it Best Corp. cooperatives and Aftermarket Auto Parts
Alliance, Inc. We believe that our ability to increase revenues depends in part upon maintaining
our existing customer and market relationships, including exclusive, preferred and/or recommended
provider status, and developing new relationships. We may not be able to renew or replace our
existing licensing agreements upon expiration or maintain our market relationships that allow us to
market and sell our products effectively. The loss or diminishment of key relationships, such as
these, in whole or in part, could materially adversely impact our business.
If we experience shortages or delays in the receipt of equipment or hardware necessary to develop
our business management solutions and systems, we may suffer product delays and other material
adverse effects.
We rely on single suppliers or a limited number of suppliers for some of the products and software
licenses included in our business management solutions. For example, Dell Inc. is our single
supplier of industry standard server and workstation hardware used in some of our business
management solutions. In the past, we have experienced production delays when we were unable to
obtain the necessary equipment or hardware. If there is a shortage of, or delay in supplying us
with the necessary equipment or hardware, we would likely experience production and shipment delays
and increased costs of developing our business management solutions and systems. This could result
in a loss of sales, thus reducing our systems revenue and gross margin.
Failure to maintain adequate financial and management processes and controls could lead to errors
in our financial reporting, which could harm our reputation and our business and have a material
adverse affect on our financial condition and results of operations.
Our ability to successfully implement our business plan and comply with regulations, including the
Sarbanes-Oxley Act, requires an effective planning and management process. We are required to
document and test our internal controls over financial reporting so that we can provide reasonable
assurance with respect to our financial reports and prevent fraud. We expect that we will need to
continue to improve existing, and implement new, operational and financial systems, procedures and
controls to manage our business effectively in the future. Any delay in the implementation of, or
disruption in the transition to, new or enhanced systems, procedures and controls, could harm our
ability to accurately forecast sales demand, manage our supply chain and record and report our
financial performance on a timely and accurate basis, which could materially and adversely affect
our results of operations. If our management is unable to annually certify the effectiveness of our
internal controls or if our independent registered public accounting firm cannot render an opinion
on the effectiveness of our internal control over financial reporting at the time our fiscal year
2010 annual report is due and thereafter, or if material weaknesses in our internal controls are
identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could
harm our business and our financial condition and results of operations.
Approximately 67.1% of our total revenues for the year ended September 30, 2009 was derived from
product support, content and supply chain services and other services, which generally are
subscription-based and not governed by long-term contracts, and therefore, if our current customers
do not continue their subscriptions, our revenues could decline significantly and our operating
results could be materially adversely affected.
Our product support and content and supply chain services are typically provided on a subscription
basis, subject to cancellation on 30 to 60 days notice without penalty. Accordingly, our customers
may not continue to subscribe to our services. As we stop actively improving and selling several of
our older systems, we experience reduced rates of customer retention, which has been particularly
evident in the automotive parts aftermarket. These developments have resulted in a decrease in our
automotive segments product support revenues of $3.1 million, or 12.7%, from the year ended
September 30, 2008 as compared to the year ended September 30, 2009. We expect the decreases in
automotive segment product support revenues to continue, although we cannot predict with certainty
the magnitude and timing of future decreases. We believe that the magnitude of these declines may
be exacerbated by the current economic downturn.
Our future success is substantially dependent on the continued service of our key management
personnel and integration of new members of our senior management replacing those members of our
senior management who either left us in 2007 or transferred to new positions within the Company.
If we are unable to integrate our new members of senior management, there could be a negative
effect on our ability to operate our business.
Our success and ability to implement our business strategy, including integrating acquisitions,
depends upon the continued contributions of our management team and others, including our technical
employees. Mr. Paul H. Salsgiver, Jr. joined us as our new
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Executive Vice President and General
Manager, Hardlines and Lumber, on September 8, 2008, replacing Mr. Stephen Bieszczat, who had been
named Senior Vice President of Marketing. In addition, Mr. Kevin V. Roach joined us as our new
Executive Vice President and General Manager, Wholesale Distribution on September 29, 2008,
replacing Mr. Stephen A. McLaughlin, who transferred to the role of Senior Vice President of
Strategic and Lumber Sales and finally, Mr. Iain (Skip) W. Paterson, Jr. joined us as our new
Senior Vice President of Human Resources on May 1, 2008, replacing Ms. Beth Taylor, who passed away
on November 23, 2007. In addition, in fiscal years 2008 and 2007, we have experienced significant
turnover in the roles of chief financial officer, corporate controller and other key positions in
our finance and accounting departments. There is significant competition for such personnel, and
there can be no assurance that we will be able to attract and/or retain suitably qualified
employees. Further changes in management or the loss of the services of our senior management,
particularly Mr. Pervez A. Qureshi, our Chief Executive Officer, could make it more difficult to
successfully operate our business and achieve our business goals. In addition, our future success
also depends on the performance and integration of our new senior management and our ability to
attract and retain qualified personnel. We may be unable retain existing management, attract other
qualified managerial, technical, sales and client support personnel that are critical to our
success, which could result in harm to our customer and employee relationships, loss of key
information, expertise or know-how and unanticipated recruitment and training costs. This turnover
and inability to hire and retain qualified personnel could adversely impact our results of
operations and business.
Our new Activant Eagle and Activant Vision product extensions for the automotive parts aftermarket
are key elements to our strategy to re-establish growth in the automotive segment, and if these
product extensions do not gain market acceptance within that market our future growth and operating
results could be adversely affected.
A component of our business strategy is to re-establish growth in automotive through the
introduction of new systems and services. We have developed a version of our Activant Eagle
product, a Windows-based system that has versions originally targeted at the hardlines and lumber
vertical market, to target the automotive parts aftermarket, and we have introduced the Activant
Vision product, which we acquired in conjunction with our acquisition of The System House, Inc. in
2005. In the event our version of Activant Eagle for the automotive parts aftermarket and our
Activant Vision product do not gain acceptance within that market, our future growth and operating
results could be adversely affected.
The costs and difficulties of integrating current and future acquisitions could impede our future
growth, diminish our competitiveness and materially adversely affect our operations.
In May 2007, we acquired Silk Systems and in August 2007, we acquired Eclipse. These acquisitions
increased the size and geographic scope of our operations. Additionally, we may pursue further
acquisitions as part of our expansion strategy or to augment our sales, including additional
acquisitions that extend our presence outside of North America. We cannot be certain that our
current or future transactions will be successful and will not materially adversely affect the
conduct, operating results or financial results of our business. With respect to any future
acquisitions, we may be unable to identify additional potential acquisition targets, integrate and
manage successfully any acquired businesses or achieve a substantial portion of any anticipated
cost savings or other anticipated benefits from other acquisitions in the timeframe we anticipate,
or at all. In addition, many transactions are subject to closing conditions, which may not be
satisfied, and transactions may not be successfully completed even after their public announcement.
Acquisitions, including, Silk Systems and Eclipse, involve numerous risks, such as difficulties in
the assimilation of the operations, technologies, services and products of the acquired companies,
market acceptance of our integrated product offerings, risks related to potential unknown
liabilities associated with acquired businesses, personnel turnover and the diversion of
managements attention from other business concerns. Acquisitions of foreign businesses involve
numerous additional risks, including difficulty enforcing agreements and collecting receivables
under foreign laws and regulations, unexpected political, legal, trade or economic changes or
instability, more stringent regulatory requirements or rules relating to labor or the environment,
difficulty enforcing our intellectual property rights and increased exposure to foreign exchange
rate fluctuations. We have paid cash or borrowed debt for our recent acquisitions, including Silk
Systems and Eclipse. Any future acquisitions may involve further use of our cash resources, the
issuance of equity or debt securities and/or the incurrence of other forms of debt.
We have recorded a goodwill impairment charge and if our goodwill is further impaired in the
future, we may record additional charges to earnings, which could adversely impact our results of
operations.
Approximately $598.5 million of the purchase price paid in connection with our acquisition in May
2006 by affiliates of Hellman & Friedman LLC and certain other investors was allocated to acquired
goodwill. Approximately $67.9 million of the purchase prices for other acquisition, such as Silk
Systems and Eclipse, were also allocated to acquired goodwill. In addition, in conjunction with the
adoption of authoritative accounting guidance regarding the identification of additional
pre-acquisition income tax liabilities, we recorded a decrease to goodwill of approximately $8.2
million. We also have intangible assets with a net carrying amount of $192.4 million as of
September 30, 2009. Under relevant authoritative guidance, goodwill and other intangible assets
must be assessed for impairment at least annually and potentially more frequently, when conditions
exist or events occur that indicate the value of our goodwill and other intangible assets may be
impaired. As of December 31, 2008, we determined it necessary to evaluate goodwill for impairment
as of an interim date due to the global economic uncertainty and credit crisis and the significant
decrease in the level of overall spending, including spending in the vertical markets that we
serve. We completed the interim impairment analysis for each of our reporting units and concluded
that as of December 31, 2008, the fair value of our Hardlines and Lumber and our Automotive
reporting units was below their respective carrying values, including goodwill. Consequently, we
recorded a goodwill impairment
charge of $107.0 million, comprised of $78.0 million related to Hardlines and Lumber and $29.0
million related to Automotive. During our fiscal year 2009 annual test for impairment, we further
concluded that fair value of our Other reporting unit was below its carrying
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value, including
goodwill. As a result, we recorded a goodwill impairment charge of $7.5 million related to Other
bringing our total goodwill impairment charge for fiscal year 2009 to $114.5 million. For the
purposes of these analyses, our estimates of fair value were based on a combination of the income
approach, which estimates the fair value of our reporting units based on the future discounted cash
flows and the market approach, which estimates the fair value of our reporting units based on
comparable market prices. We will not be required to make any current or future cash payments as a
result of these impairment charges. In addition, a further significant and sustained decline in
our expected future cash flows, a significant adverse change in the economic environment or slower
growth rates could result in the need to perform an additional impairment analysis in future
periods. If we were to conclude that a future write down of our goodwill is necessary, then we
would record the additional charges, which could materially adversely affect our financial position
and results of operations.
We rely on third-party information for our electronic automotive parts and applications catalog,
and we are increasingly facing pressure to present our electronic automotive parts and applications
catalog in a flexible format, each of which could expose us to a variety of risks, including
increased pressure on our pricing.
We are dependent upon third parties to supply information for our electronic automotive parts and
applications catalog. Currently, we obtain most of this information without a contract. In the
future, more third-party suppliers may require us to enter into a license agreement and/or pay a
fee for the use of the information or may make it more generally available to others. We rely on
this third-party information to continually update our catalog. For example, an industry
association is currently developing a data collection format that would make this information more
accessible to consumers and provide it in a more usable format. In addition, as a result of
competitive pressures and technical requirements, we may be required to provide our electronic
automotive parts and applications catalog in a flexible format, which could make it more difficult
for us to maintain control over the way information presented in our catalog is used. Any
significant change in the manner or basis on which we currently receive this information or in
which it is made available to others who are or who could become competitors could have a material
adverse effect on our electronic automotive parts and applications catalog business, which could
have a material adverse effect on our business and results of operations.
If our existing customers who operate systems that we no longer actively sell do not upgrade or
delay upgrading to our current generation of systems or upgrade to a system not sold by us, or if
they opt to operate their systems without continuing their subscription to our services, our
operating results could be materially adversely affected.
Approximately a third of our existing customers currently operate systems that we service and
maintain but do not actively sell. Although we have developed upgrade paths to newer technologies
for substantially all of these older systems, we cannot predict if or when our customers will
upgrade to these newer technologies. If our customers do not upgrade or delay the upgrade cycle, or
if they upgrade to a competitive system, or if they terminate their subscription to our services
(either by operating their systems without any outside services or by securing services from a
supplier other than us), our systems sales and services revenues and operating results could be
materially adversely affected.
We compete with many other technology providers in connection with the sale of our business
management solutions to the retail and wholesale distribution market and our failure to effectively
compete may negatively impact our market share and/or revenue.
The vertical markets we serve are highly fragmented and served by many competitors. In the
vertical markets we serve, we primarily compete against smaller software companies with solutions
for a single vertical market or with proprietary systems developed by or for industry participants.
The key factors influencing customers technology purchase decisions in the vertical markets we
serve include, among others: ability to provide a turnkey business management solution with
vertical specific functionality, depth of vertical expertise, pricing, level of services offered,
credibility and scale of the technology vendor and connectivity with chosen industry trading
partners. Many of our smaller competitors offer solutions that contain fewer features and compete
by pricing their products and services below our prices, which over time may impact our pricing and
profit margins.
In the hardlines and lumber vertical market, we compete primarily with smaller, niche-focused
companies, many of which target specific geographic regions. Some of our competitors in this
vertical market include Spruce Computer Systems, Inc., eCommerce Industries, Inc. (ECi),
Distribution Management Systems Inc. (DMSi), and Progressive Solutions, Inc.
We compete with several other vertically focused software providers in the wholesale distribution
vertical market, including a division of Infor Global Solutions, Inc. and Sage Software. Other
competitors include vertically focused software vendors in the building material, distribution and
manufacturing markets, as well as independent software vendors, software tool developers and
vendors and database vendors in other markets.
In the automotive parts aftermarket, we compete primarily with smaller software and content
companies that operate regionally or in a specific niche of the market and with proprietary systems
developed by or for industry participants. Some of our competitors in this vertical market include
Autologue Computer Systems Inc., in systems, and WHI Solutions, Inc., in systems and content and
data services. Genuine Parts Company (NAPA) and General Parts, Inc. (GPI) each offer its own
branded solution to its respective company owned and independently affiliated stores.
Several large software companies have made public announcements regarding the attractiveness of
various markets we serve and their intention to expand their focus in these markets, including
Intuit Inc., Microsoft Corporation, Oracle Corporation, The Sage
Group plc,
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and SAP AG. As a
result, we expect competition with these large software companies may increase in the future.
Currently, these large software companies rarely compete directly with us except on larger or
nationally focused transactions.
Our present and future competitors may have greater financial and other resources than we do and
may develop better solutions than those offered by us. If increased spending is required to
maintain market share or a rapid technological change in the industry occurs, we may encounter
additional competitive pressures, which could materially adversely affect our market share and/or
profit margin.
Because of the varying sales cycles applicable to our systems sales, our quarterly systems revenues
and other operating results can be difficult to predict and may fluctuate substantially.
Although our systems revenues increased annually from approximately 31.0% of our total revenues for
fiscal year 2003 to approximately 40.6% of our total revenues for fiscal year 2008, as a result of
the general economic slow-down we did see a decrease in our systems revenues as a percentage of our
total revenues to approximately 32.9% for fiscal year 2009 compared to the prior year. We expect
our systems revenues to continue to represent a material percentage of our total revenues and to
fluctuate from quarter to quarter. The sales cycle for our systems generally ranges from 90 days
to 12 months, and it may be difficult to predict when a sale will close, if at all. It is therefore
difficult to predict the quarter, if any, in which a particular sale will occur and to plan our
expenditures accordingly.
Because of quarterly fluctuations, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. The delay or failure to complete systems sales in a
particular quarter would reduce our revenues in that quarter and until any such sale is made, and
increase revenues in any subsequent quarters over which revenues for any such sale would likely be
recognized.
Our customer base may shrink due to a number of factors, including future consolidation among our
customers and other businesses, attrition caused by customers exiting the markets in which we
operate, migration to a competitors products and services, or reductions in the level of support
services subscribed by our customers in response to a downturn in economic and market conditions.
This shrinkage may reduce our revenues, which would negatively impact our financial performance.
In addition, we may not be successful in our strategy to expand the marketing of our systems to new
retail and wholesale subvertical markets, such as pharmacies, which would negatively impact our
financial performance.
The markets we serve are highly fragmented. These markets have in the past and are expected to
continue to experience consolidation. For example, the hardlines and lumber vertical market has
experienced consolidation as retail hardware stores and lumber and building materials dealers try
to compete with mass merchandisers such as The Home Depot, Inc., Lowes Home Centers, Inc. and
Menard, Inc. Our customers may be acquired by companies with their own proprietary business
management systems or by companies that utilize a competitors system, or our customers may be
forced to shut down due to this competition. We may lose these customers as a result of this
consolidation.
We may also lose customers if customers exit the markets in which we operate or migrate to a
competitors products and services. For example, if original equipment manufacturers successfully
increase sales into the automotive parts aftermarket, our customers in this vertical market may
lose revenues, which could adversely affect their ability to purchase and maintain our solutions or
stay in business. In addition, the recent economic downturn has caused customers to exit the
market altogether. There may be insufficient new customers entering the market to replace the
business of exiting customers. Finally, our revenue may also contract if customers reduce the
level of support services subscribed in response to a downturn in economic and market conditions.
For example, as customers, such as large lumber yards and distributors, reduce their employee base,
they may reduce the number of users for which they subscribe for support.
We have begun to market our systems to new retail, such as pharmacies, and wholesale subvertical
markets. Although we have seen encouraging indications of acceptability of our Eagle system in the
pharmacy subvertical, there can be no assurance that those early indications will develop into
widespread acceptance, that we will be able to successfully compete against incumbent suppliers, or
that we will successfully develop industry association relationships which will help lead to
penetration of this new subvertical. If we are unable to expand into new subvertical markets, such
as pharmacies, our financial performance may be negatively impacted.
If we fail to adequately protect our proprietary rights and intellectual property, we may incur
unanticipated costs and our competitive position may suffer.
Our success and ability to compete effectively depend in part on our proprietary technology. We
have approximately 268 registered copyrights, 69 registered trademarks and 6 issued patents in the
United States. We attempt to protect our proprietary technology through the use of trademarks,
patents, copyrights, trade secrets and confidentiality agreements. Legal protections for
information products may be limited and technical means may not be available to protect against
unauthorized use, access, display, reproduction or distribution. We may not be able to adequately
protect our technology and competitors may develop similar technology independently.
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If we become subject to adverse claims alleging infringement of third-party proprietary rights, we
may incur unanticipated costs and our competitive position may suffer.
We are subject to the risk that we are infringing on the proprietary rights of third parties.
Although we are not aware of any infringement by our technology on the proprietary rights of others
and are not currently subject to any legal proceedings involving claimed infringements by our
products, we may be subject to such third-party claims, litigation or indemnity demands and these
claims may be successful. If a claim or indemnity demand were to be brought against us, it could
result in costly litigation or product shipment delays or force us to stop selling such product or
providing such services or to enter into royalty or license agreements that may require substantial
royalty or licensing payments. There can be no assurance we would be able to enter into these
agreements on commercially acceptable terms or at all.
Our software and information services could contain design defects or errors that could affect our
reputation, result in significant costs to us and impair our ability to sell our products.
Our software and information services are highly complex and sophisticated and could from time to
time contain design defects or errors. Additionally, third-party information supplied to us for
inclusion in our electronic automotive parts and applications catalog may not be complete, accurate
or timely. These defects or errors may delay the release or shipment of our products or, if the
defect or error is discovered only after customers have received the products, these defects or
errors could result in increased costs, litigation, customer attrition, reduced market acceptance
of our systems and services or damage to our reputation.
If we fail to obtain software and information we license from third parties on acceptable terms, we
may experience product delays and disruptions that could materially and adversely affect our
business and results of operations.
We license and use software and information from third parties in our business. These third-party
software and information licenses may not continue to be available to us on acceptable terms. In
addition, these third parties may from time to time receive claims that they have infringed the
intellectual property rights of others, including patent and copyright infringement claims, which
may affect our ability to continue licensing their software or information. We have products that
are dependent on third-party software products (such as the IBM U2 and Progress Software
databases). Some of our products are also dependent on third-party information licenses. For
example, we currently obtain labor-related information from Mitchell Repair Information Company,
LLC. When the term of that agreement ends, we may not be successful in renewing the agreement on
acceptable terms or obtaining comparable labor-related information from an alternative source. Our
inability to use any of this third-party software and information could result in shipment delays
or other disruptions in our business, which could materially and adversely affect our operating
results.
Interruptions in our connectivity applications and our systems could disrupt the services that we
provide and materially adversely affect our business and results of operations.
Certain of our customers depend on the efficient and uninterrupted operation of our software
connectivity applications, such as AConneX and our web hosting services. In addition, our
businesses are highly dependent on our ability to communicate with our customers in providing
services and to process, on a daily basis, a large number of transactions. We rely heavily on our
telecommunications and information technology infrastructure, as well as payroll, financial,
accounting and other data processing systems. These applications and systems are vulnerable to
damage or interruption from a variety of sources, including natural disasters, telecommunications
failures and electricity brownouts or blackouts. If any of these systems fail to operate properly
or become disabled, we could suffer financial loss, a disruption of our businesses, or damage to
our reputation. Our insurance policies may not adequately compensate us for any losses that may
occur due to any failures in our connectivity applications or in these services. We have certain
recovery plans in place to protect our businesses against natural disasters, security breaches,
power or communications failures or similar events. At the same time, we have concluded it is not
cost effective at this time to maintain any secondary off-site systems to replicate our
connectivity applications, and we do not maintain and are not contractually required to maintain a
formal disaster recovery plan with respect to these applications. Despite our preparations, in the
event of a catastrophic occurrence, our disaster recovery plans may not be successful in preventing
loss of customer data, service interruptions, disruptions to our operations or ability to
communicate with our customers, or damage to our important locations. A loss or damage to our data
center, telecommunications or information technology infrastructure, or our connectivity
applications, could result in damage to our reputation and lost revenues due to service
interruptions and adverse customer reactions.
In the event of a failure in a customers computer system installed by us, a claim for damages may
be made against us regardless of our responsibility for the failure, which could expose us to
liability.
We provide business management solutions that we believe are critical to the operations of our
customers businesses and provide benefits that may be difficult to quantify. Any failure of a
customers system installed by us could result in a claim for substantial damages against us,
regardless of our responsibility for the failure. Although we attempt to limit our contractual
liability for damages resulting from negligent acts, errors, mistakes or omissions in rendering our
services, the limitations on liability we include in our agreements may not be enforceable in all
cases, and those limitations on liability may not otherwise protect us from liability for damages.
Furthermore, our insurance coverage may not be adequate and that coverage may not remain available
at acceptable costs. Successful claims brought against us in excess of our insurance coverage could
seriously harm our business, prospects, financial condition and results of operations. Even if not
successful, large claims against us could result in significant legal and other costs and may be a
distraction to our senior management.
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Fluctuations in the value of foreign currencies could result in currency transaction losses.
Generally, our international business is conducted in foreign currencies, principally the British
pound, the Euro and the Canadian dollar. Fluctuations in the value of foreign currencies relative
to the U.S. dollar will continue to cause currency transaction gains and losses. We cannot predict
the effect of exchange rate fluctuations upon future operating results. We may experience currency
losses in the future. We monitor our foreign currency exposure and, from time to time, may attempt
to reduce our exposure through hedging. At September 30, 2009, we had no foreign currency contracts
outstanding.
Natural disasters, terrorist attacks or other catastrophic events could harm our operations and
adversely affect our future operating results.
Our operations could be subject to natural disasters and other business disruptions, which could
harm our future revenue and financial condition and increase our costs and expenses. For example,
our corporate headquarters are located near major earthquake fault lines. In the event that an
earthquake, terrorist attack or other natural or manmade catastrophe were to destroy any part of
our facilities, destroy or disrupt vital infrastructure systems or interrupt our operations for any
extended period of time, our business, financial condition and operating results would be
materially adversely affected.
The interests of our controlling stockholders, may differ from the interests of our other security
holders.
We are a wholly-owned subsidiary of Activant Group. Affiliates of Hellman & Freidman, Thoma Cressey
and JMI Equity, which we refer to as the sponsors, beneficially own, in the aggregate, over 99%
of Activant Groups common stock and an affiliate of Hellman & Friedman beneficially owns the only
authorized share of Activant Groups Series A preferred stock. In addition, a stockholders
agreement entered into by Activant Group, us and the sponsors prior to the mergers provides
affiliates of Hellman & Friedman with the right to vote the shares of Activant Group common stock
held by the other sponsors under certain circumstances. As a result of this ownership of common
stock and the share of Series A preferred stock and the terms of the stockholders agreement, these
affiliates of Hellman & Friedman are entitled to elect directors with majority voting power with
respect to the Activant Group board of directors, to appoint new management and to approve most
actions requiring the approval of the holders of outstanding Activant Group voting shares as a
single class, including adopting most amendments to the Activant Group certificate of incorporation
and approving mergers or sales of all or substantially all of our assets. These affiliates of
Hellman & Friedman, through their control of Activant Group, control us and all of our subsidiaries
that are guarantors of our senior subordinated notes.
The interests of the sponsors may differ from our other security holders in material respects. For
example, if we encounter financial difficulties or are unable to pay our debts as they mature, the
interests of the sponsors and their affiliates, as equity holders of Activant Group, might conflict
with the interests of the holders of our senior subordinated notes. The sponsors and their
affiliates may also have an interest in pursuing acquisitions, divestitures, financings or other
transactions that, in their judgment, could enhance their equity investments, even though such
transactions might involve risks to the holders of our senior subordinated notes, including the
incurrence of additional indebtedness. Additionally, the indenture governing the senior
subordinated notes permits us to pay fees, dividends or make other restricted payments under
certain circumstances, and the sponsors may have an interest in our doing so.
The sponsors and their affiliates are in the business of making investments in companies and may,
from time to time in the future, acquire interests in businesses that directly or indirectly
compete with certain portions of our business or are suppliers or customers of ours. You should
consider that the interests of the sponsors may differ from yours in material respects. See Item
12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters and Item 13 Certain Relationships and Related Transactions, and Director
Independence.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
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ITEM 2 PROPERTIES
As of
December 14, 2009, we leased a total of approximately 440,000 square feet of office and
distribution space, approximately 400,000 square feet of which is located in the U.S., with the
remainder in Canada, Ireland and the United Kingdom. Our principal executive offices are located
at 7683 Southfront Road, Livermore, CA 94551. We consider our properties suitable for their
present and intended purposes and adequate for our current level of operations.
As of
December 14, 2009, our facilities consisted of the principal properties listed in the table
below:
Approx. | ||||||||||
Size | Lease | |||||||||
Location | (Sq. ft.)(1) | Description of Use | Termination | |||||||
Livermore, California | 86,300 | Principal and management offices; product
support; software development; data entry;
sales; administrative |
2012 | |||||||
Austin, Texas | 76,300 | Management offices; product support;
software development; data entry; sales;
administrative |
2015 | |||||||
Yardley, Pennsylvania | 65,000 | Management offices; product support;
software development; sales;
administrative |
2012 | |||||||
Westminster, Colorado | 41,600 | Management offices; product support;
software development; sales;
administrative |
2011 | |||||||
Austin, Texas | 23,300 | Systems integration and distribution |
2013 | |||||||
Hyannis, Massachusetts | 20,400 | Systems integration and distribution;
product support |
2011 | |||||||
Greenville, South Carolina | 19,400 | Product support; software development;
sales; administrative |
2012 | |||||||
Montreal, Quebec | 14,800 | Management offices; product support;
software development; sales; administrative |
2010 | |||||||
Plano, Texas | 13,300 | Product support; sales; software development |
2012 | |||||||
London, Ontario | 12,000 | Product support; software development;
sales; administrative |
2014 | |||||||
Austin, Texas | 9,300 | Data center |
2013 |
(1) | This includes all leased properties in excess of 9,000 square feet that are actively used in
our operations. Locations of smaller square footage or that have been exited prior to lease
termination are not listed; however, they are included in the total square footage of 440,000. |
ITEM 3 LEGAL PROCEEDINGS
We are a party to various legal proceedings and administrative actions, all of which are of an
ordinary or routine nature incidental to our operations. We do not believe that such proceedings
and actions will, individually or in the aggregate, have a material adverse effect on our results
of operations, financial condition or cash flows.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
There is no established public trading market for any class of our common stock. All of our common
stock is held by Activant Group. We have not declared or paid any cash dividends since fiscal year
2003 and do not currently have plans to do so in the foreseeable future. Our ability to pay any
dividends in the future is limited by the terms of our senior secured credit agreement and the
indenture governing our 9.5% senior subordinated notes due 2016. See Item 1A Risk Factors and
Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations.
Equity Compensation Plan Information
The following table provides certain information as of September 30, 2009, with respect to Activant
Groups equity compensation plans in effect on that date under which shares of Activant Groups
common stock are authorized for issuance.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (A) |
Weighted-average exercise price of outstanding options, warrants and rights (B) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A)) (C) |
|||||||||
Equity compensation plans approved by stockholders |
8,102,407 | (1) | $ | 4.28 | 147,855 | |||||||
Equity compensation plans not approved by stockholders (2) |
| | |
(1) | Includes shares of Activant Groups common stock to be issued upon the exercise of options
granted under the Activant Group Inc. 2006 Stock Incentive Plan and 333,334 shares of Activant
Groups common stock to be issued upon the exercise of certain rollover options granted to Mr.
Pervez A. Qureshi in connection with the mergers. |
|
(2) | As of September 30, 2009, we did not have any equity compensation plans that were not approved
by Activant Groups or our stockholders. |
Purchases of Equity Securities of the Issuer and Affiliated Purchasers
Neither we nor any affiliated purchaser repurchased any of our equity securities in the fourth
quarter of fiscal year 2009.
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ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth our selected financial data for the years ended September 30, 2009,
2008 and 2007, the periods from October 1, 2005 to May 2, 2006 and May 2, 2006 to September 30,
2006 and the year ended September 30, 2005. The balance sheet data as of September 30, 2009 and
2008, and the statement of operations data for the years ended September 30, 2009, 2008 and 2007
set forth below are derived from the audited consolidated financial statements of Activant
Solutions Inc. included elsewhere herein. The balance sheet data as of September 30, 2007 and 2006,
and the statement of operations data for the period of May 2, 2006 to September 30, 2006 are
derived from the audited consolidated financial statements of Activant Solutions Inc. from prior
years. The balance sheet data as of September 30, 2005 and the statement of operations data for
the period from October 1, 2005 to May 2, 2006, and the year ended September 30, 2005 set forth
below are derived from the audited consolidated financial statements of Activant Solutions Holdings
Inc. (the Predecessor Company) that are not included herein. The selected financial data below
should be read in conjunction with the section titled Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations, and the audited consolidated financial
statements included elsewhere herein.
Our and our Predecessor Companys results of operations include the results of Speedware
Corporation Inc. commencing after the consummation of the Speedware Corporation Inc. acquisition on
March 30, 2005 and the results of Prophet 21, Inc. commencing after the consummation of the Prophet
21, Inc. acquisition on September 13, 2005. Our results of operations include the results of Silk
Systems commencing after the consummation of the Silk Systems acquisition on May 31, 2007, and the
results of Eclipse commencing after the consummation of the Eclipse acquisition on August 17, 2007.
Accordingly, the results of operations are not directly comparable to periods prior to the
acquisitions (in thousands).
Activant Solutions Inc. | Predecessor Company | ||||||||||||||||||||||||
Year Ended September 30, 2009 |
Year Ended September 30, 2008 |
Year Ended September 30, 2007 |
Period from May 2, 2006 to September 30, 2006 |
Period from October 1, 2005 to May 2, 2006 |
Year Ended September 30, 2005 |
||||||||||||||||||||
Statements of Operations Data: |
|||||||||||||||||||||||||
Revenues |
$ | 378,943 | $ | 426,369 | $ | 409,122 | $ | 164,190 | $ | 225,215 | $ | 265,991 | |||||||||||||
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) |
152,654 | 187,610 | 183,111 | 73,906 | 98,573 | 120,053 | |||||||||||||||||||
Gross profit |
226,289 | 238,759 | 226,011 | 90,284 | 126,642 | 145,938 | |||||||||||||||||||
Operating expenses: |
|||||||||||||||||||||||||
Sales and marketing |
55,540 | 64,039 | 64,473 | 24,828 | 31,276 | 38,076 | |||||||||||||||||||
Product development |
38,553 | 44,258 | 40,652 | 16,987 | 23,297 | 21,379 | |||||||||||||||||||
General and administrative |
24,275 | 31,517 | 27,732 | 10,590 | 16,976 | 26,141 | |||||||||||||||||||
Depreciation and amortization |
38,917 | 37,254 | 29,735 | 11,773 | 15,511 | 16,114 | |||||||||||||||||||
Impairment of goodwill |
114,500 | | | | | | |||||||||||||||||||
Acquisition related costs |
260 | 1,056 | 531 | 194 | 32,291 | | |||||||||||||||||||
Restructuring costs |
4,516 | 2,272 | 1,109 | 802 | 116 | | |||||||||||||||||||
Total operating expenses |
276,561 | 180,396 | 164,232 | 65,174 | 119,467 | 101,710 | |||||||||||||||||||
Operating income (loss) |
(50,272 | ) | 58,363 | 61,779 | 25,110 | 7,175 | 44,228 | ||||||||||||||||||
Interest expense |
(40,977 | ) | (51,196 | ) | (48,398 | ) | (20,340 | ) | (33,000 | ) | (25,728 | ) | |||||||||||||
Write-off of prior deferred financing
costs |
| | | | (15,994 | ) | | ||||||||||||||||||
Premium on debt repurchase |
| | | | (26,671 | ) | | ||||||||||||||||||
Gain on retirement of debt |
18,958 | | | | | | |||||||||||||||||||
Other income (loss), net |
(994 | ) | 1,258 | 1,529 | 335 | 733 | 428 | ||||||||||||||||||
Income (loss) before income taxes |
(73,285 | ) | 8,425 | 14,910 | 5,105 | (67,757 | ) | 18,928 | |||||||||||||||||
Income tax expense (benefit) |
18,750 | 4,804 | 9,987 | 2,025 | (22,553 | ) | 5,645 | ||||||||||||||||||
Net income (loss) |
$ | (92,035 | ) | $ | 3,621 | $ | 4,923 | $ | 3,080 | $ | (45,204 | ) | $ | 13,283 | |||||||||||
Balance Sheet Data (at end of period): |
|||||||||||||||||||||||||
Cash and cash equivalents |
$ | 44,573 | $ | 64,789 | $ | 33,379 | $ | 36,383 | $ | 10,952 | |||||||||||||||
Working capital |
2,260 | 42,245 | 30,443 | 30,731 | (3,752 | ) | |||||||||||||||||||
Total assets |
848,084 | 1,031,284 | 1,053,481 | 967,686 | 569,437 | ||||||||||||||||||||
Total debt, including current maturities |
522,895 | 617,112 | 632,863 | 565,050 | 455,477 | ||||||||||||||||||||
Stockholders equity (deficit) |
166,530 | 259,316 | 256,194 | 247,673 | (5,674 | ) |
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ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations and financial condition should
be read in conjunction with our consolidated financial statements and related notes included
herein. This discussion contains forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of a variety of factors, including those set forth under
Risk Factors.
In this report, the terms the Company, we, us and our refer to Activant Solutions Inc. and
its consolidated subsidiaries unless specifically stated otherwise.
Overview
We are a leading provider of business management solutions to wholesale and retail distribution
businesses. With over 35 years of operating history, we have developed substantial expertise in
serving businesses with complex distribution and retail requirements in three primary vertical
markets: hardlines and lumber, wholesale distribution and the automotive parts aftermarket. For
reporting purposes, we consider each of these vertical markets separate segments. The segments are
determined in accordance with how our management views and evaluates our business and based on the
criteria as outlined in the authoritative guidance that addresses accounting for segments. See
Note 13 to our consolidated financial statements for additional information.
Because these segments reflect the manner in which our management reviews our business, they
necessarily involve judgments that our management believes are reasonable in light of the
circumstances under which they are made. These judgments may change over time or may be modified to
reflect new facts or circumstances. Segments may also be changed or modified to reflect
technologies and applications that are newly created, or that change over time, or other business
conditions that evolve, each of which may result in reassessing specific segments and the elements
included within each of those segments. Recent events, including changes in our senior management,
may affect the manner in which we present segments in the future.
In the opinion of our management, this discussion and analysis of our financial condition and
results of operations reflects all adjustments, consisting only of normal recurring adjustments,
which are necessary for a fair presentation of the results for the periods presented.
The key components of our results of operations are as follows:
Revenues
Our revenues are primarily derived from customers that operate in three vertical markets
hardlines and lumber, wholesale distribution, and automotive parts aftermarket. We also derive
revenue from our productivity tools business, which we include in Other.
| The hardlines and lumber vertical consists of independent hardware retailers; home
improvement centers; paint, glass and wallpaper stores; farm supply stores; retail
nurseries and garden centers; independent lumber and building material dealers; pharmacies;
and other specialty retailers, primarily in the United States. For the year ended
September 30, 2009, we generated approximately 36.2% of our total revenues from the
hardlines and lumber vertical market. |
||
| The wholesale distribution vertical consists of distributors of a range of products
including electrical supply; plumbing; medical supply; heating and air conditioning; tile;
industrial machinery and equipment; industrial supplies; fluid power; janitorial and
sanitation products; paper and packaging; and service establishment equipment vendors,
primarily in the United States. For the year ended September 30, 2009, we generated
approximately 41.4% of our total revenues from the wholesale distribution vertical market. |
||
| The automotive parts aftermarket vertical consists of customers involved in the
manufacture, distribution, sale and installation of new and remanufactured parts used in
the maintenance and repair of automobiles and light trucks, and includes manufacturers,
warehouse distributors, parts stores, professional installers in North America, the United
Kingdom and Ireland, as well as several chains in North America. For the year ended
September 30, 2009, we generated approximately 19.8% of our total revenues from the
automotive parts aftermarket vertical. |
||
| Other primarily consists of our productivity tools business, which is involved with
software migration services and application development tools. For the year ended
September 30, 2009, we generated approximately 2.6% of our total revenues from other. |
Using a combination of proprietary software and extensive expertise in these vertical markets, we
provide complete business management solutions consisting of tailored systems, product support, and
content and supply chain services designed to meet the unique requirements of our customers. Our
fully integrated systems and services include point-of-sale, inventory management, general
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accounting and enhanced data management that enable our customers to manage their day-to-day
operations. Our revenues are derived from the following business management solutions:
| Systems, which is comprised primarily of proprietary software applications; professional
services; training; forms and paper products; and third-party software, hardware and
peripherals. |
||
| Services, which is comprised primarily of product support and content and supply chain
services. Product support services are comprised of customer support activities, including
hardware, software and network support through our help desk, software updates, preventive
and remedial on-site maintenance and depot repair services. Our content services are
comprised of proprietary database and data management products such as our comprehensive
electronic automotive parts and applications catalog and point-of-sale business analysis
data. Supply chain services are comprised of connectivity services, e-commerce, networking
and security monitoring management solutions. We generally provide our services on a
subscription basis, and accordingly, revenues are generally recurring in nature. |
Cost of Revenues
Our cost of revenues and gross margins are derived from systems and services as follows:
| Cost of systems revenues and systems gross margins Cost of systems revenues consists
primarily of direct costs of software duplication, our logistics organization, cost of
hardware where applicable, salary costs of professional services and installation
personnel, royalty payments, and allocated overhead expenses. |
||
| Cost of services revenues and services gross margins Cost of services revenues
primarily consist of material and direct labor associated with our help desk, material,
labor and production costs associated with our automotive catalog and allocated overhead
expenses. Generally, our services revenues have a higher gross margin than our systems
revenues. |
We allocate overhead expenses including facilities and information technology costs to all
departments based on headcount. As such, general overhead expenses are included in costs of
revenues and each operating expense category.
Operating Expenses
Our operating expenses consist primarily of sales and marketing, product development, and general
and administrative expenses as well as non-cash expenses including depreciation and amortization
and goodwill impairment charges.
| Sales and marketing Sales and marketing expense consists primarily of salaries and
commissions for our sales force, stock-based compensation expense, marketing expenses and
allocated overhead expenses. Our marketing approach is to develop strategic relationships,
as well as endorsement and alliance agreements, with many of the well-known market
participants in the vertical markets that we serve. The goal of these programs is to
enhance the productivity of our sales teams and to create leveraged selling opportunities
for system sales and content and supply chain offerings. |
||
| Product development Product development expense consists primarily of salaries,
stock-based compensation expense, outside services and allocated overhead expenses. Our
product development strategy includes development of additional functionality for our
existing products as well as developing new products for our existing customer base and
prospective new customers. |
||
| General and administrative General and administrative expense primarily consists of
salaries and bonuses, stock-based compensation expense, telecommunication costs, facility
costs and information technology allocations, finance, human resource and legal services. |
||
| Depreciation and amortization Depreciation and amortization expense consists of
depreciation of our fixed assets and amortization of our intangible assets. Depreciation
and amortization are not allocated to our segments. |
||
| Impairment of Goodwill We account for goodwill and other intangibles in accordance
with the relevant authoritative principles. Business acquisitions typically result in
goodwill and other intangible assets, and the recorded values of those assets may become
impaired. The determination of the value of these intangible assets requires management to
make estimates and assumptions that affect our consolidated financial statements. Goodwill
and other intangibles are tested for impairment on an annual basis as of July 1, and
between annual tests if indicators of potential impairment exist, using a fair-value-based
approach. |
||
| Acquisition related costs Acquisition related costs primarily consist of consulting
fees and other professional services incurred in connection with systems integration
activities related to prior acquisitions. Included in the 2006 periods, however, is
approximately $32.5 million in transaction fees and other expenses incurred at the time of
the mergers. |
||
| Restructuring costs Restructuring costs relate to management approved restructuring
actions to eliminate certain employee |
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positions and to consolidate certain excess facilities with the intent to streamline and
focus our operations and more properly align our cost structure with our projected revenue
streams. |
Non-Operating Expenses
Our
non-operating expenses consist of the following:
| Interest expense Interest expense represents interest on our outstanding debt as a
result of our merger and prior acquisitions. |
||
| Gain on retirement of debt Our gain on retirement of debt represents the gain in
connection with the debt we have repurchased, net of any related deferred financing fees to
be written off as well as any related transaction fees. Subject to the restrictions and
limitations set forth under the senior secured credit agreement and the indenture governing
the senior subordinated notes, we and our subsidiaries, affiliates or significant
stockholders may from time to time purchase, repay, redeem or retire additional amounts of
our outstanding debt, in privately negotiated or open market transactions, by tender offer
or otherwise. |
||
| Other income (expense), net Other income (expense), net primarily consists of interest income, foreign currency gains or losses and gains or losses on marketable securities. | ||
| Income tax expense
Income tax expense is based on state,
federal and foreign taxable income determined in accordance with current enacted laws and
tax rates. |
General Business Conditions and Trends
The global and U.S. economic environment continues to remain weak. This weakness, coupled with
high unemployment and diminished credit quality, has impacted our performance in the vertical
markets we serve, and we expect it will likely affect our performance for fiscal 2010 and
potentially beyond. While there have been recent signs that the global economic environment rate
of decline has slowed down or even reversed, there continue to be mixed signals in the broader
macro-economic environment, our business, the industries we serve, and the industries our customers
serve.
Our overall revenue continued to decline in fiscal year 2009 primarily due to lower systems
revenue. Systems revenue declined 28.1% during fiscal year 2009 compared to a 4.5% decline in the
prior year as we saw lower demand due to overall economic uncertainty. With this economic
uncertainty, we saw customer caution in making capital expenditure decisions. This customer
caution resulted in longer selling cycles and in many instances no decision by the customer. While
we have recently seen the length of selling cycles improve, we also see our customer base
challenged with, among other things, lack of access to adequate credit and higher attrition due to
bankruptcies, business shutdowns and consolidation. We saw the macro economic weakness first
impact our hardlines and lumber vertical, which is now showing early signs of improving. Our
wholesale distribution vertical has experienced a lagging decline, with a 23.8% decrease in systems
revenue in fiscal year 2009 as customers in this vertical react to the impact of the slowdown in
commercial real estate, construction and other sectors. Finally, our automotive parts aftermarket
vertical has also experienced significant declines in fiscal year 2009 with a 32.1% increase in
systems revenues from the prior year. At the same time, we are seeing several larger strategic
transactions across our verticals, as certain larger players begin to invest in their businesses to
enhance their efficiencies and in anticipation of an economic recovery.
We have proactively addressed our cost model as we faced these marketplace and revenue
uncertainties. During the past two fiscal years our management approved restructuring actions
primarily related to eliminating certain employee positions and consolidating certain excess
facilities. We recorded approximately $6.8 million of restructuring charges related to these
actions during the years ended September 30, 2009 and 2008. We also benefited from our intense
focus on managing our discretionary expenses. In addition to the aforementioned restructuring
actions, we have reduced operating expenses; primarily commissions, discretionary travel expenses,
and certain benefits.
Demand for our systems and support offerings are correlated with the economic conditions in each
vertical market and the global macroeconomic conditions. We will continue to focus on executing in
the areas we can control by continuing to provide high value products and services while managing
our expenses. Despite the challenging economic environment and corresponding reduction in revenue,
cash provided by operating activities increased for the year ended September 30, 2009 in comparison
to the prior fiscal year. We continue to use excess cash to pay down our outstanding debt
obligations. We made principal payments and repurchases of approximately $94.2 million in face
value of our debt during the year ended September 30, 2009.
If the macroeconomic environment continues to be weak, however, it will likely continue to have a
negative effect on our revenue and may have a negative effect on our operating margin growth rate.
If this were to occur it may impact our ability to meet certain financial tests under our senior
secured credit agreement and the indenture governing our senior subordinated notes. Based on our
plan for fiscal year 2010, we currently anticipate that we will be able to meet or exceed these
financial tests and covenants during this period.
Acquisitions
Eclipse Distribution Management Solutions. In August 2007, we purchased substantially all of the
assets of Eclipse Distribution Management Solutions (Eclipse) for cash consideration of
approximately $101.3 million. Eclipse is a leading enterprise software
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provider to the wholesale distribution segment and this acquisition strengthens our position with
larger wholesale distribution businesses in the electrical and plumbing sub-verticals.
Silk Systems, Inc. In May 2007, we acquired the common stock of Silk Systems, Inc. (Silk
Systems) for a total purchase price of $6.9 million, net of $0.7 million cash received. Silk
Systems is one of the leading computer software solutions providers for the Canadian home
improvement, wholesale distribution and building materials industries. This acquisition expands
our presence and commitment to the Canadian market while building on current technology and service
offerings for customers across North America.
Historical Results of Operations
Year Ended September 30, 2009 Compared to Year Ended September 30, 2008
Total revenues
Our Hardlines and Lumber, Wholesale Distribution and Automotive segments accounted for
approximately 36.2%, 41.4% and 19.8%, respectively, of our revenues during the year ended September
30, 2009. This compares to the year ended September 30, 2008, where our Hardlines and Lumber,
Wholesale Distribution and Automotive segments accounted for approximately 35.2%, 39.7% and 20.3%,
respectively, of our revenues. See Note 13 to our consolidated financial statements for further
information on our segments, including a summary of our segment revenues and contribution margin.
The following table sets forth, for the periods indicated, our segment revenues by business
management solution and the variance thereof (in thousands):
Year Ended September 30, | ||||||||||||||||
2009 | 2008 | Variance $ | Variance % | |||||||||||||
Hardlines and Lumber revenues: |
||||||||||||||||
Systems |
$ | 54,106 | $ | 69,671 | $ | (15,565 | ) | (22.3 | )% | |||||||
Services |
82,984 | 80,342 | 2,642 | 3.3 | ||||||||||||
Total Hardlines and Lumber revenues |
$ | 137,090 | $ | 150,013 | $ | (12,923 | ) | (8.6 | )% | |||||||
Wholesale Distribution revenues: |
||||||||||||||||
Systems |
$ | 56,342 | $ | 73,897 | $ | (17,555 | ) | (23.8 | )% | |||||||
Services |
100,452 | 95,414 | 5,038 | 5.3 | ||||||||||||
Total Wholesale Distribution revenues |
$ | 156,794 | $ | 169,311 | $ | (12,517 | ) | (7.4 | )% | |||||||
Automotive revenues: |
||||||||||||||||
Systems |
$ | 10,241 | $ | 15,084 | $ | (4,843 | ) | (32.1 | )% | |||||||
Services |
64,906 | 71,336 | (6,430 | ) | (9.0 | ) | ||||||||||
Total Automotive revenues |
$ | 75,147 | $ | 86,420 | $ | (11,273 | ) | (13.0 | )% | |||||||
Other revenues: |
||||||||||||||||
Systems |
$ | 3,857 | $ | 14,585 | $ | (10,728 | ) | (73.6 | )% | |||||||
Services |
6,055 | 6,040 | 15 | 0.2 | ||||||||||||
Total Other revenues |
$ | 9,912 | $ | 20,625 | $ | (10,713 | ) | (51.9 | )% | |||||||
Total revenues: |
||||||||||||||||
Systems |
$ | 124,546 | $ | 173,237 | $ | (48,691 | ) | (28.1 | )% | |||||||
Services |
254,397 | 253,132 | 1,265 | 0.5 | ||||||||||||
Total revenues |
$ | 378,943 | $ | 426,369 | $ | (47,426 | ) | (11.1 | )% | |||||||
Total revenues for the year ended September 30, 2009 decreased by $47.4 million, or 11.1%, compared
to the year ended September 30, 2008. The decrease in revenues over the comparable period a year
ago is primarily a result of an overall decrease in systems sales as well as a decrease in services
revenues in Automotive, partially offset by an increase in services revenues in Hardlines and
Lumber and Wholesale Distribution.
| Hardlines and Lumber revenues Hardlines and Lumber revenues decreased by $12.9
million, or 8.6%. The systems revenue decrease was attributed to a reduction in the volume
and lower average selling price of new system sales and the sale of additional products and
modules, primarily as a result of our customers exercising caution on making capital
expenditures both due to the weak economy and a slow retail and residential housing
environment. Services revenues increased primarily as a result of our price increases for
support services. |
||
| Wholesale Distribution revenues Wholesale Distribution revenues decreased by $12.5
million, or 7.4%. The systems revenue decrease was substantially attributable to a
reduction in the volume of new systems and the sale of additional products and modules,
primarily due to the weak economy and extended customer sales cycles. Services revenues
increased primarily |
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as a result of our price increases for support services partially offset by lower customer
retention rates due to the global economic downturn. |
|||
| Automotive revenues Automotive revenues decreased by $11.3 million, or 13.0%. The
systems revenue decrease was attributed to a reduction in the volume of new system sales
and the sale of additional products and modules, primarily due to the weak economy,
extended customer sales cycle and to a lesser extent the transition to new system
platforms. Services revenues decreased primarily as a result of the known attrition of a
major customer, General Parts, Inc., and lower retention rates as a result of the global
economic downturn. |
||
| Other revenues Other revenues decreased $10.7 million, or 51.9%, driven primarily by
prospective customers slowing down planned system migrations due to Hewlett-Packards
continued support of one of its legacy systems. |
Total cost of revenues and gross margins as a percentage of revenues
The following table sets forth, for the periods indicated, our gross margin as a percentage of
revenues (in thousands):
Year Ended September 30, | ||||||||||||
2009 | 2008 | Variance | ||||||||||
Cost of systems revenues |
$ | 67,787 | $ | 95,350 | $ | (27,563 | ) | |||||
Systems gross margins |
45.6 | % | 45.0 | % | ||||||||
Cost of services revenues |
$ | 84,867 | $ | 92,260 | $ | (7,393 | ) | |||||
Services gross margins |
66.6 | % | 63.6 | % | ||||||||
Total cost of revenues |
$ | 152,654 | $ | 187,610 | $ | (34,956 | ) | |||||
Total gross margins |
59.7 | % | 56.0 | % |
| Cost of systems revenues and systems gross margins Cost of systems revenues decreased
by $27.6 million primarily as a result of lower direct costs associated with lower overall
systems revenues. System gross margins increased by 0.6 percentage points in the year
ended September 30, 2009 from the comparable period a year ago as a result of improved
hardware margins, reductions in labor related costs and outsourced support costs. |
||
| Cost of services revenues and services gross margins Cost of services revenues
decreased by $7.4 million primarily as a result of labor related cost reductions. Services
gross margins increased by 3.0 percentage points in the year ended September 30, 2009 from
the comparable period a year ago as a result of service price increases and reductions in
labor related costs, outsourced support costs and third party maintenance costs. |
Total operating expenses
The following table sets forth, for the periods indicated, operating expenses and the variance
thereof (in thousands):
Year Ended September 30, | ||||||||||||||||
2009 | 2008 | Variance $ | Variance % | |||||||||||||
Sales and marketing |
$ | 55,540 | $ | 64,039 | $ | (8,499 | ) | (13.3 | )% | |||||||
Product development |
38,553 | 44,258 | (5,705 | ) | (12.9 | )% | ||||||||||
General and administrative |
24,275 | 31,517 | (7,242 | ) | (23.0 | )% | ||||||||||
Depreciation and amortization |
38,917 | 37,254 | 1,663 | 4.5 | % | |||||||||||
Impairment of goodwill |
114,500 | | 114,500 | | ||||||||||||
Acquisition related costs |
260 | 1,056 | (796 | ) | (75.4 | )% | ||||||||||
Restructuring costs |
4,516 | 2,272 | 2,244 | 98.7 | % | |||||||||||
Total operating expenses |
$ | 276,561 | $ | 180,396 | $ | 96,165 | 53.3 | % | ||||||||
Total operating expenses increased by $96.2 million, or 53.3%, for the year ended September 30,
2009 compared to the year ended September 30, 2008. The increase was primarily a result of the
impairment of goodwill charge as well as an increase in restructuring costs, primarily offset by
reductions in labor related expenses, strategic initiative costs, commissions, and outside services
as well as additional capitalization of software and database costs.
| Sales and marketing Sales and marketing expenses decreased by $8.5 million, or 13.3%,
for the year ended September 30, 2009 compared to the year ended September 30, 2008. The
decrease was primarily the result of a reduction of $6.0 million in labor related expenses,
$0.9 million in marketing and trade show expenses, $0.7 million in outside services, $0.4
million in bad debt and $0.4 million in travel. |
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| Product development Product development expenses decreased $5.7 million, or 12.9%,
for the year ended September 30, 2009 compared to the year ended September 30, 2008. The
decrease was primarily the result of a reduction of $2.2 million in labor related costs and
$1.5 million in outside services and third-party service costs as well as $2.1 million in
additional capitalization of software and database costs. |
||
| General and administrative General and administrative expenses decreased by $7.2
million, or 23.0%, for the year ended September 30, 2009 compared to the year ended
September 30, 2008. The decrease is primarily the result of a reduction of $1.6 million
in outside services, $0.7 million in telecommunication costs, $0.6 million in labor related
costs, and $0.6 million in travel and training costs, as well as the non-recurrence of $3.7
million of costs related to strategic initiatives in the prior year. |
||
| Depreciation and amortization Depreciation and amortization expense was $38.9 million
for the year ended September 30, 2009 compared to $37.3 million for the year ended
September 30, 2008. The increase resulted primarily from amortization expense resulting
from additional capitalization of software and database costs, in the current period. |
||
| Impairment of goodwill We account for goodwill and other intangibles in accordance
with relevant authoritative principles. Business acquisitions typically result in goodwill
and other intangible assets, and the recorded values of those assets may become impaired in
the future. The determination of the value of these intangible assets requires management
to make estimates and assumptions that affect our consolidated financial statements.
Goodwill and other intangibles are tested for impairment on an annual basis as of July 1,
and between annual tests if indicators of potential impairment exist, using a
fair-value-based approach. Our annual testing through fiscal years 2008 and 2007 indicated
no impairment of goodwill had occurred, and we had no write-offs to goodwill or other
intangible assets. As of December 31, 2008, we determined it necessary to evaluate
goodwill for impairment as of an interim date due to the global economic uncertainty and
credit crisis and the significant decrease in the level of overall spending, including
spending in the vertical markets that we serve. We completed the interim impairment
analysis for each of our reporting units and concluded that as of December 31, 2008, the
fair value of our Hardlines and Lumber and our Automotive reporting units was below their
respective carrying values, including goodwill. Consequently, we recorded a goodwill
impairment charge of $107.0 million, comprised of $78.0 million related to Hardlines and
Lumber and $29.0 million related to Automotive. During our fiscal year 2009 annual test
for impairment we further concluded that fair value of our Other reporting unit was below
its carrying value, including goodwill. As a result, we recorded a goodwill impairment
charge of $7.5 million related to Other bringing our total goodwill impairment charge for
fiscal year 2009 to $114.5 million. For the purposes of these analyses, our estimates of
fair value were based on a combination of the income approach, which estimates the fair
value of our reporting units based on the future discounted cash flows, and the market
approach, which estimates the fair value of our reporting units based on comparable market
prices. We will not be required to make any current or future cash payments as a result of
these impairment charges. We will continue to monitor if conditions exist that indicate
additional potential impairment has occurred. If such conditions exist, we may be required
to record additional impairments in the future and such impairments, if any, may be
material. |
||
| Acquisition related costs Acquisition related costs for the years ended September 30,
2009 and 2008 were $0.3 million and $1.1 million, respectively, which primarily included
consulting fees and other professional services incurred in connection with systems
integration activities related to Eclipse. These activities were completed earlier in the
fiscal year resulting in the decrease in such costs. |
||
| Restructuring costs During fiscal years 2009 and 2008, our management approved
restructuring actions primarily related to eliminating certain employee positions and
consolidating certain excess facilities with the intent to streamline and focus our
operations and more properly align our cost structure with our projected revenue streams.
We recorded restructuring charges in the years ended September 30, 2009 and 2008 of $4.5
million and $2.3 million, respectively, related to these actions. |
Interest expense
Interest expense for the year ended September 30, 2009 was $41.0 million compared to $51.2 million
for the year ended September 30, 2008. The decrease in interest expense was primarily a result of
the reduction in our outstanding debt as a result of principal payments and repurchases of our
existing debt made in the year ended September 30, 2009 totaling approximately $94.2 million as
well as lower interest rates in the year ended September 30, 2009 compared to the same period in
2008.
Gain on retirement of debt
During the year ended September 30, 2009, we repurchased approximately $60.7 million in face value
of our senior subordinated notes in open market transactions for an aggregate purchase price of
approximately $41.1 million (including accrued interest of $1.3 million). In connection with the
debt repurchase, we wrote off deferred financing costs and other transaction fees of $1.9 million.
As a result of these repurchases we recorded a gain on retirement of
debt in the amount of $19.0
million. Pursuant to the American Recovery and Reinvestment Act of 2009, we have elected to defer
payment of the income taxes associated with these gains until they are paid ratably from 2014 to
2018.
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Other income (expense), net
Other income (expense), net for the year ended
September 30, 2009 was a loss of $1.0 million compared to income of $1.3 million for the year ended
September 30, 2008. The decrease was primarily a result of lower interest income in the year ended
September 30, 2009 compared to the prior period due to a decrease in interest rates as well as a
decrease in our short-term investments.
Income tax expense
We recognized income tax expense of $18.8 million, or 45.5% of pre-tax income excluding the
impairment of goodwill, for the year ended September 30, 2009 compared to an income tax expense of
$4.8 million, or 57.0% of pre-tax income, in the comparable period in 2008. The increase in income
tax expense is due to higher fiscal year 2009 pre-tax income (excluding the impairment of goodwill)
primarily resulting from gain on retirement of debt and lower interest expense partially offset by
a lower fiscal year 2009 effective tax rate. Our effective tax rate for fiscal year 2009 differed
from the statutory rate primarily due to state taxes, net of U.S. income tax benefit. As of
September 30, 2009, we had $24.5 million of federal and state loss carry-forwards that expire
between 2010 and 2028, if not utilized earlier. As of September 30, 2009, we also had $1.8 million
of foreign business tax credit carry-forwards that expire between 2014 and 2018, if not
utilized earlier. Substantially all of our operating income was generated from domestic operations
during fiscal years 2009 and 2008. We also had foreign net operating loss carry-forwards of $2.7
million expiring between 2026 and 2028, and $19.0 million that are not subject to expiration.
Undistributed earnings, if any, of our foreign subsidiaries are considered to be permanently
reinvested and, accordingly, no U.S. federal or state income taxes have been provided thereon. See
Note 8 to our consolidated financial statements for additional information about income taxes.
Contribution margin
We began measuring segment contribution margin in fiscal year 2008 in connection with the
reorganization of our management and business structure along vertical markets. The results of the
reportable segments are derived directly from our management reporting system. The results are
based on our method of internal reporting and are not necessarily in conformity with GAAP. Our
management measures the performance of each segment based on several metrics, including
contribution margin as defined below, which is not a financial measure calculated in accordance
with GAAP. Asset data is not reviewed by our management at the segment level and therefore is not
included.
Segment contribution margin includes all segment revenues less the related cost of sales, direct
marketing, sales expense, and product development expenses. A significant portion of each segments
expenses arises from shared services and centrally managed infrastructure support costs that we
allocate to the segments to determine segment contribution margin. These expenses primarily include
information technology services, facilities, and telecommunications costs.
Certain of our operating expenses are not allocated to segments because they are separately managed
at the corporate level. These unallocated costs include sales and marketing costs other than direct
sales and marketing, general and administrative costs, such as legal, finance and human resources,
stock-based compensation expense, depreciation and amortization of intangible assets, impairment of
goodwill, acquisition related costs, restructuring costs, gain on retirement of debt, interest
expense, and other income (expense).
There are significant judgments our management makes with respect to the direct and indirect
allocation of costs that may affect the calculation of contribution margins. While our management
believes these and other related judgments are reasonable and appropriate, others could assess such
matters in ways different than our companys management.
The exclusion of costs not considered directly allocable to individual business segments results in
contribution margin not taking into account substantial costs of doing business. While our
management may consider contribution margin to be an important measure of comparative operating
performance, this measure should be considered in addition to, but not as a substitute for, net
income, cash flow and other measures of financial performance prepared in accordance with GAAP that
are otherwise presented in our financial statements. In addition, our calculation of contribution
margin may be different from the calculation used by other companies and, therefore, comparability
may be affected.
Contribution margin for the years ended September 30, 2009 and 2008 is as follows:
Year Ended September 30, | ||||||||||||||||
(in thousands) | 2009 | 2008 | Variance $ | Variance % | ||||||||||||
Hardlines and Lumber |
$ | 41,710 | $ | 34,267 | $ | 7,443 | 21.7 | % | ||||||||
Wholesale Distribution |
64,938 | 65,673 | (735 | ) | (1.1 | )% | ||||||||||
Automotive |
26,360 | 29,295 | (2,935 | ) | (10.0 | )% | ||||||||||
Other |
2,483 | 3,329 | (846 | ) | (25.4 | )% | ||||||||||
Total contribution margin |
$ | 135,491 | $ | 132,564 | $ | 2,927 | 2.2 | % | ||||||||
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| Hardlines and Lumber contribution margin The contribution margin for Hardlines and
Lumber increased $7.4 million despite the revenue decrease of $12.9 million. The increase
in contribution margin was primarily attributed to aggressive cost management of labor
related costs; support price increases; improved hardware margins; lower outside services;
additional capitalization of software and database costs as well as reduced sales and
marketing related costs. |
||
| Wholesale Distribution contribution margin The contribution margin for Wholesale
Distribution decreased by $0.7 million. The decrease was primarily due to a reduction of
systems revenue as a result of the economic downturn offset by support price increases;
aggressive cost management in labor related costs; lower third party maintenance costs;
reduced sales and marketing related costs as well as lower travel costs. |
||
| Automotive contribution margin The contribution margin for Automotive decreased by
$2.9 million primarily due to $11.3 million of lower revenues which drove lower gross
margins. The revenue decrease was attributed to reduced systems revenues, primarily due to
the weak economy and extended sales cycles and the transition to new platforms, as well as
a reduction in services revenues primarily as a result of the known attrition of a major
customer, General Parts, Inc., and lower retention rates as a result of the global economic
downturn. The revenue reduction impact on contribution margin was partially offset by
additional capitalization of software and database costs; lower labor related costs;
reduced outside services, sales and marketing related costs and bad debt expense. |
||
| Other contribution margin The contribution margin for Other decreased by $0.8
million, primarily due to $10.7 million in reduced revenues as a result of prospective
customers slowing down system migrations due to Hewlett-Packards continued support of one
of its legacy systems. The revenue reduction was offset by reduced labor related costs and
outside services. |
The reconciliation of total segment contribution margin to our consolidated income (loss) before
income taxes for the years ended September 30, 2009 and 2008 is as follows (in thousands):
Year Ended September 30, | ||||||||
2009 | 2008 | |||||||
Segment contribution margin |
$ | 135,491 | $ | 132,564 | ||||
Corporate and unallocated costs |
(23,959 | ) | (30,350 | ) | ||||
Stock-based compensation expense |
(3,611 | ) | (3,269 | ) | ||||
Depreciation and amortization |
(38,917 | ) | (37,254 | ) | ||||
Acquisition related costs |
(260 | ) | (1,056 | ) | ||||
Impairment of goodwill |
(114,500 | ) | | |||||
Restructuring costs |
(4,516 | ) | (2,272 | ) | ||||
Interest expense |
(40,977 | ) | (51,196 | ) | ||||
Gain on retirement of debt |
18,958 | | ||||||
Other income (expense), net |
(994 | ) | 1,258 | |||||
Income (loss) before income taxes |
$ | (73,285 | ) | $ | 8,425 | |||
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Year Ended September 30, 2008 Compared to Year Ended September 30, 2007
Our Hardlines and Lumber, Wholesale Distribution and Automotive segments accounted for
approximately 35.2%, 39.7% and 20.3%, respectively, of our revenues during the year ended September
30, 2008. This compares to the year ended September 30, 2007, where our Hardlines and Lumber,
Wholesale Distribution and Automotive segments accounted for approximately 42.1%, 30.7% and 21.9%,
respectively, of our revenues. See Note 13 to our consolidated financial statements for further
information on our segments, including a summary of our segment revenues and contribution margin.
Total revenues
The following table sets forth, for the periods indicated, our segment revenues by business
management solution and the variance thereof (in thousands):
Year Ended September 30, | ||||||||||||||||
2008 | 2007 | Variance $ | Variance % | |||||||||||||
Hardlines and Lumber revenues: |
||||||||||||||||
Systems |
$ | 69,671 | $ | 95,911 | $ | (26,240 | ) | (27.4 | )% | |||||||
Services |
80,342 | 76,272 | 4,070 | 5.3 | ||||||||||||
Total Hardlines and Lumber revenues |
$ | 150,013 | $ | 172,183 | $ | (22,170 | ) | (12.9 | )% | |||||||
Wholesale Distribution revenues: |
||||||||||||||||
Systems |
$ | 73,897 | $ | 55,545 | $ | 18,352 | 33.0 | % | ||||||||
Services |
95,414 | 70,114 | 25,300 | 36.1 | ||||||||||||
Total Wholesale Distribution revenues |
$ | 169,311 | $ | 125,659 | $ | 43,652 | 34.7 | % | ||||||||
Automotive revenues: |
||||||||||||||||
Systems |
$ | 15,084 | $ | 15,137 | $ | (53 | ) | (0.4 | )% | |||||||
Services |
71,336 | 74,656 | (3,320 | ) | (4.4 | ) | ||||||||||
Total Automotive revenues |
$ | 86,420 | $ | 89,793 | $ | (3,373 | ) | (3.8 | )% | |||||||
Other revenues: |
||||||||||||||||
Systems |
$ | 14,585 | $ | 14,766 | $ | (181 | ) | (1.2 | )% | |||||||
Services |
6,040 | 6,721 | (681 | ) | (10.1 | ) | ||||||||||
Total Other revenues |
$ | 20,625 | $ | 21,487 | $ | (862 | ) | (4.0 | )% | |||||||
Total revenues: |
||||||||||||||||
Systems |
$ | 173,237 | $ | 181,359 | $ | (8,122 | ) | (4.5 | )% | |||||||
Services |
253,132 | 227,763 | 25,369 | 11.1 | ||||||||||||
Total revenues |
$ | 426,369 | $ | 409,122 | $ | 17,247 | 4.2 | % | ||||||||
Total revenues for the year ended September 30, 2008 increased by $17.2 million, or 4.2%, compared
to the year ended September 30, 2007. The increase in revenues over the comparable year ago period
primarily reflects increased sales in our systems and services revenues in Wholesale Distribution
as a result of our acquisition of Eclipse in August 2007, and increased services revenue in
Hardlines and Lumber, partially offset by declines in systems revenues in Hardlines and Lumber,
declines in services revenue in Automotive and declines in Other revenues.
| Hardlines and Lumber revenues Hardlines and Lumber revenues decreased by $22.2
million, or 12.9%. The systems revenue decrease was attributed to a reduction in the
volume of new system sales and the decrease in the sale of additional products and modules,
primarily as a result of our co-op partners opening fewer new stores and customers
exhibiting caution on making capital expenditures both due to the weak economy and a
slowing retail environment. These decreases in systems revenue were partially offset by
systems revenue attributable to the acquisition of Silk Systems. Services revenues
increased primarily due to the Silk Systems acquisition as well as price increases for
support services. |
||
| Wholesale Distribution revenues Wholesale Distribution revenues increased by $43.7
million, or 34.7%. The systems revenues increase was substantially attributable to the
Eclipse acquisition, partially offset by a reduction in the volume of new systems and the
sale of additional products and modules due to the weak economy. Services revenues
increased primarily as a result of services revenue related to the Eclipse acquisition and
price increases for support services. |
||
| Automotive revenues Automotive revenues decreased by $3.4 million, or 3.8%. Systems
revenues were slightly lower as a result of selling less hardware in the year ended
September 30, 2008 compared to the same period a year ago as many customers had upgraded
hardware in the prior year. Services revenues decreased primarily as a result of the known
attrition of a major customer, General Parts Inc., and reductions in the customer base. |
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| Other revenues Other revenues decreased $0.9 million, or 4.0%, driven by lower
systems sales as a result of a slow down in planned migrations due to Hewlett-Packards
continued support of one of its legacy systems as well as lower network installation
service revenue from the installation of third party hardware. |
Total cost of revenues and gross margins as a percentage of revenues
The following table sets forth, for the periods indicated, our gross margin as a percentage of
revenues (in thousands):
Year Ended September 30, | ||||||||||||
2008 | 2007 | Variance | ||||||||||
Cost of systems revenues |
$ | 95,350 | $ | 99,290 | $ | (3,940 | ) | |||||
Systems gross margins |
45.0 | % | 45.3 | % | ||||||||
Cost of services revenues |
$ | 92,260 | $ | 83,821 | $ | 8,439 | ||||||
Services gross margins |
63.6 | % | 63.2 | % | ||||||||
Total cost of revenues |
$ | 187,610 | $ | 183,111 | $ | 4,499 | ||||||
Total gross margins |
56.0 | % | 55.2 | % |
| Cost of systems revenues and systems gross margins Cost of systems revenues decreased
by $3.9 million primarily as a result of lower direct costs associated with lower systems
revenues in Hardlines and Lumber and Other, primarily our productivity tools business,
partially offset by $9.0 million in costs attributable to the acquisition of Eclipse and
Silk Systems. System gross margins decreased by 0.3 percentage points in the year ended
September 30, 2008 from the comparable period in 2007. The decrease is primarily
attributable to lower gross margins in Hardlines and Lumber as a result of lower systems
sales, the impact of relatively fixed costs on a lower revenue base, as well as reductions
in average selling prices in the segment partially offset by a greater percentage of
systems revenue derived from higher margin products in Wholesale Distribution and in Other,
primarily our productivity tools business, as a result of lower outside services costs. |
||
| Cost of services revenues and services gross margins Cost of services revenues
increased by $8.4 million primarily as a result of $8.1 million of costs associated with
the acquisition of Eclipse and Silk Systems. Services gross margins increased by 0.4
percentage points in the year ended September 30, 2008 from the comparable period in 2007.
The increase in margins is primarily attributable to higher margin services revenues from
the acquisition of Eclipse and Silk Systems as well as the full year impact of increases in
the support customer base and price increases for customer support on a relatively fixed
cost structure. |
Total operating expenses
The following table sets forth, for the periods indicated, operating expenses and the variance
thereof (in thousands):
Year Ended September 30, | ||||||||||||||||
2008 | 2007 | Variance $ | Variance % | |||||||||||||
Sales and marketing |
$ | 64,039 | $ | 64,473 | $ | (434 | ) | (0.7 | )% | |||||||
Product development |
44,258 | 40,652 | 3,606 | 8.9 | % | |||||||||||
General and administrative |
31,517 | 27,732 | 3,785 | 13.6 | % | |||||||||||
Depreciation and amortization |
37,254 | 29,735 | 7,519 | 25.3 | % | |||||||||||
Acquisition related costs |
1,056 | 531 | 525 | 98.9 | % | |||||||||||
Restructuring costs |
2,272 | 1,109 | 1,163 | 104.9 | % | |||||||||||
Total operating expenses |
$ | 180,396 | $ | 164,232 | $ | 16,164 | 9.8 | % | ||||||||
Total operating expenses increased by $16.2 million, or 9.8%, for the year ended September 30, 2008
compared to the year ended September 30, 2007. The increase was driven primarily by virtually all
major expense categories, except sales and marketing, increasing at rates greater than overall
revenue growth, as well as increased acquisition related costs and fiscal year 2008 restructuring
activities.
| Sales and marketing Sales and marketing expenses decreased by $0.4 million, or 0.7%,
for the year ended September 30, 2008 compared to the year ended September 30, 2007. The
decrease was primarily a result of $4.2 million of lower commissions, travel and bad debt
expense in our pre-acquisition business partially offset by $3.4 million of expenses
associated with the acquisitions of Eclipse and Silk Systems. |
|
| Product development Product development expenses increased $3.6 million, or 8.9%, for
the year ended September 30, 2008 compared to the year ended September 30, 2007. This
increase was primarily the result of increased expenses of $6.7 million related to the
Eclipse and Silk Systems acquisitions, which were partially offset by $1.4 million of lower
compensation |
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expense, $1.3 million lower third-party service costs and lower software development expenses
of $1.1 million as a result of more of these costs being capitalized. |
||
| General and administrative General and administrative expenses increased by $3.8
million, or 13.6%, for the year ended September 30, 2008 compared to the year ended
September 30, 2007. The increase is primarily due to $3.9 million of costs related to
strategic initiatives offset by $0.5 million lower compensation expense and $0.6 million
lower stock-based compensation expense. |
|
| Depreciation and amortization Depreciation and amortization expense was $37.3 million
for the year ended September 30, 2008 compared to $29.7 million for the year ended
September 30, 2007. The increase resulted primarily from the amortization of the
additional $38.6 million of intangible assets associated with the acquisitions of Silk
Systems and Eclipse. |
|
| Acquisition related costs Acquisition related costs for the years ended September 30,
2008 and 2007 were $1.1 million and $0.5 million, respectively, which primarily included
consulting fees and other professional services incurred in connection with systems
integration activities related to Eclipse. |
|
| Restructuring costs During the year ended September 30, 2008, our management approved
additional restructuring actions primarily related to eliminating certain additional
employee positions with the intent to streamline and focus our operations and more properly
align our cost structure with our projected revenue streams. We recorded restructuring
charges of approximately $2.3 million related to these actions. |
Interest expense
Interest expense for the year ended September 30, 2008 was $51.2 million compared to $48.4 million
for the year ended September 30, 2007. The increase in interest expense was primarily a result of
the incremental borrowings to fund the acquisition of Eclipse in August 2007.
Other income, net
Other income, net was $1.3 million for the year ended September
30, 2008 compared to $1.5 million for the year ended September 30, 2007. The decrease was
primarily a result of losses on our marketable securities in the year ended September 30, 2008.
Income tax expense
We recognized income tax expense of $4.8 million, or 57.0% of pre-tax income, for the year ended
September 30, 2008 compared to an income tax expense of $10.0 million, or 67.0% of pre-tax income,
in the comparable period in 2007. The decrease in income tax expense is due to lower pre-tax
income and a lower effective tax rate for fiscal year 2008. Our effective tax rate for fiscal
2008 differed from the statutory rate primarily due to state taxes, net of U.S. income tax benefit.
As of September 30, 2008, we had $36.4 million of federal and state net operating loss
carry-forwards that expire between 2009 and 2028, if not utilized earlier. As of September 30,
2008, we also had $2.1 million of federal and foreign business tax credit carry-forwards that
expire between 2014 and 2018, if not utilized earlier. Substantially all of our operating income
was generated from domestic operations during 2007 and 2008. We also had foreign net operating
loss carry-forwards of $0.8 million expiring between 2026 and 2028, and $19.2 million that are not
subject to expiration. Undistributed earnings, if any, of our foreign subsidiaries are considered
to be permanently reinvested and, accordingly, no U.S. federal or state income taxes have been
provided thereon. See Note 8 to our consolidated financial statements for additional information
about income taxes.
Contribution margin
Effective October 1, 2007, and in connection with reorganizing our management and business
structure along vertical markets, we began measuring segment contribution margin. Segment level
reporting results for the year ended September 30, 2007, were restated to conform to the current
period presentation. We did not present segment level results for the year ended September 30,
2008, under the prior basis of presentation, as it was not practicable to do so.
The results of the reportable segments are derived directly from our management reporting system.
The results are based on our method of internal reporting and are not necessarily in conformity
with GAAP. Our management measures the performance of each segment based on several metrics,
including contribution margin as defined below, which is not a financial measure calculated in
accordance with GAAP. Asset data is not reviewed by our management at the segment level and
therefore is not included.
Segment contribution margin includes all segment revenues less the related cost of sales, direct
marketing, sales expense, and product development expenses. A significant portion of each segments
expenses arises from shared services and centrally managed infrastructure support costs that we
allocate to the segments to determine segment contribution margin. These expenses primarily include
information technology services, facilities, and telecommunications costs.
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Table of Contents
Certain of our operating expenses are not allocated to segments because they are separately managed
at the corporate level. These unallocated costs include sales and marketing costs other than direct
sales and marketing, general and administrative costs, such as legal and finance, stock-based
compensation expense, depreciation and amortization of intangible assets, impairment of goodwill,
acquisition related costs, restructuring costs, gain on retirement of debt, interest expense, and
other income (expense).
There are significant judgments our management makes with respect to the direct and indirect
allocation of costs that may affect the calculation of contribution margins. While our management
believes these and other related judgments are reasonable and appropriate, others could assess such
matters in ways different than our companys management.
The exclusion of costs not considered directly allocable to individual business segments results in
contribution margin not taking into account substantial costs of doing business. While our
management may consider contribution margin to be an important measure of comparative operating
performance, this measure should be considered in addition to, but not as a substitute for, net
income, cash flow and other measures of financial performance prepared in accordance with GAAP that
are otherwise presented in our financial statements. In addition, our calculation of contribution
margin may be different from the calculation used by other companies and, therefore, comparability
may be affected.
Contribution margin for the years ended September 30, 2008 and 2007 is as follows (in thousands):
Year Ended September 30, | ||||||||||||||||
2008 | 2007 | Variance $ | Variance % | |||||||||||||
Hardlines and Lumber |
$ | 34,267 | $ | 43,854 | $ | (9,587 | ) | (21.9 | )% | |||||||
Wholesale Distribution |
65,673 | 46,291 | 19,382 | 41.9 | % | |||||||||||
Automotive |
29,295 | 31,160 | (1,865 | ) | (6.0 | )% | ||||||||||
Other |
3,329 | 2,391 | 938 | 39.2 | % | |||||||||||
Total contribution margin |
$ | 132,564 | $ | 123,696 | $ | 8,868 | 7.2 | % | ||||||||
| Hardlines and Lumber contribution margin The contribution margin for Hardlines and
Lumber decreased by $9.6 million, primarily as a result of $26.2 million in lower system
revenues, which drove lower gross margins. Gross margin declines were partially offset by
lower sales and marketing and product development expenses. Sales and marketing expenses
decreased as a result of lower salary, commission and bonus expense, partially offset by
the increases in Silk Systems sales expenses. Product development expenses decreased as a
result of lower salary and bonus expense and lower software development expenses resulting
from more of these costs being capitalized. |
||
| Wholesale Distribution contribution margin The contribution margin for Wholesale
Distribution increased by $19.4 million primarily due to the acquisition of Eclipse, the
full year impact of increases in the support customer base and support price increases, as
well as lower sales and marketing costs, partially offset by lower gross margins in systems
revenues. |
||
| Automotive contribution margin The contribution margin for Automotive decreased by
$1.9 million primarily due to lower revenues and gross margin associated with the known
attrition of a major customer, General Parts, Inc., and lower hardware sales partially
offset by lower product development expenses. Product development expenses decreased
primarily as a result of lower salary and bonus expense. |
||
| Other contribution margin The contribution margin for Other increased by $0.9
million, primarily due lower outside services costs. |
The reconciliation of total segment contribution margin to our consolidated income before income
taxes for the years ended September 30, 2008 and 2007 is as follows (in thousands):
Year Ended September 30, | ||||||||
2008 | 2007 | |||||||
Segment contribution margin |
$ | 132,564 | $ | 123,696 | ||||
Corporate and unallocated costs |
(30,350 | ) | (26,379 | ) | ||||
Stock-based compensation expense |
(3,269 | ) | (4,163 | ) | ||||
Depreciation and amortization |
(37,254 | ) | (29,735 | ) | ||||
Acquisition related costs |
(1,056 | ) | (531 | ) | ||||
Restructuring costs |
(2,272 | ) | (1,109 | ) | ||||
Interest expense |
(51,196 | ) | (48,398 | ) | ||||
Other income, net |
1,258 | 1,529 | ||||||
Income before income taxes |
$ | 8,425 | $ | 14,910 | ||||
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Liquidity and Capital Resources
Overview
Our principal liquidity requirements are for working capital, capital expenditures and debt
service. Our ability to service our indebtedness will depend on our ability to generate cash in
the future.
Our cash and cash equivalents balance at September 30, 2009 was $44.6 million. As of September 30,
2009, we had $522.9 million in outstanding indebtedness comprised primarily of $398.6 million
aggregate principal amount of senior secured term loans (including an incremental term loan) due
2013 pursuant to our senior secured credit agreement, $10.0 million aggregate principal amount of
loans due 2011 pursuant to our revolving credit facility and $114.3 million aggregate principal
amount of senior subordinated notes due 2016. As previously discussed and as further discussed
below, during the year ended September 30, 2009, we repurchased approximately $60.7 million
aggregate principal amount of our senior subordinated notes resulting in gain on retirement of debt
of $19.0 million. In October of 2009, we subsequently repaid the $10.0 million remaining
outstanding principal balance on the revolving credit facility.
We believe that cash flows from operations, together with amounts available under the senior
secured credit agreement, will be sufficient to fund our working capital, capital expenditures and
debt service requirements for at least the next twelve months. Our ability to meet our 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 our control. If we are not able to
meet such requirements, we may be required to seek additional financing. There can be no assurance
that we will be able to obtain financing from other sources on terms acceptable to us, if at all.
From time to time, we intend to pursue acquisitions, but the timing, size or success of any
acquisition effort and the related potential capital commitments cannot be predicted. We expect to
fund future acquisitions primarily with cash flow from operations and borrowings, including
borrowing from amounts available under our senior secured credit agreement or through new debt
issuances. We may also issue additional equity either directly or in connection with any such
acquisitions. There can be no assurance that acquisition funds will be available on terms
acceptable to us, or at all.
Senior Secured Credit Agreement
We have a senior secured credit agreement that provides for (i) a seven-year term loan in the
amount of $390.0 million, amortized at a rate of 1.00% per year on a quarterly basis for the first
six and three-quarters years after May 2, 2006, except such amortized loan payments that may
otherwise be due are reduced dollar-for-dollar by any voluntary prepayments or mandatory repayments
we make, with the balance payable on May 2, 2013, and (ii) a five-year revolving credit facility
that permits loans in an aggregate amount of up to $40.0 million, which includes a $5.0 million
letter of credit facility and a swing line facility. Principal amounts outstanding under the
revolving credit facility are due and payable in full at maturity, on May 2, 2011. In addition,
subject to certain terms and conditions, the senior secured credit agreement provides for one or
more uncommitted incremental term loans and/or revolving credit facilities in an aggregate amount
not to exceed $75.0 million.
In August 2007, we borrowed the $75.0 million incremental term loan, which matures on May 2, 2013,
as well as $20.0 million of the revolving credit facility. During the year ended September 30,
2009, we repaid $10.0 million in principal payments towards the revolving credit facility. In
October of 2009, we subsequently repaid the $10.0 million remaining outstanding principal balance
on the revolving credit facility. Prior to fiscal year 2009, we did not make any principal
repayments towards the revolving credit facility. To date we have prepaid all of the required
amortized principal payments required under the senior secured credit agreement.
We are required each year, generally concurrent with the filing of our Annual Report on Form 10-K,
to make a mandatory principal repayment towards term loans equal to one-half of excess cash flow,
as defined in the senior secured credit agreement, for the preceding fiscal year. Any mandatory
repayments due are reduced dollar-for-dollar by any voluntary prepayments made during the year.
For the period ended September 30, 2006 and for the years ended September 30, 2007, 2008 and 2009,
we repaid $1.9 million, $25.2 million, $15.8 million, and $23.5 million, respectively, in principal
payments towards the term loans. The fiscal year 2009 payments included approximately $3.3 million
of fiscal year 2008 mandatory principal repayments and approximately $20.2 million of voluntary
prepayments. After consideration of our voluntary prepayments made in fiscal year 2009, we have a
remaining mandatory principal repayment due for fiscal year 2009 of
$5.9 million. We classified
the remaining fiscal year 2009 mandatory repayment as current portion of long-term debt in the
accompanying consolidated balance sheet. Prior to fiscal year 2008, we did not have to make any
mandatory repayments. Any future mandatory principal repayments will be dependent upon us
generating excess cash flow and/or making voluntary prepayments, both as defined in the senior
secured credit agreement.
The capital and credit markets have been experiencing extreme volatility and disruption during the
past 18 months. These market conditions have, to a degree, affected our ability to borrow under our
senior secured credit facility. On September 15, 2008, Lehman Brothers Holdings Inc. (Lehman
Brothers) and on November 1, 2009, CIT Group Inc. (CIT), filed petitions under Chapter 11 of the
U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. A
Lehman Brothers subsidiary, Lehman Commercial Paper Inc. (Lehman CPI) and a CIT subsidiary, The
CIT Group/Equipment Financing, Inc. (CIT Financing), are lenders under our senior secured credit
agreement, having provided commitments of $7.0 million and $7.5 million, respectively, under the
revolving credit facility, of which $1.8 million and $1.9 million, respectively, were outstanding
as of September 30, 2009. In October of 2009, we subsequently repaid the $10.0 million remaining
outstanding principal balance on the revolving credit facility. Although we have made no request
for funding under the revolving credit facility since the filing of the bankruptcy petitions by
Lehman
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Brothers or CIT, it is uncertain whether Lehman CPI or CIT Financing will participate in any future
requests for funding or whether another lender might assume their commitments.
The borrowings under the senior secured credit agreement bear interest at a rate equal to an
applicable margin plus, at our option, either (a) a base rate determined by reference to the higher
of (1) the prime rate of Deutsche Bank Trust Company Americas, and (2) the federal funds rate plus
1/2 of 1%; or (b) a reserve adjusted Eurodollar rate on deposits for periods of one-, two-, three-,
or six-months (or, to the extent agreed to by each applicable lender, nine- or twelve-months or
less than one month). The initial applicable margin for the borrowings is:
| under the term loan, 1.00% with respect to base rate borrowings and 2.00% with respect to
Eurodollar rate borrowings; |
|
| under the incremental term loan, 1.50% with respect to base rate borrowings and 2.50% with
respect to Eurodollar rate borrowings; and |
|
| under the revolving credit facility, 1.00% with respect to base rate borrowings and 2.00%
with respect to Eurodollar rate borrowings, which may be reduced subject to our attainment of
certain leverage ratios. |
In addition to paying interest on outstanding principal under the senior secured credit agreement,
we are required to pay a commitment fee to the lenders under the revolving credit facility in
respect of the unutilized commitments thereunder. The initial commitment fee rate is 0.50% per
annum. The commitment fee rate may be reduced subject to our attaining certain leverage ratios,
none of which had been attained as of September 30, 2009. We must also pay customary letter of
credit fees for issued and outstanding letters of credit. As of September 30, 2009, we had $0.3
million of letters of credit issued and outstanding.
The senior secured credit agreement contains a number of covenants that, among other things,
restrict, subject to certain exceptions, our ability to:
| incur additional indebtedness (including contingent liabilities); |
|
| create liens on assets; |
|
| enter into sale-leaseback transactions; |
|
| engage in mergers or acquisitions; |
|
| dispose of assets; |
|
| pay dividends and restricted payments; |
|
| make investments (including joint ventures); |
|
| make capital expenditures; |
|
| prepay other indebtedness (including the notes); |
|
| engage in certain transactions with affiliates; |
|
| amend agreements governing our subordinated indebtedness (including the notes); |
|
| amend organizational documents and other material agreements; and |
|
| materially change the nature of our business. |
In addition, the senior secured credit agreement requires us to maintain the following financial
covenants:
| a maximum total leverage ratio; and |
|
| a minimum interest coverage ratio. |
The senior secured credit agreement also contains certain customary affirmative covenants and
events of default. Substantially all of our assets and those of our subsidiaries are pledged as
collateral under the senior secured credit agreement.
Hedging and Derivative Instruments
At the time we entered into the senior secured credit agreement, we entered into four interest rate
swaps to manage and reduce the risk inherent in interest rate fluctuations and to effectively
convert a notional amount of $245.0 million of floating rate debt to fixed rate debt. In November
2007 and 2008, interest rate swaps with a notional amount of $25.0 million and $30.0 million,
respectively, matured. As of September 30, 2009, we had outstanding interest rate swaps with a
notional amount of $190.0 million. As of and for the year ended September 30, 2009, there is no
cumulative ineffectiveness related to these interest rate swaps.
Senior Subordinated Notes due 2016
We also issued $175.0 million aggregate principal amount of 9.5% senior subordinated notes due May
2, 2016. The notes were issued in a private transaction that was not subject to the registration
requirements of the Securities Act. The notes subsequently were exchanged for substantially
identical notes registered with the SEC, pursuant to a registration rights agreement entered into
in connection with the indenture under which these notes were issued.
Each of our domestic subsidiaries, as primary obligors and not as sureties, jointly and severally,
irrevocably and unconditionally guarantees, on an unsecured senior subordinated basis, the
performance and full and punctual payment when due, whether at maturity,
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by acceleration or otherwise, of all of our obligations under the indenture and the notes. The notes are our
unsecured senior subordinated obligations and are subordinated in right of payment to all of our existing and future
senior indebtedness (including the senior secured credit agreement), are effectively subordinated
to all of our secured indebtedness (including the senior secured credit agreement) and are senior
in right of payment to all of our existing and future subordinated indebtedness.
The indenture governing our senior subordinated notes limits our (and most of our subsidiaries)
ability to:
| incur additional indebtedness; |
|
| pay dividends on or make other distributions or repurchase our capital stock; |
|
| make certain investments; |
|
| enter into certain types of transactions with affiliates; |
|
| use assets as security in other transactions; and |
|
| sell certain assets or merge with or into other companies. |
Subject to certain exceptions, the indenture governing the senior subordinated notes permits us and
our restricted subsidiaries to incur additional indebtedness, including secured indebtedness.
During the year ended September 30, 2009, we repurchased approximately $60.7 million in face value
of our senior subordinated notes in open market transactions for an aggregate purchase price of
approximately $41.1 million (including accrued interest of $1.3 million). In connection with the
debt repurchase, we wrote off deferred financing costs and other transaction fees of $1.9 million.
As a result of these repurchases we recorded a gain on retirement of debt in the amount of $19.0
million. Pursuant to the American Recovery and Reinvestment Act of 2009, we have elected to defer
payment of the income taxes associated with these gains until they are paid ratably from 2014 to
2018. The repurchased notes have been retired. As of September 30, 2009, senior subordinated
notes representing $114.3 million in principal amount were outstanding. Subject to the
restrictions and limitations set forth under the senior secured credit agreement and the indenture
governing the senior subordinated notes, we and our subsidiaries, affiliates or significant
stockholders may from time to time, in our sole discretion, purchase, repay, redeem or retire
additional amounts of our outstanding debt or equity securities (including any publicly issued
debt), in privately negotiated or open market transactions, by tender offer or otherwise.
Year Ended September 30, 2009 Compared to Year Ended September 30, 2008
Our net cash provided by operating activities for the years ended September 30, 2009 and September
30, 2008 was $64.7 million and $58.9 million, respectively. After giving effect to the non-cash
goodwill impairment charge and non-operating gain on retirement of debt impacting net loss in the
year ended September 30, 2009, the increase in cash flow provided by operating activities for the
year ended compared to the prior year period was primarily due to deferred income taxes and changes
in certain working capital items. Specifically, deferred income taxes
provided $7.8 million and
accrued expenses and other provided $8.4 million more cash compared to the same period last year,
partially offset by the use of cash of $4.5 million for prepaid expenses and other assets, $5.2
million for accounts receivable and $2.0 million for accounts payable.
Our investing activities used net cash of $11.4 million and $11.6 million during the years ended
September 30, 2009 and 2008, respectively. The slight decrease in cash used in investing activities
from the prior year was primarily due to a decrease in purchases of property and equipment,
partially offset by an increase in capitalized computer software and database costs. We purchased
property and equipment of $2.4 million and $4.9 million and capitalized computer software and
database development costs of $9.0 million and $6.7 million for the year ended September 30, 2009
and 2008, respectively.
Our financing activities used cash of $73.5 million and $15.9 million during the years ended
September 30, 2009 and 2008, respectively. The increase in cash used in financing activities for
the year ended September 30, 2009 compared to the year ended September 30, 2008 was primarily due
to the repurchase of our senior subordinated notes for $39.8 million as well as payments on our
senior secured term loan of $23.5 million and prepayment of our revolving credit facility of $10.0
million in the current period.
Year Ended September 30, 2008 Compared to Year Ended September 30, 2007
Our net cash provided by operating activities for the years ended September 30, 2008 and 2007 was
$58.9 million and $50.5 million, respectively. The increase in cash flow provided by operating
activities for the year ended September 30, 2008 compared to the year ended September 30, 2007 was
primarily due to changes in certain working capital items offset by deferred income taxes.
Specifically, accounts receivable provided $18.6 million, accrued expenses and other provided $3.4
million and deferred revenue provided $0.7 million more cash compared to the same period last year,
partially offset by lower net income as well as the use of cash of $10.3 million for deferred
taxes, $4.9 million for prepaid and other assets and $3.7 million in accounts payable.
Our investing activities used net cash of $11.6 million during the year ended September 30, 2008
and $118.7 million during the year ended September 30, 2007. The decrease in cash used in
investing activities from the prior year was primarily due to the $106.4million used for the
purchase of Silk Systems and Eclipse in the prior year. We purchased property and equipment of
$4.9 million and $7.1 million and capitalized computer software and database development costs of
$6.7 million and $5.3 million for the years ended September 30, 2008 and 2007, respectively.
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Our financing activities used cash of $15.9 million and provided cash of $65.3 million for the
years ended September 30, 2008 and 2007, respectively. The increase in cash used in financing
activities for the year ended September 30, 2008 compared to the year ended September 30, 2007 was
primarily due to loan proceeds received in fiscal year 2007 of $95.0 million partially offset by
the pay down of less debt in fiscal year 2008.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations at September 30, 2009 (in thousands):
Payments Due by Fiscal Year | ||||||||||||||||||||
2015 and | ||||||||||||||||||||
Total | 2010 | 2011-12 | 2013-14 | beyond | ||||||||||||||||
Contractual Obligations: |
||||||||||||||||||||
Long-term debt obligations(1) |
$ | 522,895 | $ | 5,886 | $ | 10,000 | (5) | $ | 392,714 | $ | 114,295 | |||||||||
Operating lease obligations(2) |
20,672 | 6,582 | 9,941 | 3,160 | 989 | |||||||||||||||
Interest obligations(3) |
132,427 | 29,468 | 55,625 | 29,719 | 17,615 | |||||||||||||||
Current portion of uncertain tax positions(4) |
600 | 600 | | | | |||||||||||||||
Total |
$ | 676,594 | $ | 42,536 | $ | 75,566 | $ | 425,593 | $ | 132,899 | ||||||||||
(1) | Includes current portion of long-term debt. See Note 6 in the notes to our consolidated
financial statements for additional information regarding our long-term debt obligations. |
|
(2) | See Note 10 in the notes to our consolidated financial statements for additional information
regarding our operating lease obligations. |
|
(3) | Represents interest payment obligations related to our long-term debt as specified in the
applicable debt agreements. A portion of our long-term debt has variable interest rates due
to either existing swap agreements or interest arrangements. We have estimated our variable
interest payment obligations by using the interest rate forward curve where practical. Given
the uncertainties in future interest rates we have not included the beneficial impact of
interest rate swaps. |
|
(4) | Excludes $2.0 million of non-current uncertain tax benefits and related interest under the
provisions of the authoritative guidance that addresses accounting for income taxes, which are
included in other liabilities on our balance sheet at September 30, 2009. We have not included
these amounts in the table above because we cannot make a reasonably reliable estimate
regarding the timing of settlements with the relevant tax authorities, if any. |
|
(5) | In October of 2009, we subsequently repaid the $10.0 million remaining outstanding principal
balance on the revolving credit facility. |
The following table summarizes our commercial commitments at September 30, 2009 (in thousands):
Payments Due by Fiscal Year | ||||||||||||||||||||
2015 and | ||||||||||||||||||||
Total | 2010 | 2011-12 | 2013-14 | beyond | ||||||||||||||||
Standby letters of credit(1) |
$ | 267 | $ | 267 | $ | | $ | | $ | | ||||||||||
(1) | There are two standby letters of credit that secure certain demand deposit accounts related
to our workers compensation insurance and our credit risk management. |
Covenant Compliance
Our senior secured credit agreement requires us to meet certain financial tests, including
covenants that require us to satisfy a maximum total leverage ratio of consolidated total debt to
adjusted EBITDA (consolidated earnings before interest, taxes, depreciation and amortization,
further adjusted to exclude unusual items and other adjustments permitted in calculating covenant
compliance under the indenture governing the senior subordinated notes and our senior secured
credit facilities) and a minimum interest coverage ratio of adjusted EBITDA to consolidated
interest expense, and other financing conditions tests, which become increasingly stringent over
the term of the senior secured credit facility. See Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources Senior Secured Credit Agreement. Based on our plan
for fiscal year 2010, we currently anticipate that we will be able to meet or exceed these
financial tests and covenants during this period. This expectation is based on our cost and
revenue expectations for fiscal year 2010, which include certain cost cutting initiatives. Should
the current economic conditions cause our business or our vertical markets to deteriorate beyond
our expectations or should our cost cutting initiatives prove insufficient we may not be able to
satisfy these financial tests and covenants. In addition to these factors, our continued ability to meet those financial ratios and
tests can be affected by other events beyond our control or risks in our business
(See Item 1A - Risk Factors).
The failure to comply with any of these covenants or tests would cause a default under our senior
secured credit facilities. A default, if not waived or cured, could result in acceleration of the
outstanding indebtedness under our senior secured credit facilities and our senior subordinated
notes, in which case our debt would become immediately due and payable. In addition, a default or
acceleration of indebtedness under our senior secured credit facilities or our senior subordinated
notes could result in a default or acceleration of other indebtedness we may incur in the future
with cross-default or cross-acceleration provisions. If this occurs, we may not be able to pay our
debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be
available on terms that are acceptable to us, particularly given the current crisis in the debt
market in which the general availability of credit is substantially reduced and the cost of
borrowing is generally higher with more restrictive terms. Furthermore, if we are required to
amend our senior secured credit agreement, we may be required to pay significant amounts to obtain
a waiver or the lenders thereunder may require that interest rates applicable to our loans increase
as a condition to agreeing to any such amendment. Either such event could harm our financial
condition.
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In order to help ensure compliance with our covenants under our senior secured credit facilities we
may take additional actions in the future to modify our operations or capital structure, including
implementing additional cost cutting initiatives. In addition, in the event a default of the
financial tests required by our senior secured credit facilities occurs, we may (but no more than
two times in four fiscal quarters) cure the default by raising equity capital from our existing
investors in an amount sufficient to pass, but not to exceed, the financial test. While we believe
that these additional remedies provide us with some additional flexibility in maintaining
compliance with our tests and covenants, they do not assure us that we will not find ourselves in
violation of these tests and covenants. If repayment under our senior secured credit agreement is
accelerated, we cannot assure you that we would have sufficient assets or access to credit to repay
our indebtedness.
We use consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as
further adjusted, a non-GAAP financial measure, to determine our compliance with certain covenants
contained in our senior secured credit agreement and in the indenture governing our senior
subordinated notes. For covenant calculation purposes, adjusted EBITDA is defined as
consolidated net income (loss) adjusted to exclude interest, taxes, depreciation and amortization,
and further adjusted to exclude unusual items and other adjustments permitted in calculating
covenant compliance under our senior secured credit facilities and the indenture governing our
senior subordinated notes. The breach of covenants in our senior secured credit agreement that are
tied to ratios based on adjusted EBITDA could result in a default under that agreement and under
our indenture governing the senior subordinated notes. Our ability to engage in activities such as
incurring additional indebtedness, making investments and paying dividends is also tied to ratios
based on adjusted EBITDA.
Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms
are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund
cash needs. While adjusted EBITDA and similar measures are frequently used as measures of
operations and the ability to meet debt service requirements, these terms are not necessarily
comparable to other similarly titled captions of other companies due to the potential
inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of
earnings or charges resulting from matters that we may consider not to be indicative of our ongoing
operations. In particular, the definition of adjusted EBITDA in the indenture allows us to add back
certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating
net income (loss). However, these are expenses that may recur, vary greatly and are difficult to
predict. Further, our debt instruments require that adjusted EBITDA be calculated for the most
recent four fiscal quarters. As a result, the measure can be disproportionately affected by a
particularly strong or weak quarter. Further, it may not be comparable to the measure for any
subsequent four-quarter period or any complete fiscal year.
The following is a reconciliation of net income (loss), which is a GAAP measure of our operating
results, to adjusted EBITDA (as described in our senior secured credit agreement and the indenture
governing our senior subordinated notes, including related calculations) for the twelve months
ended September 30, 2009 and 2008 (in thousands).
Twelve Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Net income (loss) |
$ | (92,035 | ) | $ | 3,621 | |||
Acquisition costs |
118 | 769 | ||||||
Deferred revenue purchase accounting adjustment |
| 1,755 | ||||||
Adjusted net income (loss) |
(91,917 | ) | 6,145 | |||||
Interest expense |
40,977 | 51,196 | ||||||
Income tax expense and other income-based taxes |
19,510 | 4,804 | ||||||
Depreciation and amortization |
38,917 | 37,254 | ||||||
Gain on retirement of debt |
(18,958 | ) | | |||||
Non-cash charges (impairment charges and
stock-based compensation expense) |
118,130 | 3,269 | ||||||
Non-recurring cash charges and restructuring charges |
6,000 | 6,000 | ||||||
Deferred compensation payments |
297 | 280 | ||||||
Sponsor payments |
150 | 99 | ||||||
Foreign exchange (gain) loss |
372 | (624 | ) | |||||
Pro- forma adjustments |
| 1,132 | ||||||
Adjusted EBITDA |
$ | 113,478 | $ | 109,555 | ||||
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Our financial covenant requirements and ratios for the period ended September 30, 2009 were as
follows:
Covenant | ||||||||
Requirements | Our Ratio | |||||||
Senior Secured Credit Agreement (1) |
||||||||
Maximum consolidated total debt to adjusted EBITDA ratio |
4.75x | 4.28 | ||||||
Minimum adjusted EBITDA to consolidated interest expense |
2.25x | 2.95 | ||||||
Senior Subordinated Notes (2) |
||||||||
Minimum adjusted EBITDA to fixed charges ratio required
to incur additional indebtedness pursuant to
ratio provisions |
2.00x | 2.95 |
(1) | Our senior secured credit agreement requires us to maintain a consolidated total debt to
adjusted EBITDA ratio of a maximum of 4.50x by the end of the quarter ending December 31,
2009 and 3.75x by the end of the quarter ending December 31, 2010. Consolidated total debt is
defined in the senior secured credit agreement as total debt other than certain indebtedness
and is reduced by the amount of cash and cash equivalents on our consolidated balance sheet
in excess of $7.5 million. As of September 30, 2009, our consolidated total debt was $485.8
million, consisting of total debt other than certain indebtedness totaling $522.9 million,
net of cash and cash equivalents in excess of $7.5 million totaling $37.1 million. We are
also required to maintain an adjusted EBITDA to consolidated interest expense ratio of a
minimum of 2.50x by the end of the quarter ending March 31, 2010 and 2.75x by the end of the
quarter ending December 31, 2010. Consolidated interest expense is defined in the senior
secured credit agreement as consolidated cash interest expense less cash interest income and
is further adjusted for certain non-cash interest expenses and other items. Failure to
satisfy these ratio requirements would constitute a default under the senior secured credit
agreement. If our lenders failed to waive any such default, our repayment obligations under
the senior secured credit agreement could be accelerated. This would also constitute a
default under the indenture governing the senior subordinated notes. |
|
(2) | Our ability to incur additional indebtedness and make certain restricted payments under the
indenture governing the senior subordinated notes, subject to specified exceptions, is tied
to adjusted EBITDA to fixed charges ratio of at least 2.00x, except that we may incur certain
indebtedness and make certain restricted payments and certain permitted investments without
regard to the ratio. Fixed charges is defined in the indenture governing the senior
subordinated notes as consolidated interest expense less interest income, adjusted for
acquisitions, and further adjusted for non-cash interest expense. |
Income from Partnership Investments
Prior to the year ended September 30, 2007, we, as general partner, owned an approximate 20%
interest in two separate partnerships with certain customers. We provided management information
systems and services to these partnerships. For the year ended September 30, 2007, we recorded
service revenue from these partnerships of $0.4 million. During the year ended September 30, 2008,
we dissolved one of these partnerships and own a remaining approximate 20% interest in a separate
partnership with a certain customer. We provide management information systems and services to
this partnership. During the year ended September 30, 2009, we dissolved the remaining
partnership. For the years ended September 30, 2009, 2008 and 2007, we recorded service revenues
from partnerships of $0.1 million, $0.2 million and $0.4 million, respectively.
Off-Balance Sheet Arrangements
As of September 30, 2009, we did not have any material off-balance sheet arrangements (as defined
in Item 303(a)(4)(ii) of Regulation S-K).
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an on-going basis, management evaluates estimates,
including those discussed below. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions. We believe the following critical accounting policies affect
our more significant judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition
We recognize revenue in accordance with relevant authoritative accounting principles. We generate
revenue from the sale of software licenses, computer hardware, maintenance services, professional
services, data and content services, and education. We generally utilize written contracts as the
means to establish the terms and conditions by which our licenses, products, maintenance and
services are sold to our customers. Revenue is recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, the fee is fixed or determinable, collection is
probable, and vendor-specific objective evidence (VSOE) of the fair value of undelivered elements
exists. We record revenue net of our sales tax obligations.
For the majority of our system sales, which typically include multiple elements such as software,
hardware, maintenance, professional services, and education, we use the residual method of revenue
recognition. Under the residual method, consideration is allocated to undelivered elements based
upon VSOE of the fair value of those elements, with the residual of the arrangement fee allocated
to the software components. We have established VSOE of fair value for each undelivered element of
the system sale through independent transactions not sold in connection with a software license.
In situations where we have not established VSOE of fair value, all revenue from the arrangement is
deferred until sufficient evidence exists, or until all elements of that arrangement have been
delivered.
Professional and education services that are sold in connection with software license arrangements
generally qualify for separate accounting from the license elements because they do not involve
significant production, modification, or customization of our software products and are not
otherwise considered to be essential to the functionality of such products. Revenue from such
services is generally recognized as the services are performed. If the arrangement does not
qualify for separate accounting of the software licenses and professional services, the combined
software license and professional service elements are recognized based on contract accounting
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using either the percentage-of-completion or completed-contract method depending on whether or not
costs to complete the services are reasonably dependable.
Maintenance and content services are separately priced in our arrangements. Revenue is recognized
ratably over the term of the arrangement.
Software and Database Development Costs
In accordance with authoritative accounting principles, costs incurred internally in creating
computer software products are expensed until technological feasibility has been established, which
is typically evidenced by a completed program design. Thereafter, applicable software development
costs are capitalized and subsequently reported at the lower of amortized cost or net realizable
value. Costs incurred related to the accumulation of data for the development of databases are
capitalized and subsequently reported at the lower of amortized cost or net realizable value.
Capitalized costs are amortized using the greater of the amount computed using (a) the ratio that
current gross revenues bear to the total anticipated future gross revenues or (b) the straight-line
method over the estimated economic life of the product not to exceed five years. We are required to
use our professional judgment in determining whether software development costs meet the criteria
for immediate expense or capitalization using the criteria described above and evaluate software
and database development costs for impairment at each balance sheet date by comparing the
unamortized capitalized costs to the net realizable value. The net realizable value is the
estimated future gross revenue from that product reduced by the estimated future costs of
completing, maintaining and disposing of the product. We capitalized approximately $9.0 million,
$6.7 million and $5.3 million of software and development costs and recorded related amortization
expense of approximately $5.3 million, $3.1 million and $1.3 million for the years ended September
30, 2009, 2008 and 2007, respectively. We had no write-offs of software and database development
costs for any of these periods.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts receivable based upon expected collectability. The
reserve is established based upon an analysis of our aged receivables. Additionally, if necessary,
a specific reserve for individual accounts is recorded when we become aware of a customers
inability to meet its financial obligations, such as in the case of a bankruptcy filing or
deterioration in the customers operating results or financial position. We also regularly review
the allowance by considering factors such as historical experience, credit quality, age of the
accounts receivable balance, and current economic conditions that may affect a customers ability
to pay.
Valuation of Goodwill and Other Intangibles
We account for goodwill and other intangibles in accordance with relevant authoritative accounting
principles. Business acquisitions typically result in goodwill and other intangible assets, and
the recorded values of those assets may become impaired in the future. The determination of the
value of these intangible assets requires management to make estimates and assumptions that affect
our consolidated financial statements. Goodwill and other intangibles are tested for impairment on
an annual basis as of July 1, and between annual tests if indicators of potential impairment exist,
using a fair-value-based approach. Our annual testing through fiscal years 2008 and 2007 indicated
no impairment of goodwill had occurred and we had no write-offs to goodwill or other intangible
assets. As a result of the global economic uncertainty and credit crisis present in the last
calendar quarter of 2008, we determined it necessary to evaluate goodwill for impairment as of
December 31, 2008. We completed the impairment analysis for each of our reporting units and
concluded that as of December 31, 2008, the fair value of our Hardlines and Lumber and our
Automotive reporting units was below their respective carrying values, including goodwill.
Consequently, we recorded a goodwill impairment charge of $107.0 million, comprised of $78.0
million related to Hardlines and Lumber and $29.0 million related to Automotive. During our fiscal
year 2009 annual test for impairment we further concluded that fair value of our Other reporting
unit was below its carrying value, including goodwill. As a result, we recorded a goodwill
impairment charge of $7.5 million related to Other bringing our total goodwill impairment charge
for fiscal year 2009 to $114.5 million. For the purposes of these analyses, our estimates of fair
value were based on a combination of the income approach, which estimates the fair value of our
reporting units based on the future discounted cash flows, and the market approach, which estimates
the fair value of our reporting units based on comparable market prices. We will not be required
to make any current or future cash payments as a result of these impairment charges. We will
continue to monitor if conditions exist that indicate additional potential impairment has occurred.
If such conditions exist, we may be required to record additional impairments in the future and
such impairments, if any, may be material.
For the years ended September 30, 2009, 2008 and 2007, we recorded amortization expense of $33.7
million, $31.2 million and $23.7 million, respectively, related to other intangibles. We also
recorded other adjustments to goodwill during the years ended September 30, 2009, 2008 and 2007,
totaling $4.0 million, $4.2 million, and $4.3 million, respectively, as a result of resolving
certain pre-acquisition tax liabilities. See Note 4 to our consolidated financial statements for
further information.
Income Taxes
We account for income taxes in accordance with relevant authoritative accounting principles.
Deferred income taxes are provided for all temporary differences based on differences between
financial reporting and tax basis 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. A valuation
allowance is established against deferred tax assets if the future realization of these assets is
not likely based on the weight of the available evidence. Income taxes are provided on the undistributed earnings of foreign subsidiaries that are not considered to
be permanently reinvested.
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In June 2006, the Financial Accounting Standards Board (FASB) issued guidance clarifying the
accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation also provides guidance on recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
We adopted this guidance on October 1, 2007. See Note 8 to our consolidated financial statements
for further impact of this adoption. Significant judgment is required to evaluate uncertain tax
positions. We evaluate our uncertain tax positions on a quarterly basis. Our evaluations are based
upon a number of factors, including changes in facts or circumstances, changes in tax law,
correspondence with tax authorities during the course of audits and effective settlement of audit
issues. Changes in the recognition or measurement of uncertain tax positions could result in
material increases or decreases in our income tax expense in the period in which we make the
change, which could have a material impact on our effective tax rate and operating results.
Recently Issued Accounting Pronouncements
In September 2009, we adopted the FASB Accounting Standards Codification (ASC). The FASB
established the ASC as the single source of authoritative non-governmental U.S. generally accepted
accounting principles (GAAP), superseding various existing authoritative accounting
pronouncements. It eliminates the previous GAAP hierarchy and establishes one level of
authoritative GAAP. All other literature is considered non-authoritative. The FASB will not issue
new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts. Instead, it will issue an Accounting Standards Update (ASU). The FASB will not
consider ASUs as authoritative in their own right. ASUs will serve only to update the ASC, provide
background information about the guidance and provide the bases for conclusions on the change(s) in
the ASC. Unless needed to clarify a point to readers, we will refrain from citing specific section
references when discussing application of accounting principles or addressing new or pending
accounting rule changes.
In October 2009, the FASB issued an ASU that amended the accounting rules addressing revenue
recognition for multiple-deliverable revenue arrangements by eliminating the criterion for
objective and reliable evidence of fair value for the undelivered products or services. Instead,
revenue arrangements with multiple deliverables should be divided into separate units of accounting
provided the deliverables meet certain criteria. Additionally the ASU provides for elimination of
the use of the residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables based on their relative selling
price. A hierarchy for estimating such selling price is included in the update. This ASU will be
effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010. Early adoption is permitted. We are currently
evaluating whether this update will have an impact on our consolidated financial statements.
In October 2009, the FASB issued an ASU that provides a list of items to consider when determining
whether the software and non-software components function together to deliver a products essential
functionality. This ASU is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. We are currently evaluating whether this update will have an impact on our consolidated
financial statements.
In September 2009, the FASB issued an ASU providing clarification for measuring fair value when a
quoted price in an active market for the identical liability is not available. It also clarifies
that when estimating the fair value of a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. This ASU is effective for fiscal periods beginning after
August 27, 2009. We do not believe this update will have a material impact on our consolidated
financial statements.
In May 2009, the FASB established the standards for accounting for and disclosure of subsequent
events. It defines subsequent events as those events or transactions that occur after the balance
sheet date, but before the financial statements are issued or available to be issued. The statement
defines subsequent events as either recognized or non-recognized and requires the date through
which an entity evaluates subsequent events be disclosed. We adopted this guidance in June 2009.
See Note 1 to our consolidated financial statements for additional information regarding subsequent
events.
In April 2009, the FASB issued amended disclosure rules concerning interim disclosure requirements
for fair value of financial instruments. These rules amend the previous accounting standard, which
now require disclosures about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. The effective date of this
amendment is for interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. We adopted the provisions of this amendment as
of June 30, 2009. See Notes 6 and 7 to our consolidated financial statements for required
disclosures.
Effective October 1, 2008, we adopted standards and related applicable amendments regarding fair
value measurement. In this standard, the FASB defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not
require any new fair value measurements, rather it applies to existing accounting pronouncements
that require or permit fair value measurements. The FASB first amended the statement to exclude
guidance regarding leases and certain other lease-related accounting pronouncements. A second
amendment delayed the effective date for nonfinancial assets and nonfinancial liabilities, except
for items that are already recognized or disclosed at fair value in the financial statements on a
recurring basis, to fiscal years beginning after November 15, 2008. A third amendment clarifies
the application of this statement in determining
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the fair value of financial assets and liabilities in a market that is not active and provides
examples to illustrate key considerations in determining such fair value. Lastly, the fourth
amendment provides additional guidance on estimating fair value when the volume and level of
transaction activity for an asset or liability have significantly decreased in relation to normal
market activity for the asset and liability. We concluded that first, second and fourth amendments
would not have an impact on our financial statements, however the third amendment was included in
our October 2008 adoption. See Note 7 to our consolidated financial statements for required
disclosures.
In March 2008, the FASB issued guidance requiring enhanced disclosures about derivative and hedging
activities. These disclosures should enable financial statement users to understand how and why a
company uses derivative instruments and how derivative instruments and related hedged items affect
a companys financial position, financial performance and cash flows. We adopted this guidance in
January 2009. See Note 6 to our consolidated financial statements for additional information
regarding the required disclosures of our derivative instruments and hedging activities. This
statement does not impact the consolidated statements of operations as it is disclosure only in
nature.
In December 2007, the FASB issued guidance regarding business combinations, which significantly
changes the principles and requirements for how the acquirer of a business recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree, and the goodwill acquired. This statement is effective
prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal
years beginning after December 15, 2008. We are in the process of evaluating this standard and
therefore have not yet determined the impact if any it may have on our consolidated financial
statements.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Historically, our exposure to market risk for changes in interest rates relates primarily to our
short and long-term debt obligations. At September 30, 2009, we had $398.6 million aggregate
principal amount outstanding of term loans due 2013 pursuant to our senior secured credit
agreement, $114.3 million of 9.5% senior subordinated notes due 2016 and $10.0 million borrowings
under our revolving credit facility due 2011. The term loans and the revolving credit facility bear
interest at floating rates. In May 2006, we entered into four interest rate swaps to manage and
reduce the risk inherent in interest rate fluctuations and to effectively convert a notional amount
of $245.0 million of floating rate debt to fixed rate debt. In November 2008 and 2007, interest
rate swaps with a notional amount of $30.0 million and $25.0 million, respectively, matured. As of
September 30, 2009, we had outstanding interest rate swaps with a notional amount of $190.0
million. Giving effect to the interest rate swaps, a 0.25% increase in floating rates would
increase our interest expense by $0.5 million annually. See Hedging and Derivative Instruments
under Note 6 to our consolidated financial statements, which section is incorporated herein by
reference.
Foreign Currency Risk
The majority of our operations are based in the United States and, accordingly, the majority of our
transactions are denominated in U.S. dollars; however, we do 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, we have operations in Canada, the
United Kingdom and Ireland and conduct transactions in the local currency of each location.
We monitor our foreign currency exposure and, from time to time, will attempt to reduce our
exposure through hedging. At September 30, 2009, we had no foreign currency contracts outstanding.
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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
44 | ||||
45 | ||||
46 | ||||
47 | ||||
48 | ||||
49 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of Activant Solutions Inc.
We have audited the accompanying consolidated balance sheets of Activant Solutions Inc. (the
Company) as of September 30, 2009 and 2008 and the related consolidated statements of operations
and comprehensive income (loss), stockholders equity, and cash flows for each of the three years
in the period ended September 30, 2009. Our audits also included the financial statement schedule
listed in the Index at Item 15(a) (2). These financial statements and schedule are the
responsibility of the Companys 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 the standards of the Public Company Accounting Oversight
Board (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. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and 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 Activant Solutions Inc. at September 30, 2009 and
2008, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended September 30, 2009, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, 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 14, 2009
December 14, 2009
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ACTIVANT SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
September 30, | ||||||||
(in thousands, except share data) | 2009 | 2008 | ||||||
ASSETS: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 44,573 | $ | 64,789 | ||||
Trade accounts receivable, net of allowance
for doubtful accounts of $4,621 and $5,415 at
September 30, 2009 and 2008, respectively |
34,412 | 45,138 | ||||||
Inventories |
4,985 | 5,310 | ||||||
Deferred income taxes |
4,285 | 6,226 | ||||||
Income taxes receivable |
| 1,186 | ||||||
Prepaid expenses and other current assets |
5,524 | 5,124 | ||||||
Total current assets |
93,779 | 127,773 | ||||||
Property and equipment, net |
6,073 | 8,942 | ||||||
Intangible assets, net |
192,394 | 217,058 | ||||||
Goodwill |
543,718 | 662,209 | ||||||
Deferred financing costs |
8,903 | 13,130 | ||||||
Other assets |
3,217 | 2,172 | ||||||
Total assets |
$ | 848,084 | $ | 1,031,284 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 18,030 | $ | 19,181 | ||||
Payroll related accruals |
17,787 | 15,020 | ||||||
Deferred revenue |
31,654 | 32,518 | ||||||
Current portion of long-term debt |
5,886 | 3,325 | ||||||
Accrued expenses and other current liabilities |
18,162 | 15,484 | ||||||
Total current liabilities |
91,519 | 85,528 | ||||||
Long-term debt, net of discount |
517,009 | 613,787 | ||||||
Deferred tax liabilities |
53,837 | 54,028 | ||||||
Other liabilities |
19,189 | 18,625 | ||||||
Total liabilities |
681,554 | 771,968 | ||||||
Commitments and contingencies (See Note 10) |
| | ||||||
Common Stock: |
||||||||
Par value $0.01, authorized 1,000 shares, 10
shares issued and outstanding at September
30, 2009 and 2008 |
| | ||||||
Additional paid-in capital |
257,570 | 254,148 | ||||||
Retained earnings (accumulated deficit) |
(80,680 | ) | 11,355 | |||||
Other accumulated comprehensive loss: |
||||||||
Unrealized loss on cash flow hedges |
(8,593 | ) | (5,585 | ) | ||||
Cumulative translation adjustment |
(1,767 | ) | (602 | ) | ||||
Total stockholders equity |
166,530 | 259,316 | ||||||
Total liabilities and stockholders equity |
$ | 848,084 | $ | 1,031,284 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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ACTIVANT SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Year Ended September 30, | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Revenues: |
||||||||||||
Systems |
$ | 124,546 | $ | 173,237 | $ | 181,359 | ||||||
Services |
254,397 | 253,132 | 227,763 | |||||||||
Total revenues |
378,943 | 426,369 | 409,122 | |||||||||
Cost of revenues (exclusive of
depreciation and amortization of $18.5
million, $13.1 million, and $12.7 million
for the years ended September 30, 2009,
2008 and 2007, respectively, included in
amounts shown separately below): |
||||||||||||
Systems (Note 9) |
67,787 | 95,350 | 99,290 | |||||||||
Services (Note 9) |
84,867 | 92,260 | 83,821 | |||||||||
Total cost of revenues |
152,654 | 187,610 | 183,111 | |||||||||
Gross profit |
226,289 | 238,759 | 226,011 | |||||||||
Operating expenses: |
||||||||||||
Sales and marketing (Note 9) |
55,540 | 64,039 | 64,473 | |||||||||
Product development (Note 9) |
38,553 | 44,258 | 40,652 | |||||||||
General and administrative (Note 9) |
24,275 | 31,517 | 27,732 | |||||||||
Depreciation and amortization |
38,917 | 37,254 | 29,735 | |||||||||
Impairment of goodwill |
114,500 | | | |||||||||
Acquisition related costs |
260 | 1,056 | 531 | |||||||||
Restructuring costs |
4,516 | 2,272 | 1,109 | |||||||||
Total operating expenses |
276,561 | 180,396 | 164,232 | |||||||||
Operating income (loss) |
(50,272 | ) | 58,363 | 61,779 | ||||||||
Interest expense |
(40,977 | ) | (51,196 | ) | (48,398 | ) | ||||||
Gain on retirement of debt |
18,958 | | | |||||||||
Other income (expense), net |
(994 | ) | 1,258 | 1,529 | ||||||||
Income (loss) before income taxes |
(73,285 | ) | 8,425 | 14,910 | ||||||||
Income tax expense |
18,750 | 4,804 | 9,987 | |||||||||
Net income (loss) |
$ | (92,035 | ) | $ | 3,621 | $ | 4,923 | |||||
Comprehensive income (loss): |
||||||||||||
Net income (loss) |
$ | (92,035 | ) | $ | 3,621 | $ | 4,923 | |||||
Unrealized loss on cash flow hedges |
(3,008 | ) | (2,694 | ) | (788 | ) | ||||||
Foreign currency translation adjustment |
(1,165 | ) | (791 | ) | 237 | |||||||
Comprehensive income (loss) |
$ | (96,208 | ) | $ | 136 | $ | 4,372 | |||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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ACTIVANT SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Retained | ||||||||||||||||||||||||
Additional | Earnings | Other Accumulated | Total | |||||||||||||||||||||
Common Stock | Paid-in | (Accumulated | Comprehensive | Stockholders | ||||||||||||||||||||
(in thousands) | Shares | Amount | Capital | Deficit) | Loss | Equity | ||||||||||||||||||
Balance, September 30, 2006 |
10 | $ | | $ | 246,744 | $ | 3,080 | $ | (2,151 | ) | $ | 247,673 | ||||||||||||
Foreign currency
translation adjustments |
| | | | 237 | 237 | ||||||||||||||||||
Repurchase of Activant
Group common
stock |
| | (14 | ) | | | (14 | ) | ||||||||||||||||
Stock-based compensation |
| | 4,163 | | | 4,163 | ||||||||||||||||||
Unrealized loss on cash
flow hedges |
| | | | (788 | ) | (788 | ) | ||||||||||||||||
Net income |
| | | 4,923 | | 4,923 | ||||||||||||||||||
Balance, September 30, 2007 |
10 | | 250,893 | 8,003 | (2,702 | ) | 256,194 | |||||||||||||||||
Foreign currency
translation adjustments |
| | | | (791 | ) | (791 | ) | ||||||||||||||||
Repurchase of Activant
Group common
stock |
| | (14 | ) | | | (14 | ) | ||||||||||||||||
Stock-based compensation |
| | 3,269 | | | 3,269 | ||||||||||||||||||
Unrealized loss on cash
flow hedges |
| | | | (2,694 | ) | (2,694 | ) | ||||||||||||||||
Adoption of FIN No. 48 |
| | | (269 | ) | | (269 | ) | ||||||||||||||||
Net income |
| | | 3,621 | | 3,621 | ||||||||||||||||||
Balance, September 30, 2008 |
10 | | 254,148 | 11,355 | (6,187 | ) | $ | 259,316 | ||||||||||||||||
Foreign currency
translation adjustments |
| | | | (1,165 | ) | (1,165 | ) | ||||||||||||||||
Exercise of options |
| | 196 | | | 196 | ||||||||||||||||||
Repurchases of Activant
Group common
stock |
| | (385 | ) | | | (385 | ) | ||||||||||||||||
Stock-based compensation |
| | 3,611 | | | 3,611 | ||||||||||||||||||
Unrealized loss on cash
flow hedges |
| | | | (3,008 | ) | (3,008 | ) | ||||||||||||||||
Net loss |
| | | (92,035 | ) | | (92,035 | ) | ||||||||||||||||
Balance, September 30, 2009 |
10 | $ | | $ | 257,570 | $ | (80,680 | ) | $ | (10,360 | ) | $ | 166,530 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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ACTIVANT SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Operating activities: |
||||||||||||
Net income (loss) |
$ | (92,035 | ) | $ | 3,621 | $ | 4,923 | |||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||||
Impairment of goodwill |
114,500 | | | |||||||||
Gain on retirement of debt |
(18,958 | ) | | | ||||||||
Stock-based compensation expense |
3,611 | 3,269 | 4,163 | |||||||||
Depreciation |
5,229 | 6,056 | 6,048 | |||||||||
Amortization of intangible assets |
33,688 | 31,198 | 23,687 | |||||||||
Amortization of deferred financing costs |
2,370 | 2,477 | 2,176 | |||||||||
Provision for doubtful accounts |
1,609 | 2,435 | 3,657 | |||||||||
Deferred income taxes |
1,750 | (6,019 | ) | 4,257 | ||||||||
Changes in assets and liabilities: |
||||||||||||
Trade accounts receivable |
9,117 | 14,341 | (4,285 | ) | ||||||||
Inventories |
325 | 49 | (62 | ) | ||||||||
Prepaid expenses and other assets |
(259 | ) | 4,276 | 9,152 | ||||||||
Accounts payable |
(1,201 | ) | 780 | 4,457 | ||||||||
Deferred revenue |
(864 | ) | (1054 | ) | (1,745 | ) | ||||||
Accrued expenses and other |
5,865 | (2,534 | ) | (5,971 | ) | |||||||
Net cash provided by operating activities |
64,747 | 58,895 | 50,457 | |||||||||
Investing activities: |
||||||||||||
Business acquisitions |
| | (108,172 | ) | ||||||||
Purchase of property and equipment |
(2,398 | ) | (4,924 | ) | (7,056 | ) | ||||||
Capitalized computer software and database costs |
(9,024 | ) | (6,690 | ) | (5,276 | ) | ||||||
Purchase price adjustments |
| | 1,784 | |||||||||
Net cash used in investing activities |
(11,422 | ) | (11,614 | ) | (118,720 | ) | ||||||
Financing activities: |
||||||||||||
Repurchases of debt |
(39,840 | ) | | | ||||||||
Proceeds from borrowings |
| | 95,000 | |||||||||
Repayment of borrowings |
| | (2,000 | ) | ||||||||
Payments on long-term debt |
(33,512 | ) | (15,751 | ) | (25,187 | ) | ||||||
Deferred financing costs |
| (106 | ) | (2,540 | ) | |||||||
Exercise of options |
196 | | | |||||||||
Repurchases of Activant Group common stock |
(385 | ) | (14 | ) | (14 | ) | ||||||
Net cash provided by (used in) financing activities |
(73,541 | ) | (15,871 | ) | 65,259 | |||||||
Net change in cash and cash equivalents |
(20,216 | ) | 31,410 | (3,004 | ) | |||||||
Cash and cash equivalents, beginning of period |
64,789 | 33,379 | 36,383 | |||||||||
Cash and cash equivalents, end of period |
$ | 44,573 | $ | 64,789 | $ | 33,379 | ||||||
Supplemental disclosures of cash flow information |
||||||||||||
Cash paid during the period for interest |
$ | 43,766 | $ | 47,997 | $ | 45,813 | ||||||
Cash paid during the period for income taxes
(net of receipts) |
$ | 7,689 | $ | 8,478 | $ | (3,642 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
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ACTIVANT SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
September 30, 2009
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated balance sheets as of September 30, 2009 and 2008 and the accompanying
consolidated statements of operations and comprehensive income (loss) and cash flows for each of
the three years in the period ended September 30, 2009 represent our financial position, results of
operations and cash flows as of and for the periods then ended.
In preparing the accompanying consolidated financial statements, we have reviewed, as determined
necessary by our management, events that have occurred after September 30, 2009, up until the
issuance of the financial statements, which occurred on
December 14, 2009. As of such date, our
management was not aware of any subsequent events, other than those disclosed herein, requiring
additional disclosure.
Description of Business
We are a leading provider of business management solutions to distribution and specialty retail
businesses. We have experience serving businesses with complex distribution and retail requirements
in three primary vertical markets: hardlines and lumber, wholesale distribution and the automotive
parts aftermarket. Using a combination of proprietary software and extensive expertise in these
vertical markets, we provide complete business management solutions consisting of tailored systems,
product support, content and supply chain products and services and professional services designed
to meet the unique requirements of our customers. Our fully integrated systems and services include
point-of-sale, inventory management, general accounting, e-commerce, warehouse automation, and
product data management that enable our customers to manage their day-to-day business operations.
Cash Equivalents
We consider all highly liquid investments with maturities of three months or less when purchased to
be cash equivalents.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts receivable based upon expected collectability. The
reserve is established based upon an analysis of our aged receivables. Additionally, if necessary,
a specific reserve for individual accounts is recorded when we become aware of a customers
inability to meet its financial obligations, such as in the case of a bankruptcy filing or
deterioration in the customers operating results or financial position. We also regularly review
the allowance by considering factors such as historical experience, credit quality, age of the
accounts receivable balance, and current economic conditions that may affect a customers ability
to pay.
Inventories
Inventories primarily consist of purchased parts and finished goods. Inventories are valued at the
lower of cost or estimated fair market value with cost computed on an average cost basis.
Consideration is given to obsolescence, excessive levels, deterioration and other factors in
evaluating net realizable value. We record write downs for excess and obsolete inventory equal to
the difference between the cost of inventory and the estimated fair market value based upon
assumptions about future product life-cycles, product demand and market conditions. At the point of
loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes
in facts and circumstances do not result in the restoration or increase in that newly established
cost basis.
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. 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.
Software and Database Development Costs
In accordance with relevant authoritative accounting principles, costs incurred internally in
creating computer software products are expensed until technological feasibility has been
established, which is typically evidenced by a completed program design. Thereafter, applicable
software development costs are capitalized and subsequently reported at the lower of amortized cost
or net realizable value. Costs incurred related to the accumulation of data for the development of
databases are capitalized and subsequently reported at the
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lower of amortized cost or net realizable value. Capitalized costs are amortized using the greater
of the amount computed using (a) the ratio that current gross revenues bear to the total
anticipated future gross revenues or (b) the straight-line method over the estimated economic life
of the product not to exceed five years. We are required to use our professional judgment in
determining whether software development costs meet the criteria for immediate expense or
capitalization using the criteria described above and evaluate software and database development
costs for impairment at each balance sheet date by comparing the unamortized capitalized costs to
the net realizable value. The net realizable value is the estimated future gross revenue from that
product reduced by the estimated future costs of completing, maintaining and disposing of the
product. We capitalized approximately $9.0 million, $6.7 million and $5.3 million of software and
database development costs and recorded related amortization expense of approximately $5.3 million,
$3.1 million and $1.3 million for the years ended September 30, 2009, 2008 and 2007, respectively.
We had no write-offs of software and database development costs for any of these periods.
Deferred Financing Costs
Financing costs are deferred and amortized to interest expense using the straight-line method over
the terms of the related debt, which approximates the effective interest method, unless associated
with any debt repurchases or retirements. At the time of any such repurchases or retirements, a
proportionate amount of net deferred financing costs are written off and included in the
calculation of gain/(loss) on retirement. We recognized amortization of deferred financing costs
totaling $2.4 million, $2.5 million and $2.2 million for the years ended September 30, 2009, 2008
and 2007, respectively. We wrote off deferred financing costs of $1.9 million for the year ended
September 30, 2009, in connection with debt repurchases.
Goodwill and Other Intangible Assets
We account for goodwill and other intangibles in accordance with relevant authoritative accounting
principles. Business acquisitions typically result in goodwill and other intangible assets, and
the recorded values of those assets may become impaired in the future. The determination of the
value of these intangible assets requires management to make estimates and assumptions that affect
our consolidated financial statements. Goodwill and other intangibles are tested for impairment on
an annual basis as of July 1, and between annual tests if indicators of potential impairment exist,
using a fair-value-based approach. Our annual testing through fiscal years 2008 and 2007 indicated
no impairment of goodwill had occurred, and we had no write-offs to goodwill or other intangible
assets. As a result of the global economic uncertainty and credit crisis present in the last
calendar quarter of 2008, we determined it necessary to evaluate goodwill for impairment as of
December 31, 2008. We completed the impairment analysis for each of our reporting units and
concluded that as of December 31, 2008, the fair value of our Hardlines and Lumber and our
Automotive reporting units was below their respective carrying values, including goodwill.
Consequently, we recorded a goodwill impairment charge of $107.0 million, comprised of $78.0
million related to Hardlines and Lumber and $29.0 million related to Automotive. During our fiscal
year 2009 annual test for impairment we further concluded that fair value of our Other reporting
unit was below its carrying value, including goodwill. As a result, we recorded a goodwill
impairment charge of $7.5 million related to Other bringing our total goodwill impairment charge
for fiscal year 2009 to $114.5 million. For the purposes of these analyses, our estimates of fair
value were based on a combination of the income approach, which estimates the fair value of our
reporting units based on the future discounted cash flows, and the market approach, which estimates
the fair value of our reporting units based on comparable market prices. We will not be required
to make any current or future cash payments as a result of these impairment charges. We will
continue to monitor if conditions exist that indicate additional potential impairment has occurred.
If such conditions exist, we may be required to record additional impairments in the future and
such impairments, if any, may be material.
We amortize other finite life intangible assets using the straight-line method over their estimated
period of benefit, ranging from two to ten years. We evaluate the recoverability of intangible
assets periodically and take into account events or circumstances that warrant revised estimates of
useful lives or that indicate that impairment exists. No impairments of finite life intangible
assets have been identified during any of the periods presented.
Long-Lived Assets
We periodically review the carrying amounts of property and equipment and other long-lived assets
to determine whether current events or circumstances 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 the carrying value of the assets; thus, no
impairment loss has been recognized.
Revenue Recognition
We recognize revenue in accordance with relevant authoritative accounting principles. We generate
revenue from the sale of software licenses, computer hardware, maintenance services, professional
services, data and content services, and education. We generally utilize written contracts as the
means to establish the terms and conditions by which our licenses, products, maintenance and
services are sold to our customers. Revenue is recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, the fee is fixed or determinable, collection is
probable, and vendor-specific objective evidence (VSOE) of the fair value of undelivered elements
exists. We record revenue net of our sales tax obligations.
For the majority of our system sales, which typically include multiple elements such as software,
hardware, maintenance, professional services, and education, we use the residual method of revenue
recognition. Under the residual method, consideration is allocated to
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undelivered elements based upon VSOE of the fair value of those elements, with the residual of the
arrangement fee allocated to the software components. We have established VSOE of fair value for
each undelivered element of the system sale through independent transactions not sold in connection
with a software license. In situations where we have not established VSOE of fair value, all
revenue from the arrangement is deferred until sufficient evidence exists, or until all elements of
that arrangement have been delivered.
Professional and education services that are sold in connection with software license arrangements
generally qualify for separate accounting from the license elements because they do not involve
significant production, modification, or customization of our software products and are not
otherwise considered to be essential to the functionality of such products. Revenue from such
services is generally recognized as the services are performed. If the arrangement does not
qualify for separate accounting of the software licenses and professional services, the combined
software license and professional service elements are recognized based on contract accounting
using either the percentage-of-completion or completed-contract method depending on whether or not
costs to complete the services are reasonably dependable.
Maintenance and content services are separately priced in our arrangements. Revenue is recognized
ratably over the term of the arrangement.
Advertising Costs
We expense all advertising costs as incurred, and the amounts were not material for any of the
periods presented.
Income Taxes
We account for income taxes in accordance with relevant authoritative accounting principles.
Deferred income taxes are provided for all temporary differences based on differences between
financial reporting and tax basis 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. A valuation
allowance is established against deferred tax assets if the future realization of these assets is
not likely based on the weight of the available evidence. Income taxes are provided on the
undistributed earnings of foreign subsidiaries that are not considered to be permanently
reinvested.
As a result of our adoption of an accounting standard in October 2007, we recognize and measure
benefits for uncertain tax positions which requires significant judgment from management. See Note
8 for further impact of this adoption. We evaluate our uncertain tax positions on a quarterly
basis and base these evaluations upon a number of factors, including changes in facts or
circumstances, changes in tax law, correspondence with tax authorities during the course of audits
and effective settlement of audit issues. Changes in the recognition or measurement of uncertain
tax positions could result in material increases or decreases in our income tax expense in the
period in which we make the change, which could have a material impact on our effective tax rate
and operating results.
Fair Value of Financial Instruments
Effective October 1, 2008, we adopted an accounting standard, which defines fair value, establishes
a framework for measuring fair value as well as expands on required disclosures regarding fair
value measurements. This standard applies to reported balances that are required or permitted to
be measured at fair value under existing accounting pronouncements; accordingly, the standard does
not require any new fair value measurements of reported balances.
Financial assets and liabilities with carrying amounts approximating fair value include cash and
cash equivalents, trade accounts receivable, accounts payable and accrued expenses and other
current liabilities. The carrying amount of these financial assets and liabilities approximates
fair value because of their short maturities. See Note 7 for
additional information.
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
We perform ongoing credit evaluations of our customers and generally do not require collateral from
our customers. Most of our customers are in hardlines and lumber, wholesale distribution and the
automotive parts aftermarket industries.
No single customer accounted for more than 10% of our total revenues during the years ended
September 30, 2009, 2008 and 2007.
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Foreign Currency
Assets and liabilities of subsidiary operations denominated in foreign currencies are translated at
the period-end rates of exchange and the income statements are translated at the average rates of
exchange for the period. Translation adjustments resulting from this process are charged or
credited to other comprehensive income. Local currencies are considered to be the functional
currencies.
Stock-Based Compensation
We record stock-based compensation in accordance with authoritative accounting principles which
requires all stock-based compensation to employees, including grants of employee stock options, be
recognized in the financial statements based on their fair values. We estimate the fair value of
stock options using a Black-Scholes option pricing model that uses certain assumptions including
expected term, expected volatility of the underlying stock, expected dividend pay-out rate and
risk-free rate of return. The expected term is based on historical data and represents the period
of time that stock options granted are expected to be outstanding. Due to the fact that the common
stock underlying the options is not publicly traded, the expected volatility is based on a
comparable group of companies for the period. We do not intend to pay dividends on our common
stock for the foreseeable future, and accordingly, use a dividend yield of zero. The risk-free
rate for periods within the contractual life of the option is based on the Treasury Bill coupon
rate for U.S. Treasury securities in effect at the time of the grant with a maturity approximating
the expected term. In addition, we are required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If our actual forfeiture rate is materially
different from our estimate, the stock-based compensation expense could be significantly different
from the amount we have recorded in the current period.
Recently Issued Accounting Pronouncements
In September 2009, we adopted the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC). The FASB established the ASC as the single source of authoritative
non-governmental U.S. GAAP, superseding various existing authoritative accounting pronouncements.
It eliminates the previous GAAP hierarchy and establishes one level of authoritative GAAP. All
other literature is considered non-authoritative. The FASB will not issue new standards in the
form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will
issue an Accounting Standards Update (ASU). The FASB will not consider ASUs as authoritative in
their own right. ASUs will serve only to update the ASC, provide background information about the
guidance and provide the bases for conclusions on the change(s) in the ASC. Unless needed to
clarify a point to readers, we will refrain from citing specific section references when discussing
application of accounting principles or addressing new or pending accounting rule changes.
In October 2009, the FASB issued an ASU that amended the accounting rules addressing revenue
recognition for multiple-deliverable revenue arrangements by eliminating the criterion for
objective and reliable evidence of fair value for the undelivered products or services. Instead,
revenue arrangements with multiple deliverables should be divided into separate units of accounting
provided the deliverables meet certain criteria. Additionally the ASU provides for elimination of
the use of the residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables based on their relative selling
price. A hierarchy for estimating such selling price is included in the update. This ASU will be
effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010. Early adoption is permitted. We are currently
evaluating whether this update will have an impact on our consolidated financial statements.
In October 2009, the FASB issued an ASU that provides a list of items to consider when
determining whether the software and non-software components function together to deliver a
products essential functionality. This ASU is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. We are currently evaluating whether this update will have an impact on our
consolidated financial statements.
In September 2009, the FASB issued an ASU providing clarification for measuring fair value when a
quoted price in an active market for the identical liability is not available. It also clarifies
that when estimating the fair value of a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. This ASU is effective for fiscal periods beginning after
August 27, 2009. We do not believe this update will have a material impact on our consolidated
financial statements.
In May 2009, the FASB established the standards for accounting for and disclosure of subsequent
events. It defines subsequent events as those events or transactions that occur after the balance
sheet date, but before the financial statements are issued or available to be issued. The statement
defines subsequent events as either recognized or non-recognized and requires the date through
which an entity evaluates subsequent events be disclosed. We adopted this guidance in June 2009.
In April 2009, the FASB issued amended disclosure rules concerning interim disclosure requirements
for fair value of financial instruments. These rules amend the previous accounting standard, which
now require disclosures about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. The effective date of this
amendment is for interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. We adopted the provisions of this amendment as
of June 30, 2009. See Notes 6 and 7 to our consolidated financial statements for required
disclosures.
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Effective October 1, 2008, we adopted standards and related applicable amendments regarding fair
value measurement. In this standard, the FASB defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not
require any new fair value measurements, rather it applies to existing accounting pronouncements
that require or permit fair value measurements. The FASB first amended the statement to exclude
guidance regarding leases and certain other lease-related accounting pronouncements. A second
amendment delayed the effective date for nonfinancial assets and nonfinancial liabilities, except
for items that are already recognized or disclosed at fair value in the financial statements on a
recurring basis, to fiscal years beginning after November 15, 2008. A third amendment clarifies
the application of this statement in determining the fair value of financial assets and liabilities
in a market that is not active and provides examples to illustrate key considerations in
determining such fair value. Lastly, the fourth amendment provides additional guidance on
estimating fair value when the volume and level of transaction activity for an asset or liability
have significantly decreased in relation to normal market activity for the asset and liability. We
concluded that the first, second and fourth amendments would not have an impact on our financial
statements, however the third amendment was included in our October 2008 adoption. See Note 7 to
our consolidated financial statements for required disclosures.
In March 2008, the FASB issued guidance requiring enhanced disclosures about derivative and hedging
activities. These disclosures should enable financial statement users to understand how and why a
company uses derivative instruments and how derivative instruments and related hedged items affect
a companys financial position, financial performance and cash flows. We adopted this guidance in
January 2009. See Note 6 for additional information regarding the required disclosures of our
derivative instruments and hedging activities. This statement does not impact the consolidated
statements of operations as it is disclosure only in nature.
In December 2007, the FASB issued guidance regarding business combinations, which significantly
changes the principles and requirements for how the acquirer of a business recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree, and the goodwill acquired. This statement is effective
prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal
years beginning after December 15, 2008. We are in the process of evaluating this standard and
therefore have not yet determined the impact if any it may have on our consolidated financial
statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current presentation.
NOTE 2 ACQUISITIONS
Acquisitions have been recorded using the purchase method of accounting, and, accordingly,
the results of operations are included in our consolidated results as of the date of each
acquisition. We allocate the purchase price of our acquisitions to the tangible assets,
liabilities and intangible assets acquired, based on their estimated fair values.
Silk Systems, Inc.
On May 31, 2007, we acquired the common stock of Silk Systems, Inc. (Silk Systems) for a total
purchase price of $6.9 million, net of $0.7 million cash received. Acquired intangible assets
consisted primarily of customer contracts, customer lists and acquired technology with a weighted
average useful life of seven years. The amortization expense related to the acquired intangible
assets is approximately $0.4 million per annum. The goodwill recorded as a result of this
acquisition is not expected to be deductible for tax purposes.
Eclipse Distribution Management Solutions
On August 17, 2007, we acquired substantially all of the assets of Eclipse for cash consideration
of approximately $101.3 million. Acquired intangible assets consist primarily of customer
contracts, customer lists and acquired technology with a weighted average useful life of six years.
The amortization expense related to the acquired intangible assets is approximately $6.8 million
per annum. The goodwill recorded as a result of this acquisition is expected to be deductible for
tax purposes.
The purchase price was allocated based on the fair value of net assets acquired as follows (in
thousands):
Trade receivables |
$ | 4,506 | ||
Inventory |
705 | |||
Property and equipment |
266 | |||
Other assets |
48 | |||
Goodwill |
64,496 | |||
Other intangible assets |
36,000 | |||
Deferred revenue |
(4,761 | ) | ||
Total purchase price |
$ | 101,260 | ||
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The results of operations include the results of Silk Systems commencing after May 31, 2007 and of
Eclipse commencing after August 17, 2007. Accordingly, our results of operations for the years
ended September 30, 2007 and 2008 are not directly comparable.
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment, net consist of the following as of September 30 (in thousands):
2009 | 2008 | |||||||
Furniture and equipment |
$ | 17,462 | $ | 14,562 | ||||
Service parts |
1,022 | 4,113 | ||||||
Leasehold improvements |
3,195 | 3,244 | ||||||
Gross property and equipment |
21,679 | 21,919 | ||||||
Less accumulated depreciation |
(15,606 | ) | (12,977 | ) | ||||
Total |
$ | 6,073 | $ | 8,942 | ||||
NOTE 4 GOODWILL
The carrying amount of goodwill by reportable segment is as follows as of September 30 (in
thousands):
2009 | 2008 | |||||||
Hardlines and Lumber |
$ | 107,952 | $ | 186,480 | ||||
Wholesale Distribution |
334,288 | 335,018 | ||||||
Automotive |
99,214 | 128,534 | ||||||
Other |
2,264 | 12,177 | ||||||
Total |
$ | 543,718 | $ | 662,209 | ||||
Changes in the carrying amount of goodwill for fiscal years 2009 and 2008 are as follows (in
thousands):
Balance at September 30, 2007 |
$ | 672,206 | ||
Final valuation of acquisition |
(5,800 | ) | ||
Adoption of FIN No. 48 and adjustments for
pre-acquisition income tax liabilities |
(4,197 | ) | ||
Balance at September 30, 2008 |
662,209 | |||
Impairment of goodwill |
(114,500 | ) | ||
Adjustments for pre-acquisition income tax liabilities |
(3,991 | ) | ||
Balance at September 30, 2009 |
$ | 543,718 | ||
We account for goodwill and other intangibles in accordance with relevant authoritative accounting
principles. Business acquisitions typically result in goodwill and other intangible assets, and
the recorded values of those assets may become impaired in the future. The determination of the
value of these intangible assets requires management to make estimates and assumptions that affect
our consolidated financial statements. Goodwill and other intangibles are tested for impairment on
an annual basis as of July 1, and between annual tests if indicators of potential impairment exist,
using a fair-value-based approach. Our annual testing through fiscal years 2008 and 2007 indicated
no impairment of goodwill had occurred, and we had no write-offs to goodwill or other intangible
assets. As a result of the global economic uncertainty and credit crisis, we determined it
necessary to evaluate goodwill for impairment as of December 31, 2008. We completed the impairment
analysis for each of our reporting units and concluded that as of December 31, 2008, the fair value
of our Hardlines and Lumber and our Automotive reporting units was below their respective carrying
values, including goodwill. Consequently, we recorded a goodwill impairment charge of $107.0
million, comprised of $78.0 million related to Hardlines and Lumber and $29.0 million related to
Automotive. During our fiscal year 2009 annual test for impairment we further concluded that fair
value of our Other reporting unit was below its carrying value, including goodwill. As a result,
we recorded a goodwill impairment charge of $7.5 million related to Other bringing our total
goodwill impairment charge for fiscal year 2009 to $114.5 million. For the purposes of these
analyses, our estimates of fair value were based on a combination of the income approach, which
estimates the fair value of our reporting units based on the future discounted cash flows, and the
market approach, which estimates the fair value of our reporting units based on comparable market
prices. We will not be required to make any current or future cash payments as a result of these
impairment charges. We will continue to monitor if conditions exist that indicate additional
potential impairment has occurred. If such conditions exist, we may be required to record
additional impairments in the future and such impairments, if any, may be material.
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In conjunction with the adoption of authoritative accounting guidance and the identification of
additional pre-acquisition income tax uncertainties and basis adjustments related to temporary
differences of acquired assets that are not expected to reverse, we recorded a net decrease to
goodwill of approximately $4.0 million and $4.2 million, respectively, for the years ended
September 30, 2009 and 2008. (See Note 8 for additional information). Additionally in the year
ended September 30, 2008, we decreased goodwill by $5.8 million, related to the final allocation of
purchase price to acquired assets.
NOTE 5 INTANGIBLE ASSETS
The components of purchased intangible assets are as follows as of September 30, (in
thousands):
2009 | 2008 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Carrying | Accumulated | Net Carrying | Carrying | Accumulated | Net Carrying | |||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
Technology based |
$ | 70,600 | $ | (37,287 | ) | $ | 33,313 | $ | 70,600 | $ | (25,435 | ) | $ | 45,165 | ||||||||||
Customer based |
161,328 | (48,701 | ) | 112,627 | 161,328 | (33,173 | ) | 128,155 | ||||||||||||||||
Other |
768 | (478 | ) | 290 | 768 | (273 | ) | 495 | ||||||||||||||||
Capitalized software and database costs |
23,193 | (9,831 | ) | 13,362 | 14,169 | (4,517 | ) | 9,652 | ||||||||||||||||
Trademarks and tradenames |
3,800 | (1,498 | ) | 2,302 | 3,800 | (709 | ) | 3,091 | ||||||||||||||||
Total amortizable intangible assets |
259,689 | (97,795 | ) | 161,894 | 250,665 | (64,107 | ) | 186,558 | ||||||||||||||||
Trademarks and tradenames |
30,500 | | 30,500 | 30,500 | | 30,500 | ||||||||||||||||||
Total |
$ | 290,189 | $ | (97,795 | ) | $ | 192,394 | $ | 281,165 | $ | (64,107 | ) | $ | 217,058 | ||||||||||
During the year ended September 30, 2009, we recorded additions to intangible assets of $9.0
million related to capitalized software and database costs. During the year ended September 30,
2008, we increased intangible assets by $12.7 million of which $6.0 million was related to the
final allocation of purchase price to intangible assets acquired and $6.7 million was related to
capitalized software and database costs. Additionally, as a result of the final allocation we
adjusted the weighted average lives of the acquired intangibles.
Acquired finite-lived intangibles are generally amortized on a straight-line basis over the
weighted average periods. For the years ended September 30,
2009, 2008 and 2007, we recorded
amortization expense of $33.7 million, $31.2 million and
$23.7 million, respectively.
Estimated amortization
expense for each of the next five years is $34.8 million,
$34.4 million,
$31.5 million, $19.9 million, and $15.3 million, respectively.
We evaluate the purchased intangible assets with an indefinite life on an annual basis as of the
beginning of July 1, and whenever events and changes in circumstances indicate that there may be a
potential impairment. Our annual testing resulted in no impairment charges to intangible assets in
the years ended September 30, 2009 and 2008. Future impairment tests could result in a charge to
earnings.
NOTE 6 DEBT
Total debt consisted of the following as of September 30 (in thousands):
2009 | 2008 | |||||||
Senior secured credit facility due 2013 |
$ | 331,227 | $ | 350,600 | ||||
Senior secured credit facility (incremental term
loan) due 2013 |
67,373 | 71,512 | ||||||
Senior subordinated notes due 2016 |
114,295 | 175,000 | ||||||
Revolving credit facility due 2011 |
10,000 | 20,000 | ||||||
Total debt |
522,895 | 617,112 | ||||||
Current portion |
(5,886 | ) | (3,325 | ) | ||||
Total long-term debt, net of discount |
$ | 517,009 | $ | 613,787 | ||||
Senior Secured Credit Agreement
We have a senior secured credit agreement that provides for (i) a seven-year term loan in the
amount of $390.0 million, amortized at a rate of 1.00% per year on a quarterly basis for the first
six and three-quarters years after May 2, 2006, except such amortized loan payments that may
otherwise be due are reduced dollar-for-dollar by any voluntary prepayments or mandatory repayments
we make, with the balance payable on May 2, 2013, and (ii) a five-year revolving credit facility
that permits loans in an aggregate amount of up to $40.0 million, which includes a $5.0 million
letter of credit facility and a swing line facility. Principal amounts outstanding under the
revolving credit facility are due and payable in full at maturity, on May 2, 2011. In addition,
subject to certain terms and conditions, the
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senior secured credit agreement provides for one or more uncommitted incremental term loans
and/or revolving credit facilities in an aggregate amount not to exceed $75.0 million.
In August 2007, we borrowed the $75.0 million incremental term loan, which matures on May 2, 2013,
as well as $20.0 million of the revolving credit facility. During the year ended September 30,
2009, we repaid $10.0 million in principal payments towards the revolving credit facility. In
October of 2009, we subsequently repaid the $10.0 million remaining outstanding principal balance
on the revolving credit facility. Prior to fiscal year 2009, we did not make any principal
repayments towards the revolving credit facility. To date we have prepaid all of the required
amortized principal payments required under the senior secured credit agreement.
We are required each year, generally concurrent with the filing of our Annual Report on Form 10-K,
to make a mandatory principal repayment towards term loans equal to one-half of excess cash flow,
as defined in the senior secured credit agreement, for the preceding fiscal year. Any mandatory
repayments due are reduced dollar-for-dollar by any voluntary prepayments made during the year.
For the period ended September 30, 2006 and for the years ended September 30, 2007, 2008 and 2009,
we repaid $1.9 million, $25.2 million, $15.8 million, and $23.5 million, respectively, in principal
payments towards the term loans. The fiscal year 2009 payments included approximately $3.3 million
of fiscal year 2008 mandatory principal repayments and approximately $20.2 million of voluntary
prepayments. After consideration of our voluntary prepayments made in fiscal year 2009, we have a
remaining mandatory principal repayment due for fiscal year 2009 of
$5.9 million. We classified
the remaining fiscal year 2009 mandatory repayment as current portion of long-term debt in the
accompanying consolidated balance sheet. Prior to fiscal year 2008, we did not have to make any
mandatory repayments. Any future mandatory principal repayments will be dependent upon us
generating excess cash flow and/or making voluntary prepayments, both as defined in the senior
secured credit agreement.
The capital and credit markets have been experiencing extreme volatility and disruption during the
past 18 months. These market conditions have, to a degree, affected our ability to borrow under our
senior secured credit facility. On September 15, 2008, Lehman Brothers Holdings Inc. (Lehman
Brothers) and on November 1, 2009, CIT Group Inc. (CIT), filed petitions under Chapter 11 of the
U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. A
Lehman Brothers subsidiary, Lehman Commercial Paper Inc. (Lehman CPI) and a CIT subsidiary, The
CIT Group/Equipment Financing, Inc. (CIT Financing), are lenders under our senior secured credit
agreement, having provided commitments of $7.0 million and $7.5 million, respectively, under the
revolving credit facility, of which $1.8 million and $1.9 million, respectively, were outstanding
as of September 30, 2009. In October of 2009, we subsequently repaid the $10.0 million remaining
outstanding principal balance on the revolving credit facility. Although we have made no request
for funding under the revolving credit facility since the filing of the bankruptcy petitions by
Lehman Brothers or CIT, it is uncertain whether Lehman CPI or CIT Financing will participate in any
future requests for funding or whether another lender might assume their commitments.
The borrowings under the senior secured credit agreement bear interest at a rate equal to an
applicable margin plus, at our option, either (a) a base rate determined by reference to the higher
of (1) the prime rate of Deutsche Bank Trust Company Americas, and (2) the federal funds rate plus
1/2 of 1%; or (b) a reserve adjusted Eurodollar rate on deposits for periods of one-, two-, three-,
or six-months (or, to the extent agreed to by each applicable lender, nine- or twelve-months or
less than one month). The initial applicable margin for the borrowings is:
| under the term loan, 1.00% with respect to base rate borrowings and 2.00% with respect to Eurodollar rate borrowings; | |
| under the incremental term loan, 1.50% with respect to base rate borrowings and 2.50% with respect to Eurodollar rate borrowings; and | |
| under the revolving credit facility, 1.00% with respect to base rate borrowings and 2.00% with respect to Eurodollar rate borrowings, which may be reduced subject to our attainment of certain leverage ratios. |
In addition to paying interest on outstanding principal under the senior secured credit agreement,
we are required to pay a commitment fee to the lenders under the revolving credit facility in
respect of the unutilized commitments thereunder. The initial commitment fee rate is 0.50% per
annum. The commitment fee rate may be reduced subject to our attaining certain leverage ratios,
none of which had been attained as of September 30, 2009. We must also pay customary letter of
credit fees for issued and outstanding letters of credit. As of September 30, 2009, we had $0.3
million of letters of credit issued and outstanding.
Substantially all of our assets and those of our subsidiaries are pledged as collateral under the
senior secured credit agreement.
Derivative Instruments and Hedging Activities
Our objective in using interest rate swaps is to add stability to interest expense and to manage
and reduce the risk inherent in interest rate fluctuations. To accomplish this objective, we
primarily use interest rate swaps as part of our interest rate risk management strategy. Interest
rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a
counterparty in exchange for our making fixed-rate payments over the life of the agreements without
exchange of the underlying notional amount. At the time we entered into the senior secured credit
agreement, we entered into four interest rate swaps to effectively convert a notional amount of
$245.0 million of floating rate debt to fixed rate debt. In November 2007 and 2008, interest rate
swaps with a notional amount of $25.0 million and $30.0 million, respectively, matured. As of
September 30, 2009, we had outstanding interest rate swaps
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with a notional amount of $190.0
million, of which $50.0 million matured in November 2009. As of and for the year ended September
30, 2009, there is no cumulative ineffectiveness related to these interest rate swaps.
We account for these interest rate swaps as cash flow hedges in accordance with relevant
authoritative accounting principles. We estimate the fair value of the interest rate swaps based
on quoted prices and market observable data of similar instruments. If the interest rate swap
agreements are terminated prior to maturity, the fair value of the interest rate swaps recorded in
accumulated other comprehensive income (loss) (OCI) may be recognized in the consolidated
statements of operations based on an assessment of the agreements at the time of terminations.
During the year ended September 30, 2009, we did not discontinue any interest rate swaps. The
realized gains and losses on these instruments are recorded in earnings as adjustments to interest
expense. The unrealized gains and losses are recognized in OCI. For the years ended September 30,
2009, 2008 and 2007, we recorded an unrealized loss of
$4.4 million ($3.0 million net of tax), $4.5
million ($2.7 million net of tax) and $1.3 million ($0.8 million net of tax), respectively. At
September 30, 2009, cumulative net unrealized losses of approximately $13.7 million, before taxes,
were recorded in OCI, of which an estimated $7.0 million are expected to be reclassified to net
income within the next twelve months, providing an offsetting economic impact against the
underlying transaction. To the extent any of the interest rate swaps are deemed ineffective, a
portion of the unrealized gains and losses is recorded in interest expense rather than OCI.
The following table summarizes the derivative-related activity, excluding taxes, in OCI for the
fiscal year 2009 (in thousands):
Unrealized loss in OCI at September 30, 2008 |
$ | (9,282 | ) | |
Net decrease in fair value |
(4,441 | ) | ||
Unrealized loss in OCI at September 30, 2009 |
$ | (13,723 | ) | |
The following tables summarize the fair value and realized and unrealized losses of the
interest rate swaps as of and for the year ended September 30, 2009 (in thousands):
Fair Value of Derivative Instruments | ||||||||||||||||||||
Derivative Assets | Derivative Liabilities | |||||||||||||||||||
Location in the | Location in the | |||||||||||||||||||
Consolidated | Consolidated | |||||||||||||||||||
Notional Amount | Balance Sheet | Fair Value | Balance Sheet | Fair Value | ||||||||||||||||
Interest rate swaps due November 2009 |
$ | 50,000 | Prepaid expenses and other current assets | $ | | Accrued expenses and other current liabilities | $ | (611 | ) | |||||||||||
Interest rate swaps due November 2011 |
$ | 140,000 | Other assets | $ | | Other liabilities | $ | (13,112 | ) |
Effect of Derivative Instruments on Consolidated Statements of Operations | ||||||||||||||||||||
Loss recognized in | Gain/(Loss) reclassified from OCI into | |||||||||||||||||||
Loss recognized in earnings (1) | OCI | earnings (2) | ||||||||||||||||||
Location | Amount | Amount | Location | Amount | ||||||||||||||||
Interest rate swaps |
Interest expense | $ | (7,215 | ) | $ | (4,441 | ) | Interest expense | $ | |
(1) | Includes amounts related to periodic settlements required under our derivative contracts. | |
(2) | Represents ineffectiveness related to the interest rate swaps. |
Senior Subordinated Notes due 2016
We also issued $175.0 million aggregate principal amount of 9.5% senior subordinated notes due May
2, 2016. The notes were issued in a private transaction that was not subject to the registration
requirements of the Securities Act. The notes subsequently were exchanged for substantially
identical notes registered with the SEC, pursuant to a registration rights agreement entered into
in connection with the indenture under which these notes were issued.
During the year ended September 30, 2009, we repurchased approximately $60.7 million in face value
of our senior subordinated notes in open market transactions for an aggregate purchase price of
approximately $41.1 million (including accrued interest of $1.3 million). In connection with the
debt repurchase, we wrote off deferred financing costs and other transaction fees of $1.9 million.
As a result of these repurchases we recorded a gain on retirement of debt in the amount of $19.0
million. Pursuant to the American Recovery and Reinvestment Act of 2009, we have elected to defer
payment of the income taxes associated with these gains until they are paid ratably from 2014 to
2018. The repurchased notes have been retired. As of September 30, 2009, senior subordinated
notes representing $114.3 million in principal amount were outstanding. Subject to the
restrictions and limitations set forth under the senior secured credit agreement and the indenture
governing the senior subordinated notes, we and our subsidiaries, affiliates or significant
stockholders may from time to time purchase, repay, redeem or retire additional amounts of our
outstanding debt or equity securities (including any publicly issued debt), in privately negotiated
or open market transactions, by tender offer or otherwise.
Each of our domestic subsidiaries, as primary obligors and not as sureties, jointly and severally,
irrevocably and unconditionally guarantees, on an unsecured senior subordinated basis, the
performance and full and punctual payment when due, whether at maturity,
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by acceleration or
otherwise, of all of our obligations under the indenture and the notes. The notes are our
unsecured senior subordinated obligations and are subordinated in right of payment to all of our
existing and future senior indebtedness (including the
senior secured credit agreement), are effectively subordinated to all of our secured indebtedness
(including the senior secured credit agreement) and are senior in right of payment to all of our
existing and future subordinated indebtedness.
The terms of the senior secured credit agreement and the indenture governing the senior
subordinated notes restrict certain activities by us, the most significant of which include
limitations on additional indebtedness, liens, guarantees, payment or declaration of dividends,
sale of assets and transactions with affiliates. In addition, the senior secured credit agreement
requires us to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The
senior secured credit agreement and the indenture also contain certain customary affirmative
covenants and events of default. At September 30, 2009, we were in compliance with all of the
senior secured credit agreements and the indentures covenants.
Compliance with these covenants is dependent on the results of our operations, which are subject to
a number of factors including current economic conditions. Based on our plan for the fiscal year
2010, we currently anticipate that we will be able to meet or exceed these financial tests and
covenants during this period. This expectation is based on our cost and revenue expectations for
fiscal year 2010, which include certain cost cutting initiatives. Should the current economic
conditions cause our business or our vertical markets to deteriorate beyond our expectations or
should our cost cutting initiatives prove insufficient we may not be able to satisfy these
financial tests and covenants.
In order to help ensure compliance with our covenants under our senior secured credit facilities,
we may take additional actions in the future, including implementing additional cost cutting
initiatives, making additional repurchases of some of our debt or making further changes to our
operations. In the event of a default of the financial covenants referred to above, we may (but no
more than two times in four fiscal quarters) cure the default by raising equity capital from our
existing investors in an amount sufficient to pass, but not to exceed, the financial covenant.
While we believe that these additional remedies provide us with some additional flexibility in
maintaining compliance with our tests and covenants, they do not assure us that we will not find
ourselves in violation of these tests and covenants. Upon the occurrence of an event of default
under the senior secured credit facilities, the lenders could elect to declare all amounts
outstanding to be immediately due and payable and terminate all commitments to extend further
credit. Any such acceleration would also result in a default under the indenture governing the
senior subordinated notes.
Aggregate maturities of debt, as of September 30, 2009, are as follows (in thousands):
2010 |
$ | 5,886 | ||
2011 |
10,000 | (1) | ||
2012 |
| |||
2013 |
392,714 | |||
2014 |
| |||
Thereafter |
114,295 | |||
Total |
$ | 522,895 | ||
(1) | In October of 2009, we subsequently repaid the $10.0 million remaining outstanding principal balance on the revolving credit facility. |
NOTE 7 FAIR VALUE
Effective October 1, 2008, we adopted an accounting standard, which defines fair value,
establishes a framework for measuring fair value as well as expands on required disclosures
regarding fair value measurements. This standard applies to reported balances that are required or
permitted to be measured at fair value under existing accounting pronouncements; accordingly, the
standard does not require any new fair value measurements of reported balances.
Inputs are referred to as assumptions that market participants would use in pricing the asset or
liability. The uses of inputs in the valuation process are categorized into a three-level fair
value hierarchy.
| Level 1 uses quoted prices in active markets for identical assets or liabilities we
have the ability to access. |
||
| Level 2 uses observable inputs other than quoted prices in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data. |
||
| Level 3 uses one or more significant inputs that are unobservable and supported by
little or no market activity, and that reflect the use of significant management judgment |
Our Level 1 assets and liabilities consist of cash equivalents, which are primarily invested in
money market funds, deferred compensation assets, which consist of corporate-owned life insurance
policies that are valued at their net surrender value, and deferred compensation liabilities,
valued based on various publicly traded mutual funds. These assets and liabilities are classified
as Level 1
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because they are valued using quoted prices and other relevant information generated by
market transactions involving identical assets and liabilities.
We use derivative financial instruments, specifically interest rate swaps, for non-trading
purposes. We entered into interest rate swaps to manage and reduce the risk inherent in interest
rate fluctuations arising from previously un-hedged interest payments associated with floating rate
debt. We account for the interest rate swaps discussed above under Note 6 as cash flow hedges.
Derivative contracts with negative net fair values are recorded in other liabilities. The
valuation of these instruments is determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative. This analysis
reflects the contractual terms of the derivatives, including the period to maturity, and uses
observable market-based inputs, including interest rate curves. The fair values of interest rate
swaps are determined using the market standard methodology of netting the discounted future fixed
cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The
variable cash payments (or receipts) are based on an expectation of future interest rates (forward
curves) derived from observable market interest rate curves. We have determined that our
derivative valuation in its entirety should be classified as Level 2.
We record adjustments to appropriately reflect our nonperformance risk and the respective
counterpartys nonperformance risk in our fair value measurements. As of September 30, 2009, we
have assessed the significance of the impact of nonperformance risk on the overall valuation of our
derivative position and have determined that it is not significant to the overall valuation of the
derivatives.
The fair value of our cash equivalents, deferred compensation plan assets and liabilities and
interest rate swaps was determined using the following inputs as of September 30, 2009 (in
thousands):
Quoted Prices | ||||||||||||||||
in Active Markets | ||||||||||||||||
for Identical | ||||||||||||||||
Assets and | Significant Other | Significant | ||||||||||||||
Liabilities | Observable Inputs | Unobservable Inputs | Total | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | Fair Value | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents (1) |
$ | 25,658 | $ | | $ | | $ | 25,658 | ||||||||
Deferred compensation plan assets (2) |
2,472 | | | 2,472 | ||||||||||||
Liabilities: |
||||||||||||||||
Interest rate swap due 2009(3) |
| (611 | ) | | (611 | ) | ||||||||||
Interest rate swap due 2011(4) |
| (13,112 | ) | | (13,112 | ) | ||||||||||
Deferred compensation plan liabilities(4) |
(1,844 | ) | | | (1,844 | ) | ||||||||||
Total |
$ | 26,286 | $ | (13,723 | ) | $ | | $ | 12,563 | |||||||
(1) | Included in cash and cash equivalents in our consolidated balance sheet as of September 30, 2009. | |
(2) | Included in other assets in our consolidated balance sheet as of September 30, 2009. | |
(3) | Included in accrued expenses and other current liabilities in our consolidated balance sheet as of September 30, 2009. | |
(4) | Included in other liabilities in our consolidated balance sheet as of September 30, 2009. |
Other Financial Assets and Liabilities
Financial assets and liabilities with carrying amounts approximating fair value include cash, trade
accounts receivable, accounts payable and accrued expenses and other current liabilities. The
carrying amount of these financial assets and liabilities approximates fair value because of their
short maturities.
Long-term debt, including current-portion of long-term debt, as of September 30, 2009 had a
carrying amount of $522.9 million and fair value of $498.9 million. As of September 30, 2008,
long-term debt, including current-portion of long-term debt, had a carrying amount of $617.1
million and fair value of $607.1 million. The carrying amount is based on interest rates available
upon the date of the issuance of debt and is reported in the
consolidated balance sheets. The fair value is based on interest rates that are currently
available to us for issuance of debt with similar terms and remaining maturities.
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NOTE 8 INCOME TAXES
Significant components of the income tax expense attributable to continuing operations are as
follows (in thousands):
Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 10,548 | $ | 7,246 | $ | 1,742 | ||||||
State |
3,709 | 2,890 | 3,758 | |||||||||
Foreign |
376 | 687 | 230 | |||||||||
Total Current |
14,633 | 10,823 | 5,730 | |||||||||
Deferred: |
||||||||||||
Federal |
4,853 | (5,690 | ) | 3,423 | ||||||||
State |
620 | (481 | ) | 473 | ||||||||
Foreign |
(1,356 | ) | 152 | 361 | ||||||||
Total Deferred |
4,117 | (6,019 | ) | 4,257 | ||||||||
Income tax expense |
$ | 18,750 | $ | 4,804 | $ | 9,987 | ||||||
The provision for income taxes differs from the expected tax expense amount computed by applying
the statutory federal income tax rate of 35% to income (loss) before income taxes as a result of
the following (in thousands):
Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Income tax expense at statutory federal income tax rate |
$ | (25,650 | ) | $ | 2,949 | $ | 5,219 | |||||
Permanent differences impairment of goodwill |
40,075 | | | |||||||||
State taxes, net of federal income tax expense |
2,814 | 1,566 | 2,436 | |||||||||
Other permanent differences |
33 | 473 | 298 | |||||||||
Tax credits and other |
203 | (538 | ) | (40 | ) | |||||||
Change in tax rates applied to deferred taxes |
992 | (297 | ) | 585 | ||||||||
Change in reserves and valuation allowance |
283 | 651 | 1,489 | |||||||||
Income tax expense |
$ | 18,750 | $ | 4,804 | $ | 9,987 | ||||||
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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 our deferred taxes as of September 30 are as
follows (in thousands):
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Current deferred tax assets: |
||||||||
Inventory and sales return reserves |
$ | 844 | $ | 1,223 | ||||
Accrued expenses |
1,398 | 2,110 | ||||||
Bad debts and other |
1,780 | 1,960 | ||||||
Deferred income |
675 | 1,036 | ||||||
4,697 | 6,329 | |||||||
Non-current deferred tax assets: |
||||||||
Net operating losses and tax credit carry forward |
9,186 | 10,735 | ||||||
Depreciation and amortization |
5,975 | 3,442 | ||||||
Stock-based compensation |
4,477 | 2,942 | ||||||
Accrued expenses |
2,170 | 1,166 | ||||||
Unrealized losses |
5,564 | 3,674 | ||||||
27,372 | 21,959 | |||||||
Valuation allowance |
(3,906 | ) | (4,280 | ) | ||||
Total deferred tax assets |
28,163 | 24,008 | ||||||
Deferred tax liabilities: |
||||||||
Software and intangible assets non-current |
(77,303 | ) | (71,707 | ) | ||||
Other current |
(412 | ) | (103 | ) | ||||
Total deferred tax liabilities |
(77,715 | ) | (71,810 | ) | ||||
Net deferred tax liabilities |
$ | (49,552 | ) | $ | (47,802 | ) | ||
As of September 30, 2009, we had $3.4 million of federal and $21.1 million of state net operating
loss (NOL) carry forwards expiring between 2010 and 2028, if not utilized. We also had foreign
NOLs of $2.7 million expiring between 2026 and 2028, and $19.0 million that are not subject to
expiration. Also as of September 30, 2009, we had $1.8 million of
foreign, business tax credit carry forwards that expire between 2014 and 2018, if not utilized.
The valuation allowance decreased by $0.4 million during the year ended September 30,
2009. The $3.9 million valuation
allowance at September 30, 2009 is primarily comprised of allowances against net operating loss
carry-forwards. Approximately $3.0 million of deferred tax assets currently subject to a valuation
allowance will be recorded as a decrease to income tax expense if the benefits are ultimately
realized.
Substantially all of our operating income was generated from domestic operations during 2008 and
2009. Undistributed earnings, if any, of our foreign subsidiaries is considered to be permanently
reinvested and, accordingly, no U.S. federal or state income taxes have been provided thereon.
In June 2006, the FASB issued guidance clarifying the accounting for uncertainty in income taxes by
prescribing a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The
interpretation also provides guidance on recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We adopted this guidance on October 1,
2007 and as a result we recognized an increase of $2.1 million in the liability for unrecognized
tax benefits which was recorded as a $1.5 million increase to goodwill, a $0.3 million decrease to
the opening balance of retained earnings, and a $0.3 million increase to deferred tax assets.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in
income tax expense. As of October 1, 2008 and September 30, 2009, the balance of accrued interest
and penalties was approximately $0.5 million and $0.6 million, respectively.
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Changes in the balance of unrecognized tax benefits (excluding interest and penalties, classified
in other non-current liabilities) is as follows (in thousands):
Balance as of October 1, 2008 |
$ | 6,029 | ||
Additions based on tax positions related to the current year |
651 | |||
Additions based on tax positions related to prior years |
170 | |||
Reductions for settlements with taxing authorities |
(3,238 | ) | ||
Reductions as a result of a lapse of applicable statute of limitations |
(973 | ) | ||
Balance as of September 30, 2009 |
$ | 2,639 | ||
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax
rate is approximately $1.7 million as of September 30, 2009. The $3.2 million settlement reduction
related to the closure of a federal examination of the 2004 through 2007 tax periods that resulted
in no additional payment. The tax years 2004 through 2008 remain open to examination by the major
taxing jurisdictions to which we are subject, and we are not currently under U.S. federal
examination for any tax year.
It is reasonably possible as of September 30, 2009 that the unrecognized tax benefits will decrease
by approximately $0.6 million within the next twelve months, primarily due to tax positions
relating to certain tax credits and positions relating to transfer pricing. A significant portion
of these unrecognized tax benefits would be recorded as an adjustment to goodwill.
NOTE 9 EMPLOYEE STOCK AND SAVINGS PLANS
Stock-based Compensation Expense
The following table summarizes stock-based compensation expense and its allocation within the
consolidated statements of operations and comprehensive income (loss) as follows (in thousands):
Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cost of revenues |
||||||||||||
Systems |
$ | 30 | $ | 32 | $ | 43 | ||||||
Services |
193 | 232 | 351 | |||||||||
Operating expenses |
||||||||||||
Sales and marketing |
1,303 | 942 | 1,020 | |||||||||
Product development |
279 | 340 | 390 | |||||||||
General and administrative |
1,806 | 1,723 | 2,359 | |||||||||
Total |
$ | 3,611 | $ | 3,269 | $ | 4,163 | ||||||
We also recognized a total income tax benefit in the consolidated statements of operations
and comprehensive income (loss) related to the total stock-based compensation expense amounts
above, of approximately $1.6 million, $1.3 million, and $1.7 million for the years ended September
30, 2009, 2008 and 2007, respectively.
Valuation Assumptions
We estimate the fair value of stock options using a Black-Scholes option pricing model that uses
certain assumptions including expected term, expected volatility of the underlying stock, expected
dividend pay-out rate and risk-free rate of return. The expected term is based on historical data
and represents the period of time that stock options granted are expected to be outstanding. Due
to the fact that the common stock underlying the options is not publicly traded, the expected
volatility is based on a comparable group of companies for the period. We do not intend to pay
dividends on our common stock for the foreseeable future, and accordingly, use a dividend yield of
zero. The risk-free rate for periods within the contractual life of the option is based on the
Treasury Bill coupon rate for U.S. Treasury securities in effect at the time of the grant with a
maturity approximating the expected term.
The fair value of each award granted from the Activant Group Inc. 2006 Stock Incentive Plan (the
Stock Incentive Plan), during the years ended September 30, 2009 and 2008, was estimated at the
date of grant using the Black-Scholes option pricing model with the following weighted average
assumptions for the year ended September 30:
2009 | 2008 | |||||||
Expected term |
6.66 years | 6.66 years | ||||||
Expected volatility |
72.92 | % | 50.00 | % | ||||
Expected dividends |
0.00 | % | 0.00 | % | ||||
Risk-free rate |
1.79 | % | 3.20 | % |
The weighted-average estimated grant date fair values for
the employee stock options granted under
the Stock Incentive Plan during the three years in the period ended
September 30, 2009, 2008 and 2007 were $2.86 per share,
$2.45 per share and $2.46 per share, respectively.
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2006 Stock Incentive Plan
As of
September 30, 2009, the Stock Incentive Plan had 7,916,958
authorized shares (of which 45,000 shares
were issued and subsequently repurchased and retired in fiscal year 2009) of Activant Group common
stock reserved for issuances pursuant to existing and future awards thereunder. The exercise price
of options granted under the Stock Incentive Plan may not be less than the fair market value at the
date of grant as determined in good faith by the board of directors of Activant Group from time to
time. Options granted under the Stock Incentive Plan vest in varying amounts over a period up to
five years and expire ten years from the date of the grant.
Information with respect to stock option activity for the fiscal years ended September 30, 2009 and
2008 are as follows:
Stock Incentive Plan | ||||||||||||
Weighted | Weighted | |||||||||||
Number of | Average Exercise | Average | ||||||||||
Shares | Price | Contractual Term | ||||||||||
Total options outstanding at September 30, 2007 |
6,759,073 | $ | 4.38 | |||||||||
Options granted |
875,250 | 4.53 | ||||||||||
Options forfeited |
(824,500 | ) | 4.37 | |||||||||
Options exercised |
| | ||||||||||
Total options outstanding at September 30, 2008 |
6,809,823 | $ | 4.40 | |||||||||
Options granted |
1,356,000 | 4.49 | ||||||||||
Options forfeited |
(351,750 | ) | 4.41 | |||||||||
Options exercised |
(45,000 | ) | 4.35 | |||||||||
Total options outstanding at September 30, 2009 |
7,769,073 | $ | 4.42 | 7.67 years | ||||||||
Total options exercisable at September 30, 2009 |
3,958,997 | $ | 4.40 | 7.33 years | ||||||||
Predecessor Company Plan
In connection with the mergers, Activant Group entered into an option rollover agreement with Mr.
Pervez A. Qureshi, our Chief Executive Officer and President, pursuant to which Mr. Qureshi agreed
to rollover $1.0 million of spread value of his then outstanding stock options to purchase
Predecessor Company common stock into 333,334 vested stock options to purchase shares of common
stock of Activant Group at an exercise price of $1.00 per share. Pursuant to the option rollover
agreement, Activant Group agreed to assume these options pursuant to the terms of the Activant
Solutions Holdings Inc. Second Amended and Restated Stock Option Plan for Key Employees, as amended
(the Predecessor Company Plan), which is the stock option plan under which these options were
originally granted. The stock-based payment expense for these options has been fully recognized.
Information on stock options for the year ended September 30, 2009 under the Predecessor Company
Plan is as follows:
Weighted | ||||||||||||
Predecessor Company Plan | Average | |||||||||||
Number of | Weighted Average | Contractual | ||||||||||
Shares | Exercise Price | Term | ||||||||||
Total options outstanding at September 30, 2008 |
333,334 | $ | 1.00 | |||||||||
Options granted |
| | ||||||||||
Options forfeited |
| | ||||||||||
Options exercised |
| | ||||||||||
Total options outstanding and exercisable at
September 30, 2009 |
333,334 | $ | 1.00 | 6.59 years | ||||||||
At September 30, 2009, the total intrinsic value of both outstanding and exercisable stock
options under the Predecessor Company Plan was $1.0 million. Under the Stock Incentive Plan, the
exercise price of the outstanding employee stock options was greater than or equal to the fair
market value of the underlying stock, as determined by the board of directors, resulting in no
intrinsic value for both outstanding and exercisable stock options as of September 30, 2009. At
September 30, 2009, there was approximately $8.7 million of total unrecognized stock-based
compensation expense related to unvested stock options, which we expect to recognize as expense in
future periods through 2014. Options with a fair value of
$4.0 million, $3.1 million and $3.6 million became
vested during fiscal years 2009, 2008 and 2007, respectively.
401(k) Plan
We have a savings and investment plan known as the Activant Solutions Inc. Savings and Investment
Plan (the 401(k) Plan), as allowed under Sections 401(k) and 401(a) of the Internal Revenue Code.
The 401(k) Plan provides employees with tax deferred salary
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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 401(k) Plan.
The 401(k) Plan provides for contributions as determined annually by our board of directors. For
the first half of fiscal year 2009 and all of fiscal years 2008 and 2007, we matched 50%, up to
$3,000 in total, of the first 6% of compensation contributed by each employee. The deferred amount
could not exceed 25% of the annual aggregate salaries of those employees eligible for participation
(highly compensated executive participants were limited to a maximum of 10%). In mid fiscal year
2009, in light of the economic conditions at that time, we suspended our matching contributions to
the 401(k) Plan, as permitted under Sections 401(k) and 401(a) of the Internal Revenue Code. For
the years ended September 30, 2009, 2008 and 2007, our
contributions amounted to $2.4 million, $3.0
million and $2.7 million, respectively. Following the end of the 2009 fiscal year, we made a
one-time catch-up matching contribution for fiscal year 2009 of $1.4 million, which is included in
the aforementioned 2009 contributions amount.
Deferred Compensation Plan
On December 18, 2008, our board of directors approved the amendment and restatement of our
top-hat deferred compensation plan effective as of December 31, 2008 (Deferred Compensation
Plan). Under the Deferred Compensation Plan, an eligible participant is permitted to defer, in
compliance with Section 409A of the Internal Revenue Code, any percentage (from 0% to 100%) of his
or her qualifying base salary and bonus above the limit that could be contributed to our 401(k)
Plan for each calendar year. Additionally, we can credit participant accounts with employer
contributions at any time, but we did not make any such contributions during the 2009 and 2008
fiscal year. All amounts allocated to a participants deferral account are adjusted at the end of
each calendar year for investment gains and losses based on the performance of certain hypothetical
investment choices selected by participants. Participants may change their selected investment
choices as permitted by the plan administrator. We remain liable to pay all amounts deferred in a
participants deferral account, as adjusted for all notional investment gains and losses, at the
time specified in a participants deferral election, or otherwise as permitted under the terms of
the Deferred Compensation Plan.
At September 30, 2009 and 2008, our liability to plan participants for salary deferrals, adjusted
for notional gains and losses, was $1.8 million and $1.9 million, respectively.
NOTE 10 COMMITMENTS AND CONTINGENCIES
Operating Leases
We rent integration and distribution, software development and data entry facilities;
administrative, executive, sales, and customer support offices; and, certain office equipment under
non-cancelable operating lease agreements. Certain lease agreements contain renewal options and
rate adjustments. We recorded rental expense of $7.1 million, $7.0 million and $6.6 million for
the years ended September 30, 2009, 2008 and 2007, respectively. Future minimum rental commitments
under all non-cancelable operating leases as of September 30, 2009 are as follows (in thousands):
Year ending September 30, | ||||
2010 |
$ | 6,582 | ||
2011 |
6,053 | |||
2012 |
3,888 | |||
2013 |
1,808 | |||
2014 |
1,352 | |||
Thereafter |
989 | |||
Total |
$ | 20,672 | ||
Legal Matters
We are 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 is not expected
to have a material adverse effect on our results of operations or financial position.
NOTE 11 RESTRUCTURING COSTS
During the year ended September 30, 2009, our management approved restructuring plans for
eliminating certain employee positions and consolidating certain excess facilities with the intent
to streamline and focus our operations and to more properly align our cost structure with current
business conditions and our projected future revenue streams. These plans included the elimination
of approximately 250 employee positions and the consolidation of space within multiple facilities
locations. As of September 30, 2009, substantially all of the affected employees had been notified
and terminated, and all of the facilities consolidations had been completed. In accordance with
relevant authoritative accounting principles, we recorded restructuring charges of approximately
$4.5 million for the year ended September 30, 2009, related to workforce reductions (comprised of
severance and related benefits) and consolidation of
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facilities. All restructuring charges were
recorded in Restructuring Costs in the consolidated statements of operations and comprehensive
income (loss).
We also undertook certain restructuring actions in fiscal year 2008 and 2007. We recorded
restructuring charges of approximately $2.3 million related to workforce reductions (comprised of
severance and related benefits) and consolidation of facilities in the year ended September 30,
2008. All of the affected employees had been notified and substantially all had been terminated as
of September 30, 2009. Our restructuring liability for these fiscal year 2008 actions was less
than $0.1 million as of September 30, 2009. During the year ended September 30, 2009, we accrued
additional charges for these past actions related to certain employee termination benefits that are
required to be accrued from the time of notification through the date specified in the benefit.
The remaining employee termination benefits are expected to be paid in fiscal year 2010. We
recorded restructuring charges of approximately $1.1 million related to workforce reductions
(comprised of severance and related benefits) in the year ended September 30, 2007. All of the
affected employees had been notified and terminated as of September 30, 2008.
Our restructuring liability at September 30, 2009, was approximately $0.9 million and the changes
in our restructuring liabilities for the year then ended were as follows (in thousands):
Balance at | Balance at | |||||||||||||||
September 30, | Restructuring | September 30, | ||||||||||||||
2008 | Charges | Payments | 2009 | |||||||||||||
2009 Actions Severance and Related Benefits |
$ | | $ | 3,321 | $ | (3,291 | ) | $ | 30 | |||||||
2009 Actions Facility Closings |
| 1,321 | (509 | ) | 812 | |||||||||||
2008 Actions Severance and Related Benefits |
216 | (126 | ) | (45 | ) | 45 | ||||||||||
$ | 216 | $ | 4,516 | $ | (3,845 | ) | $ | 887 | ||||||||
NOTE 12 RELATED PARTY TRANSACTIONS
As of September 30, 2009, we owned approximately 46% of Internet Autoparts, Inc. (Internet
Autoparts), a web-based parts ordering and communication company. For the year ended September 30,
2007, we received a dividend from Internet Autoparts of approximately $0.5 million. For the years
ended September 30, 2008 and 2009, we did not receive a dividend. Currently, we have an
accumulated loss in our investment in Internet Autoparts and have temporarily discontinued applying
the equity method of recording investment earnings in accordance with relevant authoritative
accounting principles, as we have no requirement to fund future losses. If we are able to recover
the net losses accumulated over the years, we will then resume applying the equity method to our
investment in Internet Autoparts.
NOTE 13 SEGMENT REPORTING
We are a leading provider of business management solutions to wholesale and retail
distribution businesses. We have developed substantial expertise in serving businesses with
complex distribution and retail requirements in three primary vertical markets: hardlines and
lumber, wholesale distribution and automotive parts aftermarket, which are considered our segments
for reporting purposes. The segments are determined in accordance with how our management views and
evaluates our business and based on the criteria as outlined in authoritative accounting guidance
regarding segments.
Because these segments reflect the manner in which our management reviews our business, they
necessarily involve judgments that our management believes are reasonable in light of the
circumstances under which they are made. These judgments may change over time or may be modified to
reflect new facts or circumstances. Segments may also be changed or modified to reflect
technologies and applications that are newly created, or that change over time, or other business
conditions that evolve, each of which may result in reassessing specific segments and the elements
included within each of those segments. Recent events, including changes in our senior management,
may affect the manner in which we present segments in the future. A description of the businesses
served by each of our reportable segments follows:
| Hardlines and Lumber segment The hardlines and lumber vertical market consists of independent hardware retailers; home improvement centers; paint, glass and wallpaper stores; farm supply stores; retail nurseries and garden centers; independent lumber and building material dealers; pharmacies; and other specialty retailers, primarily in the United States. | ||
| Wholesale Distribution segment The wholesale distribution vertical market consists of distributors of a range of products including electrical supply; plumbing; medical supply; heating and air conditioning; tile; industrial machinery and equipment; industrial supplies; fluid power; janitorial and sanitation products; paper and packaging; and service establishment equipment vendors, primarily in the United States. | ||
| Automotive segment The automotive parts aftermarket vertical consists of customers involved in the manufacture, distribution, sale and installation of new and remanufactured parts used in the maintenance and repair of automobiles and light |
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trucks, and includes manufacturers, warehouse distributors, parts stores, professional
installers in North America and Europe as well as several chains in North America. |
|||
| Other Other primarily consists of our productivity tools business, which is involved
with software migration services and application development tools. |
Segment Revenue and Contribution Margin
The results of the reportable segments are derived directly from our management reporting system.
The results are based on our method of internal reporting and are not necessarily in conformity
with GAAP. Our management measures the performance of each segment based on several metrics,
including contribution margin as defined below, which is not a financial measure calculated in
accordance with GAAP. Asset data is not reviewed by our management at the segment level and
therefore is not included.
Segment contribution margin includes all segment revenues less the related cost of sales, direct
marketing, sales expense, and product development expenses. A significant portion of each segments
expenses arises from shared services and centrally managed infrastructure support costs that we
allocate to the segments to determine segment contribution margin. These expenses primarily include
information technology services, facilities, and telecommunications costs.
Our reportable segment financial information for the years ended September 30, 2009, 2008 and 2007
are as follows (in thousands):
Year Ended September 30, 2009 | Year Ended September 30, 2008 | |||||||||||||||||||||||||||||||||||||||
Hardlines | Hardlines | |||||||||||||||||||||||||||||||||||||||
and | Wholesale | Auto- | and | Wholesale | Auto- | |||||||||||||||||||||||||||||||||||
Lumber | Distribution | motive | Other | Total | Lumber | Distribution | motive | Other | Total | |||||||||||||||||||||||||||||||
Revenues |
$ | 137,090 | $ | 156,794 | $ | 75,147 | $ | 9,912 | $ | 378,943 | $ | 150,013 | $ | 169,311 | $ | 86,420 | $ | 20,625 | $ | 426,369 | ||||||||||||||||||||
Contribution Margin |
$ | 41,710 | $ | 64,938 | $ | 26,360 | $ | 2,483 | $ | 135,491 | $ | 34,267 | $ | 65,673 | $ | 29,295 | $ | 3,329 | $ | 132,564 |
Year Ended September 30, 2007 | ||||||||||||||||||||
Hardlines | ||||||||||||||||||||
and | Wholesale | Auto- | ||||||||||||||||||
Lumber | Distribution | motive | Other | Total | ||||||||||||||||
Revenues |
$ | 172,183 | $ | 125,659 | $ | 89,793 | $ | 21,487 | $ | 409,122 | ||||||||||
Contribution Margin |
$ | 43,854 | $ | 46,291 | $ | 31,160 | $ | 2,391 | $ | 123,696 |
Certain of our operating expenses are not allocated to segments because they are separately managed
at the corporate level. These unallocated costs include sales and marketing costs other than direct
sales and marketing, general and administrative costs, such as legal and finance, stock-based
compensation expense, depreciation and amortization of assets, impairment of goodwill, acquisition
related costs, restructuring costs, gain on retirement of debt, interest expense, and other income
(expense).
There are significant judgments that our management makes with respect to the direct and indirect
allocation of costs that may affect the calculation of contribution margins. While our management
believes these and other related judgments are reasonable and appropriate, others could assess such
matters in ways different than our companys management.
The exclusion of costs not considered directly allocable to individual business segments results in
contribution margin not taking into account substantial costs of doing business. We use
contribution margin, in part, to evaluate the performance of, and allocate resources to, each of
the segments. While our management may consider contribution margin to be an important measure of
comparative operating performance, this measure should be considered in addition to, but not as a
substitute for, net income (loss), cash flow and other measures of financial performance prepared
in accordance with GAAP that are otherwise presented in our financial statements. In addition, our
calculation of contribution margin may be different from the calculation used by other companies
and, therefore, comparability may be affected.
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The reconciliation of total segment contribution margin to our income (loss) before income taxes is
as follows (in thousands):
Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Segment contribution margin |
$ | 135,491 | $ | 132,564 | $ | 123,696 | ||||||
Corporate and unallocated costs |
(23,959 | ) | (30,350 | ) | (26,379 | ) | ||||||
Stock-based compensation expense |
(3,611 | ) | (3,269 | ) | (4,163 | ) | ||||||
Depreciation and amortization |
(38,917 | ) | (37,254 | ) | (29,735 | ) | ||||||
Acquisition related costs |
(260 | ) | (1,056 | ) | (531 | ) | ||||||
Impairment of goodwill |
(114,500 | ) | | | ||||||||
Restructuring costs |
(4,516 | ) | (2,272 | ) | (1,109 | ) | ||||||
Interest expense |
(40,977 | ) | (51,196 | ) | (48,398 | ) | ||||||
Gain on retirement of debt |
18,958 | | | |||||||||
Other income (expense), net |
(994 | ) | 1,258 | 1,529 | ||||||||
Income (loss) before income taxes |
$ | (73,285 | ) | $ | 8,425 | $ | 14,910 | |||||
Geographic Segments
A breakdown by geographic area of revenues and total fixed assets is shown below. The geographic
area covers the United States and Other, which includes Canada, United Kingdom and Ireland.
Year Ended September 30, | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Revenues: |
||||||||||||
United States |
$ | 359,272 | $ | 397,205 | $ | 386,092 | ||||||
Other |
19,671 | 29,164 | 23,030 | |||||||||
Total |
$ | 378,943 | $ | 426,369 | $ | 409,122 | ||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Fixed assets: |
||||||||
United States |
$ | 5,865 | $ | 8,438 | ||||
Other |
208 | 504 | ||||||
Total |
$ | 6,073 | $ | 8,942 | ||||
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NOTE 14 GUARANTOR CONSOLIDATION
The senior secured credit agreement and the senior subordinated notes are guaranteed by our
existing, wholly-owned domestic subsidiaries HM COOP LLC, Activant Wholesale Distribution Solutions
Inc., Speedware Group, Inc. and Speedware America, Inc. (collectively, the Guarantors). Since
September 30, 2006, (i) the following subsidiaries have been merged into Activant Solutions Inc.:
Triad Systems Financial Corporation, Triad Data Corporation, CCI/TRIAD Gem, Inc., Enterprise
Computing Inc., Speedware Holdings, Inc., CCI/ARD, Inc. and Speedware USA, Inc.; and (ii) the
following subsidiaries have been merged into Activant Wholesale Distribution Solutions Inc.
(formerly known as Prophet 21 New Jersey, Inc.): Prophet 21 Investment Corporation, Prophet 21
Canada, Inc., SDI Merger Corporation, Distributor Information Systems Corporation, Trade Services
Systems, Inc., STANPak Systems, Inc., Prelude Systems Inc. and Greenland Holding Corp. Our other
subsidiaries (collectively, the Non-Guarantors) are not guarantors of the senior secured credit
agreement and the senior subordinated notes. The accompanying consolidating balance sheets as of
September 30, 2009 and September 30, 2008 and the accompanying consolidating statements of
operations for the years ended September 30, 2009, 2008 and 2007 and cash flows for the years ended
September 30, 2009, 2008 and 2007 represent the financial position, results of operations and cash
flows of our Guarantors and Non-Guarantors.
Consolidating Balance Sheet as of September 30, 2009
Guarantor | Non- | |||||||||||||||||||
Principal | Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
ASSETS: |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 42,001 | $ | 215 | $ | 2,357 | $ | | $ | 44,573 | ||||||||||
Trade accounts receivable, net of allowance
for doubtful accounts |
16,811 | 14,383 | 3,218 | | 34,412 | |||||||||||||||
Inventories |
3,576 | 1,185 | 224 | | 4,985 | |||||||||||||||
Deferred income taxes |
3,057 | 1,217 | 11 | | 4,285 | |||||||||||||||
Prepaid expenses and other current assets |
4,935 | 454 | 135 | | 5,524 | |||||||||||||||
Total current assets |
70,380 | 17,454 | 5,945 | | 93,779 | |||||||||||||||
Property and equipment, net |
5,347 | 518 | 208 | | 6,073 | |||||||||||||||
Intangible assets, net |
167,675 | 23,134 | 1,585 | | 192,394 | |||||||||||||||
Goodwill |
448,840 | 91,956 | (3,115 | ) | 6,037 | 543,718 | ||||||||||||||
Investments in subsidiaries |
16,769 | | | (16,769 | ) | | ||||||||||||||
Intercompany receivables (payables) |
(89,248 | ) | 99,035 | (9,787 | ) | | | |||||||||||||
Deferred financing costs |
8,903 | | | | 8,903 | |||||||||||||||
Other assets |
3,036 | 181 | | | 3,217 | |||||||||||||||
Total assets |
$ | 631,702 | $ | 232,278 | $ | (5,164 | ) | $ | (10,732 | ) | $ | 848,084 | ||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | 16,456 | $ | 1,635 | $ | (61 | ) | $ | | $ | 18,030 | |||||||||
Payroll related accruals |
(13,401 | ) | 29,850 | 1,338 | | 17,787 | ||||||||||||||
Deferred revenue |
9,142 | 20,021 | 2,491 | | 31,654 | |||||||||||||||
Current portion of long-term debt |
5,886 | | | | 5,886 | |||||||||||||||
Accrued expenses and other current liabilities |
18,650 | 1,177 | (1,665 | ) | | 18,162 | ||||||||||||||
Total current liabilities |
36,733 | 52,683 | 2,103 | | 91,519 | |||||||||||||||
Long-term debt |
517,009 | | | | 517,009 | |||||||||||||||
Deferred tax and other liabilities |
78,895 | (2,723 | ) | (3,146 | ) | | 73,026 | |||||||||||||
Total liabilities |
632,637 | 49,960 | (1,043 | ) | | 681,554 | ||||||||||||||
Total stockholders equity (deficit) |
(935 | ) | 182,318 | (4,121 | ) | (10,732 | ) | 166,530 | ||||||||||||
Total liabilities and stockholders equity
(deficit) |
$ | 631,702 | $ | 232,278 | $ | (5,164 | ) | $ | (10,732 | ) | $ | 848,084 | ||||||||
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Consolidating Balance Sheet as of September 30, 2008
Guarantor | Non- | |||||||||||||||||||
Principal | Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
ASSETS: |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 55,926 | $ | 2,931 | $ | 5,932 | $ | | $ | 64,789 | ||||||||||
Trade accounts receivable, net of
allowance for doubtful accounts |
25,789 | 14,808 | 4,541 | | 45,138 | |||||||||||||||
Inventories |
4,000 | 1,050 | 260 | | 5,310 | |||||||||||||||
Deferred income taxes |
4,726 | 1,435 | 65 | | 6,226 | |||||||||||||||
Income taxes receivable |
671 | 282 | 233 | | 1,186 | |||||||||||||||
Prepaid expenses and other current
assets |
4,616 | 223 | 285 | | 5,124 | |||||||||||||||
Total current assets |
95,728 | 20,729 | 11,316 | | 127,773 | |||||||||||||||
Property and equipment, net |
7,586 | 852 | 504 | | 8,942 | |||||||||||||||
Intangible assets, net |
185,128 | 29,912 | 2,018 | | 217,058 | |||||||||||||||
Goodwill |
560,023 | 97,631 | (1,482 | ) | 6,037 | 662,209 | ||||||||||||||
Investments in subsidiaries |
12,018 | | 787 | (12,805 | ) | | ||||||||||||||
Intercompany receivables (payables) |
4,660 | 10,102 | (14,762 | ) | | | ||||||||||||||
Deferred financing costs |
13,130 | | | | 13,130 | |||||||||||||||
Other assets |
1,769 | 362 | 41 | | 2,172 | |||||||||||||||
Total assets |
$ | 880,042 | $ | 159,588 | $ | (1,578 | ) | $ | (6,768 | ) | $ | 1,031,284 | ||||||||
LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | 15,938 | $ | 2,347 | $ | 890 | $ | 6 | $ | 19,181 | ||||||||||
Payroll related accruals |
9,204 | 4,132 | 1,684 | | 15,020 | |||||||||||||||
Deferred revenue |
11,427 | 18,306 | 2,785 | | 32,518 | |||||||||||||||
Current portion of long-term debt |
3,325 | | | | 3,325 | |||||||||||||||
Accrued expenses and other current
liabilities |
16,622 | 196 | (1,334 | ) | | 15,484 | ||||||||||||||
Total current liabilities |
56,516 | 24,981 | 4,025 | 6 | 85,528 | |||||||||||||||
Long-term debt |
613,787 | | | | 613,787 | |||||||||||||||
Deferred tax and other liabilities |
76,759 | (2,159 | ) | (1,947 | ) | | 72,653 | |||||||||||||
Total liabilities |
747,062 | 22,822 | 2,078 | 6 | 771,968 | |||||||||||||||
Total stockholders equity (deficit) |
132,980 | 136,766 | (3,656 | ) | (6,774 | ) | 259,316 | |||||||||||||
Total liabilities and stockholders
equity (deficit) |
$ | 880,042 | $ | 159,588 | $ | (1,578 | ) | $ | (6,768 | ) | $ | 1,031,284 | ||||||||
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Consolidating Statement of Operations for the Year Ended September 30, 2009
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Revenues: |
||||||||||||||||||||
Systems |
$ | 63,643 | $ | 56,348 | $ | 4,555 | $ | | $ | 124,546 | ||||||||||
Services |
141,474 | 97,850 | 15,073 | | 254,397 | |||||||||||||||
Total revenues |
205,117 | 154,198 | 19,628 | | 378,943 | |||||||||||||||
Cost of revenues: |
||||||||||||||||||||
Systems |
37,993 | 25,590 | 4,204 | | 67,787 | |||||||||||||||
Services |
53,912 | 24,534 | 6,421 | | 84,867 | |||||||||||||||
Total cost of revenues |
91,905 | 50,124 | 10,625 | | 152,654 | |||||||||||||||
Gross profit |
113,212 | 104,074 | 9,003 | | 226,289 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing |
31,441 | 20,337 | 3,762 | | 55,540 | |||||||||||||||
Product development |
14,795 | 21,040 | 2,718 | | 38,553 | |||||||||||||||
General and administrative |
21,975 | 1,501 | 799 | | 24,275 | |||||||||||||||
Depreciation and amortization |
31,055 | 7,191 | 671 | | 38,917 | |||||||||||||||
Impairment of goodwill |
114,500 | | | | 114,500 | |||||||||||||||
Acquisition related costs |
53 | 105 | 102 | | 260 | |||||||||||||||
Restructuring costs |
3,071 | 378 | 1,067 | | 4,516 | |||||||||||||||
Total operating expenses |
216,890 | 50,552 | 9,119 | | 276,561 | |||||||||||||||
Operating income (loss) |
(103,678 | ) | 53,522 | (116 | ) | | (50,272 | ) | ||||||||||||
Interest expense |
(41,683 | ) | (13 | ) | 719 | | (40,977 | ) | ||||||||||||
Gain on retirement of debt |
18,958 | | | | 18,958 | |||||||||||||||
Other income (expense), net |
1,266 | (328 | ) | (1,932 | ) | | (994 | ) | ||||||||||||
Income (loss) before income taxes |
(125,137 | ) | 53,181 | (1,329 | ) | | (73,285 | ) | ||||||||||||
Income tax expense |
15,028 | 1,234 | 2,488 | | 18,750 | |||||||||||||||
Net income (loss) |
$ | (140,165 | ) | $ | 51,947 | $ | (3,817 | ) | $ | | $ | (92,035 | ) | |||||||
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Consolidating Statement of Operations for the Year Ended September 30, 2008
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Revenues: |
||||||||||||||||||||
Systems |
$ | 86,565 | $ | 74,729 | $ | 11,943 | $ | | $ | 173,237 | ||||||||||
Services |
140,635 | 95,276 | 17,221 | | 253,132 | |||||||||||||||
Total revenues |
227,200 | 170,005 | 29,164 | | 426,369 | |||||||||||||||
Cost of revenues (exclusive
of depreciation
and amortization shown
separately below): |
||||||||||||||||||||
Systems |
51,534 | 31,861 | 11,955 | | 95,350 | |||||||||||||||
Services |
56,261 | 25,753 | 10,246 | | 92,260 | |||||||||||||||
Total cost of revenues |
107,795 | 57,614 | 22,201 | | 187,610 | |||||||||||||||
Gross profit |
119,405 | 112,391 | 6,963 | | 238,759 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing |
35,353 | 23,765 | 4,921 | | 64,039 | |||||||||||||||
Product development |
18,659 | 21,957 | 3,642 | | 44,258 | |||||||||||||||
General and administrative |
25,763 | 2,626 | 3,128 | | 31,517 | |||||||||||||||
Depreciation and
amortization |
30,136 | 6,442 | 676 | | 37,254 | |||||||||||||||
Acquisition related costs |
999 | 55 | 2 | | 1,056 | |||||||||||||||
Restructuring costs |
1,658 | (33 | ) | 647 | | 2,272 | ||||||||||||||
Total operating expenses |
112,568 | 54,812 | 13,016 | | 180,396 | |||||||||||||||
Operating income (loss) |
6,837 | 57,579 | (6,053 | ) | | 58,363 | ||||||||||||||
Interest expense |
(51,114 | ) | (6 | ) | (76 | ) | | (51,196 | ) | |||||||||||
Other income (expense), net |
(5,063 | ) | (953 | ) | 7,274 | | 1,258 | |||||||||||||
Income (loss) before income
taxes |
(49,340 | ) | 56,620 | 1,145 | | 8,425 | ||||||||||||||
Income tax expense |
1,764 | 2,238 | 802 | | 4,804 | |||||||||||||||
Net income (loss) |
$ | (51,104 | ) | $ | 54,382 | $ | 343 | $ | | $ | 3,621 | |||||||||
71
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Consolidating Statement of Operations for the Year Ended September 30, 2007
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Revenues: |
||||||||||||||||||||
Systems |
$ | 118,535 | $ | 55,750 | $ | 7,074 | $ | | $ | 181,359 | ||||||||||
Services |
141,008 | 70,814 | 15,941 | | 227,763 | |||||||||||||||
Total revenues |
259,543 | 126,564 | 23,015 | | 409,122 | |||||||||||||||
Cost of revenues (exclusive of
depreciation and amortization
shown separately below): |
||||||||||||||||||||
Systems |
66,985 | 20,720 | 11,585 | | 99,290 | |||||||||||||||
Services |
58,379 | 17,474 | 7,968 | | 83,821 | |||||||||||||||
Total cost of revenues |
125,364 | 38,194 | 19,553 | | 183,111 | |||||||||||||||
Gross profit |
134,179 | 88,370 | 3,462 | | 226,011 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing |
40,460 | 19,292 | 4,721 | | 64,473 | |||||||||||||||
Product development |
23,202 | 14,602 | 2,848 | | 40,652 | |||||||||||||||
General and administrative |
19,195 | 4,569 | 3,968 | | 27,732 | |||||||||||||||
Depreciation and amortization |
28,086 | 1,176 | 473 | | 29,735 | |||||||||||||||
Acquisition related costs |
529 | 2 | | | 531 | |||||||||||||||
Restructuring costs |
1,109 | | | | 1,109 | |||||||||||||||
Total operating expenses |
112,581 | 39,641 | 12,010 | | 164,232 | |||||||||||||||
Operating income (loss) |
21,598 | 48,729 | (8,548 | ) | | 61,779 | ||||||||||||||
Interest expense |
(48,387 | ) | (4 | ) | (7 | ) | | (48,398 | ) | |||||||||||
Other income (expense), net |
1,810 | (443 | ) | 162 | | 1,529 | ||||||||||||||
Income (loss) before income taxes |
(24,979 | ) | 48,282 | (8,393 | ) | | 14,910 | |||||||||||||
Income tax expense (benefit) |
20,489 | (12,186 | ) | 1,684 | | 9,987 | ||||||||||||||
Net income (loss) |
$ | (45,468 | ) | $ | 60,468 | $ | (10,077 | ) | $ | | $ | 4,923 | ||||||||
72
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Consolidating Statement of Cash Flows for the year ended September 30, 2009
Guarantor | ||||||||||||||||||||
(in thousands) | Principal
Operations |
Subsidiaries | Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Net cash provided by (used in)
operating activities |
$ | 71,007 | $ | (2,709 | ) | $ | (3,551 | ) | $ | | $ | 64,747 | ||||||||
Investing activities: |
||||||||||||||||||||
Purchase of property and equipment |
(2,367 | ) | (7 | ) | (24 | ) | | (2,398 | ) | |||||||||||
Capitalized computer software and
database costs |
(9,024 | ) | | | | (9,024 | ) | |||||||||||||
Net cash used in investing activities |
(11,391 | ) | (7 | ) | (24 | ) | | (11,422 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Repurchases of debt |
(39,840 | ) | | | | (39,840 | ) | |||||||||||||
Payments on long-term debt |
(33,512 | ) | | | | (33,512 | ) | |||||||||||||
Exercise of options |
196 | | | | 196 | |||||||||||||||
Repurchases of Activant Group common
stock |
(385 | ) | | | | (385 | ) | |||||||||||||
Net cash used in financing activities |
(73,541 | ) | | | | (73,541 | ) | |||||||||||||
Net change in cash and cash
equivalents |
(13,925 | ) | (2,716 | ) | (3,575 | ) | | (20,216 | ) | |||||||||||
Cash and cash equivalents, beginning
of period |
55,926 | 2,931 | 5,932 | | 64,789 | |||||||||||||||
Cash and cash equivalents, end of
period |
$ | 42,001 | $ | 215 | $ | 2,357 | $ | | $ | 44,573 | ||||||||||
Consolidating Statement of Cash Flows for the year ended September 30, 2008
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash provided by (used in)
operating activities |
$ | 58,216 | $ | (1,041 | ) | $ | 1,720 | $ | | $ | 58,895 | |||||||||
Investing activities: |
||||||||||||||||||||
Purchase of property and equipment |
(4,591 | ) | (182 | ) | (151 | ) | | (4,924 | ) | |||||||||||
Capitalized computer software and
database costs |
(6,690 | ) | | | | (6,690 | ) | |||||||||||||
Net cash used in investing activities |
(11,281 | ) | (182 | ) | (151 | ) | | (11,614 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Deferred financing costs |
(106 | ) | | | | (106 | ) | |||||||||||||
Payments on long-term debt |
(15,751 | ) | | | | (15,751 | ) | |||||||||||||
Repurchase of Activant Group common
stock |
(14 | ) | | | | (14 | ) | |||||||||||||
Net cash used in financing activities |
(15,871 | ) | | | | (15,871 | ) | |||||||||||||
Net change in cash and cash equivalents |
31,064 | (1,223 | ) | 1,569 | | 31,410 | ||||||||||||||
Cash and cash equivalents, beginning of
period |
24,862 | 4,154 | 4,363 | | 33,379 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 55,926 | $ | 2,931 | $ | 5,932 | $ | | $ | 64,789 | ||||||||||
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Consolidating Statement of Cash Flows for the year ended September 30, 2007
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash provided by (used in)
operating activities |
$ | 51,393 | $ | (1,618 | ) | $ | 682 | $ | | $ | 50,457 | |||||||||
Investing activities: |
||||||||||||||||||||
Business acquisitions |
(108,172 | ) | | | | (108,172 | ) | |||||||||||||
Purchase of property and equipment |
(6,276 | ) | (592 | ) | (188 | ) | | (7,056 | ) | |||||||||||
Capitalized computer software costs and
databases |
(5,276 | ) | | | | (5,276 | ) | |||||||||||||
Purchase price adjustments |
1,436 | (1,408 | ) | 1,756 | | 1,784 | ||||||||||||||
Net cash provided by (used in)
investing activities |
(118,288 | ) | (2,000 | ) | 1,568 | | (118,720 | ) | ||||||||||||
Financing activities: |
||||||||||||||||||||
Proceeds from borrowings |
95,000 | | | | 95,000 | |||||||||||||||
Deferred financing costs |
(2,540 | ) | | | | (2,540 | ) | |||||||||||||
Payment on long-term debt |
(25,187 | ) | | | | (25,187 | ) | |||||||||||||
Repayment of borrowings |
(2,000 | ) | | | | (2,000 | ) | |||||||||||||
Repurchase
of Activant Group common stock |
(14 | ) | | | | (14 | ) | |||||||||||||
Net cash provided by financing
activities |
65,259 | | | | 65,259 | |||||||||||||||
Net change in cash and cash equivalents |
(1,636 | ) | (3,618 | ) | 2,250 | | (3,004 | ) | ||||||||||||
Cash and cash equivalents, beginning of
period |
26,498 | 7,772 | 2,113 | | 36,383 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 24,862 | $ | 4,154 | $ | 4,363 | $ | | $ | 33,379 | ||||||||||
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NOTE 15 QUARTERLY INFORMATION (UNAUDITED)
The following tables present selected unaudited consolidated statements of operations
information for each quarter of fiscal years 2009 and 2008 (in thousands):
Quarter Ended | ||||||||||||||||
December 31, | March 31, | June 30, | September 30, | |||||||||||||
2008 | 2009 | 2009 | 2009 | |||||||||||||
Total revenues |
$ | 96,266 | $ | 95,953 | $ | 90,925 | $ | 95,799 | ||||||||
Gross profit |
56,296 | 57,389 | 54,775 | 57,829 | ||||||||||||
Net income (loss) |
(24,801 | ) | (69,683 | ) | 7,614 | (5,165 | ) |
Quarter Ended | ||||||||||||||||
December 31, | March 31, | June 30, | September 30, | |||||||||||||
2007 | 2008 | 2008 | 2008 | |||||||||||||
Total revenues |
$ | 108,910 | $ | 108,092 | $ | 103,723 | $ | 105,644 | ||||||||
Gross profit |
59,290 | 59,278 | 58,278 | 61,913 | ||||||||||||
Net income (loss) |
593 | (57 | ) | 829 | 2,256 |
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Table of Contents
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act. This term refers to the controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified by the SEC in its rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the companys management, including its principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Our management evaluated, with the participation
of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of September 30, 2009. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures
were effective as of September 30, 2009 to provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms,
and is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) for our
company. Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our internal control over financial reporting as of
September 30, 2009. In making this evaluation, they used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal ControlIntegrated Framework.
Based on this evaluation, our management concluded that, as of September 30, 2009, our internal
control over financial reporting was effective.
This Annual Report on Form 10-K does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial reporting. Managements
report was not subject to attestation by our independent registered public accounting firm pursuant
to temporary rules of the SEC that permit us to provide only the managements report in this Annual
Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter
ended September 30, 2009 that materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect
that our disclosure controls and procedures or internal control over financial reporting will
prevent all errors and all fraud. A control system, no matter how well conceived and operated, can
only provide reasonable, not absolute, assurances that the objectives of the control system are
met. The design of a control system reflects resource constraints, and the benefits of controls
must be considered relative to their costs. Because there are inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of error or fraud, if any, within our company have been or will be detected.
ITEM 9B OTHER INFORMATION
None.
76
Table of Contents
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set forth below are the names, ages and positions of our and Activant Groups directors and
executive officers as of December 14, 2009. All directors hold office until the next annual
meeting of our stockholders and Activant Groups stockholder(s), as the case may be, or until their
successors are duly elected and qualified.
Name | Age | Position | ||||
Pervez A. Qureshi
|
52 | President, Chief Executive Officer and Director | ||||
Kathleen M. Crusco
|
44 | Senior Vice President and Chief Financial Officer | ||||
Iain W. Paterson, Jr.
|
56 | Senior Vice President of Human Resources and Facilities | ||||
Kevin V. Roach
|
48 | Executive Vice President and General Manager of Wholesale Distribution | ||||
Paul H. Salsgiver, Jr.
|
57 | Executive Vice President and General Manager of Hardlines and Lumber and Automotive | ||||
Timothy F. Taich
|
53 | Vice President and General Counsel | ||||
William Wilson
|
50 | Senior Vice President of Product Development | ||||
C. Andrew Ballard
|
37 | Director (1) (2) * | ||||
Paul V. Barber
|
48 | Director (1) | ||||
Marcel Bernard
|
71 | Director | ||||
S. Scott Crabill
|
39 | Director (2) | ||||
Robert B. Henske
|
48 | Chairman of the Board of Directors (1) (2) ** | ||||
David R. Tunnell
|
39 | Director |
(1) | Denotes a member of the Audit Committee. | |
(2) | Denotes a member of the Compensation Committee. | |
* | Denotes Chair of Audit Committee. | |
** | Denotes Chair of Compensation Committee. |
Mr. Qureshi has been employed by us since 1994. He was appointed as our President and Chief
Executive Officer (CEO) and became one of our directors on May 2, 2006. Mr. Qureshi joined us as
a Director of Marketing in 1994. He became Senior Vice President and General Manager of our
Hardlines and Lumber division in 1999. He became Group President of our vertical markets in 2004,
Senior Vice President and Chief Operating Officer in April 2005, and Executive Vice President in
October 2005. Prior to joining us, Mr. Qureshi was President of a management consulting company he
founded and was Vice President of Marketing at Harvest Software. He has also held management
positions at Metaphor Computer Systems and the Hewlett-Packard Company and engineering positions at
International Business Machines Corporation. Mr. Qureshi holds a B.S.E.E. degree from the
University of Lowell and an M.B.A. from the Darden Graduate School of Business at the University of
Virginia.
Ms. Crusco joined us as Senior Vice President and Chief Financial Officer on May 3, 2007. Prior to
joining us, Ms. Crusco was Vice President, Worldwide Finance at Polycom, Inc. from March 2005 to
May 2007 and Vice President, Worldwide Controller from January 2002 to March 2005. In addition,
Ms. Crusco served as Chief Accounting Officer at Polycom, Inc. from August 2002 through March 2005.
From April 1999 through January 2002, Ms. Crusco served as Vice President, Worldwide Controller at
Documentum, Inc. and from July 1997 through April 1999 as Director of Finance at Adaptec, Inc. Ms.
Crusco also spent 10 years at PricewaterhouseCoopers LLP in various management roles. Ms. Crusco
has a B.S. in Business Administration with an emphasis in accounting from California State
University of Chico.
Mr. Paterson joined us as our Senior Vice President of Human Resources and Facilities in May 2008.
Prior to joining us, Mr. Paterson was the Chief Human Resources Officer of Alliant Energy, Inc.
from July 2005 to April 2008. From February 2004 to June 2005, Mr. Paterson was the President of
PeopleThought, LLC, an organization that he founded. From November 1998 to November 2003, Mr.
Paterson served as Vice President, Human Resources of JD Edwards, Inc. (now part of Oracle
Corporation). From July 1997 to October 1998, he served as Vice President, Human Resources of KN
Energy, Inc. (now part of Kinder Morgan). In addition, from 1992 to 1997, Mr. Paterson served as
Director of Human Resources at Bellsouth Cellular, a Division of BellSouth (now AT&T Wireless).
Mr. Paterson has a B.S. in General Management from Purdue University, an M.B.A. from Indiana
University and a Senior Professional Human Resources certification from the Society of Human
Resources Management.
Mr. Roach has been our Executive Vice President and General Manager of Wholesale Distribution since
September 2008. Mr. Roach most recently served as President of Rockwell Software, a division of
Rockwell Automation, Inc. From 2004 to 2008, Mr. Roach served in several positions with GE Fanuc
Automation, Inc., including Vice President, Sales and Vice President, Global Manufacturing
Solutions. From 1999 to 2004, Mr. Roach was President and CEO of SensorPulse, Inc. Mr. Roach has
an M.B.A. in Business and Technology from Renssalaer Polytechnic Institute, Lally School of
Management and completed his undergraduate studies at Stonehill College and Bridgewater State
University.
Mr. Salsgiver joined us as our Executive Vice President and General Manager of Hardlines and Lumber
in September 2008. In August 2009, he gained the additional responsibility of Automotive. Mr.
Salsgiver most recently served as President and Chief Executive
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Officer of Compassoft, Inc. From May 2008 to July 2008, Mr. Salsgiver served as President and
Chief Executive Officer of Aspectrics, Inc. and from 2003 to 2008, Mr. Salsgiver served as
President and Chief Executive Officer of HigherMarkets, Inc. In addition, from 1999 to 2003, Mr.
Salsgiver served in various executive and consulting positions and prior to that, from 1990 to
1999, Mr. Salsgiver was an executive with PeopleSoft, Inc., where he served as President of the
Education and Government division from 1994 to 1999. Mr. Salsgiver has a B.S. in Business
Administration with an emphasis in accounting and finance from the University of California,
Berkeley.
Mr. Taich joined us on September 18, 2006 as Vice President, General Counsel and Secretary. Prior
to joining us, Mr. Taich served as acting General Counsel at Maxtor Corporation, where he held
various positions in the Legal Department from 2001 to 2006. Mr. Taich served as Corporate Legal
Counsel for Triad Systems Corporation from 1991 to 1997, a publicly traded company and predecessor
of Activant. Mr. Taich also served in the Legal Department of Compaq Computer Corporation (and
previously Tandem Computers, which was acquired by Compaq and is now part of the Hewlett-Packard
Company) from 1997 to 1999, and as a principal and venture partner of Palo Alto Ventures and
Wingspring, Inc., respectively. Mr. Taich began his career as an associate at the law firm of Ware
& Friedenrich (now DLA Piper) from 1986 to 1991. He is a member of the State Bar of California and
holds a J.D. from the University of California, Berkeley (Boalt Hall) and a B.S. in Business from
the University of Colorado, Boulder.
Mr. Wilson joined us in 1981 as a software engineer. He became Vice President of Product
Development for our non-automotive vertical markets in 1999 and for all of our vertical markets in
2004. Mr. Wilson was promoted to Senior Vice President of Product Development in October 2005.
Prior to joining us, Mr. Wilson worked at the consulting firm of Towers Perrin. Mr. Wilson has a
B.A. from Yale University.
Mr. Ballard became one of our directors on May 2, 2006. Mr. Ballard is a Managing Director at
Hellman & Friedman LLC. He also serves as a director of Catalina Marketing Corporation, Getty
Images, Inc. and Vertafore, Inc. Prior to joining Hellman & Friedman LLC in 2004, Mr. Ballard was
employed by Bain Capital Management and Bain & Company from 1994 to 2003. Mr. Ballard graduated
cum laude from Harvard College and has an M.B.A. from the Stanford Graduate School of Business.
Mr. Barber became one of our directors on May 2, 2006. Mr. Barber is a General Partner at JMI
Equity. Mr. Barber joined JMI in 1998. He serves on the board of directors of Kronos
Incorporated, Service-now.com Inc., TC 3 Health, Inc. and Vertafore, Inc. From 1990 to 1998, Mr.
Barber was the Managing Director and Head of the Software Investment Banking Practice at Alex.Brown
& Sons. Prior to joining Alex.Brown, Mr. Barber worked in Product Marketing at Microsoft
Corporation and in investment banking at Merrill Lynch & Co. Mr. Barber received an A.B. from
Stanford University and an M.B.A. from the Harvard Business School.
Mr. Bernard became one of our directors on May 2, 2006. Mr. Bernard has been an executive business
consultant and an Operating Partner at Thoma Bravo, L.L.C. since October 2008. From 1994 to 2000,
Mr. Bernard was Corporate Vice President, Operations, of Geac Computer Corporation. From 1992 to
1994, Mr. Bernard was Senior Vice President, Ontario Division, of St. Lawrence Cement, Inc. From
1991 to 1992, Mr. Bernard was President and Chief Executive Officer of Saskatchewan
Telecommunications. Prior to this, Mr. Bernard occupied various positions at Motorola, most
notably as President of Motorola Canada, Inc. from 1982 to 1991. Mr. Bernard serves on the board
of directors of Acresso Software, Inc., Datatel, Inc., Entrust, Inc., Manatron, Inc., Hyland
Software, Inc. and is the Chairman of the Board of Directors of Vision Solutions, Inc.
Mr. Crabill became one of our directors on May 2, 2006. Mr. Crabill is a Managing Partner at Thoma
Bravo, L.L.C. Mr. Crabill joined Thoma Bravo, L.L.C. in October 2008. Prior to joining Thoma
Bravo, Mr. Crabill was a Partner at Thoma Cressey Bravo, Inc. from 2002 to October 2008. Prior to
that, he was with Summit Partners and J.H. Whitney & Co. in New Canaan, Connecticut. His other
experience includes employment with the Hewlett-Packard Company as a product manager and with
Alex.Brown & Sons in corporate finance and mergers and acquisitions. Mr. Crabill also serves on
the board of directors of Attachmate Corporation, Entrust, Inc., Manatron, Inc. and Vision
Solutions, Inc. Mr. Crabill earned a B.S. in Industrial Engineering from Stanford University and an
M.B.A. from the Stanford Graduate School of Business.
Mr. Henske became one of our directors, and the Chairman of our Board of Directors, on November 2,
2007. Mr. Henske has served as a Managing Director at Hellman & Friedman LLC since July 2007.
From May 2005 until July 2007, he served as Senior Vice President and General Manager of the
Consumer Tax Group of Intuit Inc. He was Intuits Chief Financial Officer from January 2003 to
September 2005. Prior to joining Intuit, he served as Senior Vice President and Chief Financial
Officer of Synopsys, Inc. from May 2000 until January 2003. From January 1997 to May 2000, Mr.
Henske was a Partner at Oak Hill Capital Management, a Robert M. Bass Group private equity
investment firm. Mr. Henske also serves on the board of directors of Goodman Global, Inc. and
VeriFone, Inc. Mr. Henske holds a B.S. in Chemical Engineering from Rice University and an M.B.A.
in Finance and Strategic Management from The Wharton School of Business, University of
Pennsylvania.
Mr. Tunnell became one of our directors on May 2, 2006. Mr. Tunnell is a Managing Director at
Hellman & Friedman LLC. He is the Chairman of the Board of Directors of GeoVera Insurance Group
Holdings, Ltd. and Vertafore, Inc., and a director of Intergraph Corporation, Kronos Incorporated
and PARIS RE Holdings Limited. Mr. Tunnell is also a Term Member of the Council on Foreign
Relations. Prior to joining Hellman & Friedman in 1994, Mr. Tunnell was employed by the Banking
Group of Lazard Frères & Co. in New York. Mr. Tunnell graduated magna cum laude from Harvard
College and has an M.B.A. from the Harvard Business School.
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Table of Contents
Board Composition and Governance
The composition of our board of directors is established in accordance with the terms of the
stockholders agreement entered into by us, Activant Group, funds affiliated with Hellman &
Friedman, Thoma Cressey and JMI Equity and certain members of our management. Among other things,
this stockholders agreement provides that, prior to an initial public offering of the shares of
Activant Groups common stock, the parties that beneficially own shares of Activant Group common
stock will vote those shares to elect a board of directors comprised of the following persons:
| our chief executive officer; |
|
| one board member designated by Thoma Cressey (currently Mr. Crabill); |
|
| one board member designated by JMI (currently Mr. Barber); and |
|
| the remaining board members designated by Hellman & Friedman (currently Messrs. Ballard,
Bernard, Henske and Tunnell). |
For a discussion regarding the stockholders agreement, please refer to Item 13
Certain Relationships and Related Transactions, and Director IndependenceStockholders Agreement.
The committees of our board of directors currently consist of an audit committee and a compensation
committee. None of the members of our board of directors is independent, because we are a
privately held company and not subject to applicable listing standards. Please see Item 13
Certain Relationships and Related Transactions, and Director Independence.
Audit Committee Financial Expert
Our board of directors has determined that Messrs. Ballard and Barber each qualify as an audit
committee financial expert, as this term has been defined by the SEC in Item 407(d)(5) of
Regulation S-K. Each of Messrs. Ballard and Barber has extensive prior experience of actively
supervising chief financial officers.
Our board of directors determined that Mr. Ballard acquired the required attributes for designation
as an audit committee financial expert, as a result of the following relevant experience, which
forms of experience are not listed in any order of importance and were not assigned any relative
weights or values by our board of directors in making such determination:
| experience overseeing or assessing the performance of companies or public
accountants with respect to the preparation, auditing or evaluation of financial statements,
including experience serving as Audit Committee Chair for DoubleClick, Inc. from July 2005 to
2008, Audit Committee Chair for Vertafore, Inc. from December 2004 to 2006, and Audit
Committee Chair for Catalina Marketing Corporation from October 2007 to date; |
|
| experience as a private equity investor for more than ten years, including managing all
aspects and facets of accounting due diligence and issuing accounting statements; |
|
| M.B.A. from Stanford University, including advanced accounting coursework; and |
|
| continued periodic study of recent accounting pronouncements. |
Our board of directors determined that Mr. Barber acquired the required attributes for designation
as an audit committee financial expert, as a result of the following relevant experience, which
forms of experience are not listed in any order of importance and were not assigned any relative
weights or values by our board of directors in making such determination:
| experience overseeing or assessing the performance of companies or public accountants with
respect to the preparation, auditing or evaluation of financial statements, including
experience serving on the Audit Committee for Stanford University from 2003 to 2005, eBenX,
Inc. (NASDAQ: EBEX) from 1999 to 2003, and Blackbaud Inc. from 1999 to 2005; |
|
| experience as a private equity investor for more than ten years, including managing all
aspects and facets of accounting due diligence and issuing accounting statements; |
|
| M.B.A. from Harvard University; and |
|
| continued periodic study of recent accounting pronouncements. |
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Code of Ethics for Senior Financial Management
We have adopted a Code of Ethics for Senior
Financial Management (the Code of Ethics) which is
applicable to our Chief Executive Officer, Chief Financial Officer, Vice President of Finance, and
Vice President Corporate Controller. To date, we have not made any amendments to or granted any
waivers to the Code of Ethics. We have filed a copy of our Code of Ethics as Exhibit 14.1 to the
Annual Report on Form 10-K filed with the SEC on December 21, 2007. A free copy of our Code of
Ethics may be obtained by directing your request to Activant Solutions Inc., 7683 Southfront Road,
Livermore, CA 94551 Attn: General Counsel, or through the Corporate Governance tab of our website
at www. activant.com/company/governance.
ITEM 11 EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Our executive compensation program, including with
respect to our Named Executive Officers, is
overseen and administered by the compensation committee of our board of directors (the Board).
Our Named Executive Officers are (1) our current chief executive officer, (2) our current chief
financial officer and (3) each of our three other most highly compensated executive officers who
were serving as executive officers at the end of September 30, 2009.
The Board has appointed Messrs. Ballard, Crabill
and Henske to serve on the compensation committee.
None of our executive officers has served as a member of the compensation committee (or other
committee serving an equivalent function) of any other entity, whose executive officers served as a
director of our company or member of our compensation committee. Messrs. Ballard and Henske are
managing directors of Hellman & Friedman LLC and Mr. Crabill is a managing partner at Thoma Bravo,
L.L.C. Affiliates of Hellman & Friedman and Thoma Cressey together beneficially own more than 95%
of the outstanding common stock of Activant Group. See Item 12 Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters and Item 13 Certain
Relationships and Related Transactions, and Director Independence.
The compensation committee operates under a written
charter adopted by our Board and has
responsibility for discharging the responsibilities of the Board relating to the review of the
compensation of our executive officers and making recommendations to the non-executive directors
for approval. Compensation decisions with respect to our Named Executive Officers, other than our
chief executive officer, generally are made by means of reviews of executive compensation by our
chief executive officer and our senior vice president of human resources in consultation with other
members of the executive management team, which typically would include any other Named Executive
Officer to whom the applicable executive officer directly reports. Once such consultations and
reviews are complete, our chief executive officer makes recommendations regarding the compensation
of these Named Executive Officers to our compensation committee, which may accept, modify or reject
one or more of the recommendations. All recommendations with respect to the compensation of our
chief executive officer are made solely by our compensation committee. Our compensation committee
then submits its final recommendations to our non-executive directors for approval. Our
compensation committee and the non-executive directors exercise their discretion in accepting,
modifying or rejecting managements recommendations regarding executive compensation, as described
below.
Objectives of Our Compensation Program
Our executive compensation program is intended to
meet three principal objectives:
| to provide competitive compensation packages to attract and retain superior
executive
talent; |
||
| to reward successful performance by the executive and the company by linking a
significant portion of compensation to our financial results; and |
||
| to align the interests of executive officers with those of our stockholders by
providing long-term equity compensation and meaningful equity ownership. |
To meet these objectives, our compensation
program balances short-term and long-term goals and
mixes fixed and at-risk compensation related to the overall financial performance of the company.
Our compensation program for senior executives, including the Named Executive Officers, is
generally designed to reward the achievement of targeted financial goals. The compensation program
is intended to reinforce the importance of performance and accountability at various operational
levels, and a significant portion of total compensation is provided in the form of cash
compensation incentives that reward performance as measured against corporate established financial
goals, including EBITDA targets, further adjusted to exclude certain income and expense items,
including interest and other income and expense, foreign exchange gains and losses, expenses
related to strategic initiatives and acquisitions, restructuring, stock compensation and sponsor
fees, as well as purchase accounting adjustments, as approved by the compensation committee (IB
Plan EBITDA). Each element of our compensation program is reviewed individually and considered
collectively with the other elements of our compensation program to ensure that it is consistent
with the goals and objectives of both that particular element of compensation and our overall
compensation program.
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Elements of Our Executive Compensation Program
Overview
For fiscal year 2009, the principal elements of compensation
for our Named Executive Officers
included:
| annual cash compensation consisting of base salary and performance-based incentive
bonuses; |
||
| long-term equity incentive compensation; |
||
| cash retention bonus for our CEO; |
||
| health and welfare benefits; |
||
| retirement benefits; |
||
| deferred compensation arrangements; and |
||
| severance and/or change of control benefits. |
Annual Cash Compensation Base Salary
In assessing compensation for our executives, we use compensation
survey data from a broad set of
companies in a comparable industry and size. We believe that this aggregated data provides us with
appropriate benchmarks because these companies provide technology products and services and compete
with us for executives and other employees. The survey data is derived from the Radford Executive
Survey, and includes data relative to (i) an overall group of companies across a variety of
industries, (ii) software companies with revenue between $200 million and $1 billion, (iii) the
overall survey group of companies with revenue between $200 million and $500 million, (iv) the
overall survey group of companies with revenue between $200 million and $1 billion and located in
Northern California and (v) the overall survey group of companies with revenue between $200 million
and $1 billion and located outside Northern California. In performing the analysis, our
compensation committee reviewed the relevant data obtained from the categories or sub-categories of
data identified above both in relation to base salary and in relation to performance-based cash
compensation payable to our Named Executive Officers for the 2009 fiscal year.
Our annual cash compensation for our Named Executive Officers
includes base salary and
performance-based cash compensation. The table below shows the proportion of each Named Executive
Officers base salary and annual targeted performance-based cash compensation in relation to the
aggregate targeted amount of base salary and annual performance bonus for each such officer for
fiscal year 2009. As a general matter, the performance-based cash compensation component for our
Named Executive Officers constitutes one-third of their targeted cash compensation, except for our
Chief Executive Officer, whose performance-based cash compensation target constitutes one-half of
his targeted cash amount due to his position and ability to influence our financial performance.
Base as % of Total | Target Incentive as % | |||||||
Targeted Cash | of Total Targeted Cash | |||||||
Named Executive Officer | Compensation | Compensation | ||||||
Pervez A. Qureshi |
50.0 | % | 50.0 | % | ||||
Kathleen M. Crusco |
66.7 | % | 33.3 | % | ||||
Kevin V. Roach |
66.7 | % | 33.3 | % | ||||
Paul H. Salsgiver, Jr. |
66.7 | % | 33.3 | % | ||||
William Wilson |
66.7 | % | 33.3 | % |
We generally target base salary at the 50th percentile
(market median) based on our analysis of
the applicable survey data described above, and total cash compensation (assuming that 100% of the
target performance-based incentive bonus is earned) slightly above the market median based on such
survey data. However, in establishing or reviewing the base salary and annual performance-based
cash compensation for each individual, we also consider the individuals performance, achievement
of management objectives and contributions to our overall business. Therefore, the compensation
committee may and does exercise its discretion to award cash compensation for any Named Executive
Officer either below or above the market median level identified by the survey data reviewed.
Annual compensation reviews are typically performed in the second quarter of each year and total
compensation may be adjusted for Named Executive Officers after his or her annual review has been
completed. However, increases in compensation may occur at other times of the year based on
changes in responsibilities or other considerations that may apply to our Named Executive Officers.
For fiscal year 2009, the Named Executive Officers compensation review considered a number of
factors including our historical compensation practices, the experience and existing compensation
arrangements with the Named Executive Officer, competitive factors existing in the employment
market, and the competitive compensation practices within the industry. The survey data referenced
above demonstrated that overall salaries for the Named Executive Officers were slightly below the
median salaries derived from the reported survey data. In addition, the survey data demonstrated
that the total cash compensation for Mr. Qureshi and Ms. Crusco was slightly below the market
median. An adjustment in base salary was made for Messrs. Qureshi and Wilson and for Ms. Crusco as
of October 6, 2008. The base pay adjustments for Mr. Qureshi and Ms. Crusco were based on each
executives performance and their respective below-market positions relative to the comparable
market median for base salary. Mr. Qureshis annual base salary was increased by 4% to $416,000,
Ms. Cruscos annual base salary was increased by 6.9% to $310,000, and Mr. Wilsons annual base
salary was increased by 8.7% to $250,000.
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The base salaries earned by our Named Executive Officers for fiscal years 2009, 2008 and 2007 are
shown in the Summary Compensation Table below.
Annual Cash Compensation Performance Based Incentive Bonuses
Our Incentive Bonus Plan (IB Plan) is designed to reward our executives for the achievement of
pre-established annual financial targets and management objectives. As a general matter, the
targets and objectives for those of our Named Executive Officers with responsibilities that cover
our entire business are based on the achievement of company-wide performance targets while the
targets and objectives for those of our Named Executive Officers with responsibilities generally
related to only one of our business units are based on a combination of the achievement of
company-wide performance targets and applicable business unit performance targets. The IB Plan
provides for a portion of the incentive bonuses to be paid on a quarterly basis for the first three
quarters of each fiscal year if the financial performance targets for the respective quarter are
attained; in the fourth quarter, year-to-date performance is measured against our annual targets.
The final bonus payment, if any, is made to our Named Executive Officers after the end of a fiscal
year based on the financial performance for the entire year, less any amounts previously paid in
one or more quarterly installments.
For fiscal year 2009, the Named Executive Officers were eligible to receive performance-based
incentive bonuses under the IB Plan with target payouts ranging from 0% to 200% of a participants
annual target bonus amount. The actual bonus for our Named Executive Officers was payable upon
achievement of fiscal year 2009 targeted IB Plan EBITDA only. IB Plan EBITDA was selected as the
sole financial metric for the 2009 fiscal year as a result of the financial pressures imposed on us
following the significant domestic and global economic downturn commencing in 2008. The collapse
in many sectors of the economy impacted our ability to drive revenue growth, making EBITDA the
financial performance metric most critical to our success and our continuing ability to satisfy our
financial debt covenants.
Therefore, for the 2009 fiscal year, Messrs Qureshi and Wilson and Ms. Crusco were eligible to
receive a bonus under the IB Plan determined solely by the companys overall financial performance
as measured by an IB Plan EBITDA target. Messrs Roach and Salsgiver were eligible to receive a
bonus under the IB Plan determined by a combination of the companys overall financial performance as
well as applicable business unit performance, subject to a guaranteed first-year minimum incentive
bonus payout of 60% of target for both. Under the terms of the IB Plan, the IB bonus pool will
only be funded when the EBITDA threshold is exceeded. However, if the EBITDA threshold is exceeded
by an amount that would cause the bonus pool to be funded in an amount that would result in the
payment of de minimis bonuses or would otherwise be impractical, the Compensation Committee may
decide not to fund the bonus pool for that fiscal year. Funding for the IB Plan is capped relative to
achievement of the IB Plan EBITDA at a payout equal to 200% of the targeted total bonus pool.
Accordingly, the IB Plan for our Named Executive Officers, with the exception of those Named
Executive Officers receiving a guaranteed first year incentive bonus as a part of their employment
agreements, required achievement in excess of the IB Plan EBITDA target. The range of the
potential payouts under the IB Plan for fiscal year 2009, commencing at a level above possible de
minimis or impractical funding levels, was as follows:
IB Plan EBITDA Achieved as % of FY | Percentage of Bonus Pool | |
2009 EBITDA Target | Funded | |
95.4%
|
29.5% | |
100.0% | 100.0% | |
116.2% | 200.0% |
The IB Plan was capped relative to achievement of the IB Plan EBITDA at a payout equal to 200% of
the targeted total bonus pool. As a result of our fiscal year 2009 performance, bonuses were paid
for financial performance of the entire fiscal year at 48% of the quarterly annual targeted bonus
amount to each of Messrs. Qureshi and Wilson and Ms. Crusco, our three Named Executive Officers who
did not receive a guaranteed minimum bonus amount. No bonus was earned or paid for any of the
first three fiscal quarters in fiscal year 2009 based on our financial results not meeting minimum
threshold requirements for payout. In fiscal year 2009, pursuant to the terms of their offer
letters, Messrs. Roach and Salsgiver received guaranteed first-year incentive bonuses at payout
levels equal to 60% of their targeted incentive bonus for the first year of participation, which
was higher than the amounts they would otherwise have been entitled to receive based on our
financial performance for the last completed fiscal year.
We are not disclosing the Companys overall IB Plan EBITDA performance target and actual IB Plan
EBITDA performance measure for fiscal year 2009 because they represent confidential information
that is not publicly available, and we believe that disclosure of these IB Plan EBITDA performance
targets and actual performance measures would reveal detailed information about our cost structure
and our product and service pricing, margins and mix strategy, which would lead to meaningful
competitive harm. In addition, these performance targets were set at a level which was difficult
to attain, requiring historical economic strength in the vertical markets which we serve, sustained
effort by the Named Executive Officers, and substantial improvement in growth and/or margins over
the prior fiscal year, as applicable.
While our compensation committee considers the annual bonus targets for our Named Executive
Officers to be attainable, the targets require significant and sustained effort on the part of our
company and the applicable business units for the Named Executive Officers to earn a bonus equal to
or in excess of their respective target amounts. Performance-based incentive bonuses earned by the
Named Executive Officers for fiscal year 2009 are shown in the Summary Compensation Table below.
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Long-Term Equity Incentive Compensation
We intend for our stock option incentive
program to be the primary vehicle for offering long-term
incentives and rewarding our executive officers, managers and key employees. Because of the direct
relationship between the value of an option and the value of our stock, we believe that granting
options is a method of motivating our executive officers to manage our company in a manner that is
consistent with the interests of the company and our stockholders. We also regard our option
program as a key retention tool. Retention is an important factor in our determination of the
number of underlying shares to grant.
Following the completion of the mergers,
Activant Group established a new stock incentive plan, the
2006 Stock Incentive Plan (Stock Incentive Plan), which governs, among other things, the grant of
options, restricted stock and other equity-based awards. In connection with the completion of the
merger, we reserved a pool of options to acquire Activant Group common stock under the Stock
Incentive Plan to be granted to select employees, including our Named Executive Officers, after the
mergers. A portion of that pool was also reserved for grants to new hires. Our option pool was
increased after the Eclipse acquisition to assure the availability of adequate equity awards for
new and promoted participants from that transaction. As a general matter, it is our policy to
grant stock options to our Named Executive Officers only upon commencement of employment or in
connection with a promotion or assignment of additional responsibilities. We do not currently
anticipate making annual option grants.
All stock options that have been granted under
the stock incentive plan are time-based options
that vest and become exercisable over a five-year period. For a more detailed discussion regarding
the 2006 Stock Incentive Plan and the options granted under that plan, see the section titled
Employment Agreements and Severance and Change of Control Benefits2006 Stock Incentive Plan
below. Additional information regarding grants made to the Named Executive Officers is included in
the tables below.
Cash Retention Bonus
On November 15, 2006, our Board approved a cash
retention bonus plan (Cash Retention Bonus Plan)
for the payment of a bonus to those employees, including certain of our Named Executive Officers,
who had been granted an option through that date under the Stock Incentive Plan, calculated by the
number of options granted for such employee times $0.35. In the case of the Named Executive
Officers, payment of the retention bonus vests twenty percent (20%) per year, commencing on
September 30, 2007 and each September 30th for the next four subsequent years. Vesting under the
Cash Retention Bonus Plan accelerates in the event of a Change in Control, as defined under the
Stock Incentive Plan. In addition, in the event that we terminate Mr. Qureshis employment without
cause or if he resigns for good reason (as each term is defined in his employment agreement),
and one or more of the payment dates has not occurred as of such termination, any annual
installment that he would have received on or prior to the six-month anniversary of such
termination of employment will become immediately vested and payable.
Amount Outstanding and | ||||||||||||
Subject to Annual | ||||||||||||
Amount Vested | Vesting as of September | |||||||||||
Total Cash Retention | As of September 30, | 30 for the Next Two | ||||||||||
Named Executive Officer | Bonus Amount | 2009 | Years | |||||||||
Pervez A. Qureshi |
$ | 758,333 | $ | 455,000 | $ | 303,333 | ||||||
William Wilson |
$ | 131,250 | $ | 78,750 | $ | 52,500 |
Benefits
We offer a variety of health, welfare and retirement
programs to all eligible employees, including
the Named Executive Officers. The Named Executive Officers generally are eligible for the same
benefit programs on the same basis as the rest of our employees, including medical and dental care
coverage, life insurance coverage, short-and long-term disability and a 401(k) Plan. Based upon Mr.
Qureshis employment agreement with us, Mr. Qureshi also has a life insurance benefit of up to $2.0
million. We also provide a bi-annual (annual for executives 50 or older) company-paid executive
physical for all executives (inclusive of tax gross-up). In addition, we pay for certain airline
club memberships for Mr. Qureshi and Ms. Crusco. Except as described in this paragraph, we do not
provide perquisites as part of our executive compensation program.
Deferred Compensation Arrangements
On December 18, 2008, our Board approved the
amendment and restatement of our top-hat deferred
compensation plan effective as of December 31, 2008 (Deferred Compensation Plan). For fiscal
year 2009, one of our current Named Executive Officers, William Wilson, participated in the
Deferred Compensation Plan.
Under the Deferred Compensation Plan, an
eligible participant is permitted to defer, in compliance
with Section 409A of the Internal Revenue Code, as amended (the Code), any percentage (from 0% to
100%) of his or her qualifying base salary and bonus above the limit that could be contributed to
our 401(k) Plan for each calendar year. Additionally, we can credit participant accounts with
employer contributions at any time, but we did not make any such contributions during the 2009
fiscal year. All amounts allocated to a participants deferral account are adjusted at the end of
each calendar year for investment gains and losses based on the performance of certain hypothetical
investment choices selected by participants. Participants may change their selected investment
choices as permitted by the plan administrator. We remain liable to pay all amounts deferred in a
participants deferral account, as adjusted for all notional
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investment gains and losses, at the time
specified in a participants deferral election, or
otherwise as permitted under the terms of the Deferred Compensation Plan. We fund the Deferred
Compensation Plan by means of corporate-owned life insurance policies.
When participants make their deferral
elections for a given year, they also elect how those
deferrals will ultimately be paid. Participants may elect either a lump sum cash payment or annual
or quarterly installments for up to 10 years, but the timing of the payment of the deferred
compensation may be no earlier than three years following the year in respect of which the deferral
election is made. If a participant does not designate a specific payment date, then all deferred
amounts will be paid out upon the participants termination of employment. In addition, all
deferred amounts will be paid out upon a participants death or termination of employment if either
event occurs prior to the payment date selected by the participant; further, in the event of a
participants death prior to the commencement of payments, all amounts will be paid in a single
lump sum (regardless of the participants election). Participants may also request unplanned
distributions in limited emergency situations.
Employment Agreements and Severance
and Change of Control Benefits
We have entered into executive arrangements
with certain key executives, including the Named
Executive Officers, providing for severance benefits. The severance and change in control benefits
are designed to provide economic protection to our key executives so that they can remain focused
on our business without undue personal concern in the event that an executives position is
eliminated or significantly altered by the company, including in connection with a change in
control of our company. We recognize that circumstances may arise in which we may consider
eliminating certain key positions that are no longer necessary or a change in control transaction
may occur. These benefits are intended to provide the security needed for the executives to remain
focused and reduce the distraction regarding personal concerns during a transition.
Activant Executive Severance Plan
On February 1, 2005, we adopted the Activant
Executive Severance Plan (the Executive Severance
Plan) effective as of January 1, 2005, which covered each officer, vice president or other senior
executive employee of us (other than our chief executive officer) and who was designated as an
Eligible Employee by and in the discretion of the plan administrator. An Eligible Employee was
entitled to severance under the Executive Severance Plan if such Eligible Employee was
involuntarily terminated without cause (wherein cause means a determination by the plan
administrator that the Eligible Employee (i) has engaged in personal dishonesty, willful violation
of any law, rule or regulation or breach of fiduciary duty involving personal profit, (ii) has
failed to perform his or her duties satisfactorily, (iii) has been convicted of, or plead nolo
contendere to, certain crimes, (iv) has engaged in certain acts of negligence or willful
misconduct, (v) has materially breached corporate policy, (vi) has violated the terms of certain
agreements or (vii) has engaged in conduct likely to have a deleterious effect on the company) and
not as a result of such Eligible Employees death or disability (an Executive Qualified
Termination). For purposes of the Executive Severance Plan, an Executive Qualified Termination
also includes a termination occurring as a result of or in connection with the sale or other
divestiture of the company or the sale or other divestiture of a division, subsidiary, assets or
other entity or business segment where the Eligible Employee is required to work at a job site over
50 miles from his or her job site immediately prior to such sale or divestiture or where the
Eligible Employees base pay is reduced by more than 10% when compared to the base pay earned
immediately prior to such sale or divestiture. Upon an Executive Qualified Termination, an
Eligible Employee was entitled to receive a single lump sum severance payment equal to six months
base salary if the Eligible Employee executed a release of all claims against us. Notwithstanding
the foregoing, in no event would such severance payment, when aggregated with all other payments to
such Eligible Employee on account of the same Executive Qualified Termination under any of our
other sponsored severance arrangements, exceed the lesser of twice the annual compensation of such
Eligible Employee for the calendar year immediately preceding the calendar year during which the
Executive Qualified Termination occurred and the maximum amount which may be taken into account
under a qualified plan pursuant to Section 401(a)(17) of the Code for the year of termination.
Additionally, severance payments payable under the Executive Severance Plan to an Eligible Employee
would be offset and reduced for any and all severance amounts paid or payable to the Eligible
Employee under any individual employment or severance agreement or under any applicable law.
On November 2, 2007, we amended and restated
the Executive Severance Plan to ensure that benefits
paid under it will not be subject to excise tax under Section 409A of the Code. In connection with
such amendment and restatement, we also revised the definition of Eligible Employee under the
Executive Severance Plan to clarify that it covers each of our executives who is either a senior
vice president, executive vice president or vice president, as well as any of our other senior
level employees who is specifically designated to participate in the Executive Severance Plan, as
well as revised the definition of an Executive Qualified Termination to include termination
resulting from an acquirer offering employment to the employee, the terms of which are a material
change to the employees employment. The Executive Severance Plan was also further amended to
provide for enhanced severance benefits upon an Executive Qualified Termination, whereby an
Eligible Employee who is either a senior vice president or executive vice president will be
entitled to receive severance benefits consisting of severance pay equal to nine months of such
Eligible Employees base salary and target bonus for such year (which may, in the plan
administrators sole discretion, be paid in a lump sum or over the applicable nine-month period
following the termination of the executive), as well as the payment of the Eligible Employees
COBRA premiums under our health plans for nine months. Similarly, an Eligible Employee who is a
vice president (other than a senior vice president or executive vice president) or a specifically
designated senior level employee will be entitled to receive, upon an Executive Qualified
Termination, severance pay equal to six months of such Eligible Employees base salary and target
bonus for such year (which may, in the plan administrators sole discretion, be paid in a lump sum
or over the applicable six-month period following the termination of the executive), as well as the
payment of the Eligible Employees COBRA premiums under our health plans for six months.
Additionally,
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no severance payments will be payable under
the Executive Severance Plan to an Eligible Employee
entitled to receive an equal or greater severance benefit under any individual employment or
severance agreement, plan or program, or under any other obligation or applicable law.
Each of Ms. Crusco and Messrs. Roach,
Salsgiver and Wilson is entitled to receive severance
benefits under the amended and restated Executive Severance Plan. Mr. Qureshi is not eligible to
participate in the Executive Severance Plan as his severance benefits were separately negotiated in
connection with his employment agreement (see Employment and Severance Agreements and Arrangements
with our Named Executive OfficersPervez Qureshi below).
Other Change of Control Benefits
As set forth under the heading Cash
Retention Bonus, Mr. Qureshi is entitled to full acceleration
of the unvested portion of the retention bonus in the event of a Change in Control, as defined
under the Stock Incentive Plan. Similarly, all of our Named Executive Officers are entitled to
receive full acceleration of any unvested portion of their outstanding equity awards under the
Stock Incentive Plan in the event of a Change in Control, as set forth under the heading 2006
Stock Incentive Plan below.
Employment and Severance Agreements and
Arrangements with our Named Executive Officers
Pervez A. Qureshi. In connection with
the transactions, Mr. Qureshi entered into a definitive
employment agreement with Activant Group, which was subsequently amended and restated on December
30, 2008, that governs the terms of his employment with Activant Group, the material terms of which
include the following:
| Mr. Qureshi serves as the president and chief executive officer
of Activant Group and
our company. |
||
| The employment agreement took effect on May 2, 2006, and the term
of the employment
agreement is for an indefinite period. However, Mr. Qureshi or Activant Group may end the
employment at any time. |
||
| Mr. Qureshi is paid a current base salary of $416,000 per annum.
Any adjustments to the
base salary are made by the compensation committee of the Activant Group board of
directors. |
||
| Mr. Qureshi is provided the opportunity to earn annual cash
performance bonuses in
amounts equal to up to 175% of base salary based upon the achievement of cumulative
quarterly or annual performance targets established by the compensation committee and the
board of directors of Activant Group, consistent with our current IB Plan. |
||
| Activant Group agreed to grant to Mr. Qureshi 2,166,667 options to
purchase shares of
Activant Group common stock. These options vest over five years, provided that these
options will become fully vested and exercisable in the event of a sale or change of
control of Activant Group. |
||
| Mr. Qureshi is provided with employee benefits in accordance with
our programs as in
effect from time to time and applicable to our executive officers, as well as a life
insurance benefit of up to $2.0 million. |
||
| Subject to his execution of an effective release of claims in favor
of us and certain
other parties, and his continued compliance with the restrictive covenants described below,
Mr. Qureshi has the right to receive the following severance payments and benefits in the
event that he is involuntarily terminated by us without cause, as defined in his
employment agreement, or if he resigns for good reason, as defined in his employment
agreement: |
| base salary through the date of termination, any earned but unpaid
portion of the
annual or quarterly performance bonus award, any accrued but unused vacation,
reimbursement for any unreimbursed business expenses properly incurred by Mr.
Qureshi in accordance with our policy prior to the date of termination and any
employee benefits to which he may be entitled under any employee benefit plans, such
amounts, and any other severance benefits owed, reduced by any amounts owed to us or
our affiliates by Mr. Qureshi; |
||
| pro rata portion of any annual performance bonus that Mr. Qureshi
would have
earned in the year in which such termination of employment occurs; |
||
| termination payment equal to 150% of Mr. Qureshis then
effective annual base
salary and an additional termination payment equal to 150% of Mr. Qureshis then
effective annual base salary, payable in equal monthly payments over the nine-month
period following termination; |
||
| continued coverage for a period of 18 months following termination
of employment
under our health plans in accordance with the terms thereof; and |
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| accelerated vesting of Mr. Qureshis options equal to the number of shares that
would have vested if he had continued to be employed by us for an additional six months
and a period of 180 days following termination to exercise all vested options. |
| While Activant Groups common stock is not publicly traded, Mr. Qureshi and we will use
commercially reasonable efforts to obtain stockholder approval in accordance with the terms
of Section 280G of the Code for any payments and benefits contingent upon the occurrence of
a change in control. Mr. Qureshis employment agreement also contains a clause cutting
back such payments and benefits for the purposes of Section 280G of the Code in the event
that such a cutback would allow Mr. Qureshi to obtain a higher after-tax value from such
payments and benefits. |
||
| While employed by us and for a period of 18 months thereafter, except for the
confidentiality covenant whose duration is for an indefinite term, Mr. Qureshi is subject
to compliance with various restrictive covenants, including non-competition and
non-solicitation/non-hire, for the benefit of us and certain other parties. |
On May 1, 2006, Mr. Qureshi also entered into an option rollover agreement pursuant to which he
agreed to rollover $1.0 million of spread value of his then outstanding stock options into 333,334
vested stock options to purchase shares of common stock of Activant Group at an exercise price of
$1.00 per share. Pursuant to the option rollover agreement, Activant Group agreed to assume these
options pursuant to the terms of the Activant Solutions Holdings Inc. Second Amended and Restated
Stock Option Plan for Key Employees, as amended, which is the stock option plan under which these
options were originally granted.
Kathleen M. Crusco. On March 19, 2007, we entered into a letter agreement with Ms. Crusco for the
position of Senior Vice President and Chief Financial Officer, with an effective start date of May
3, 2007. Pursuant to Ms. Cruscos employment arrangement with us, Ms. Crusco is paid an annual
base salary of $310,000 and is eligible to receive a target incentive bonus under the IB Plan of
$155,000. The offer letter with Ms. Crusco also provides for (i) a stock option grant for 425,000
shares of common stock of Activant Group under the Stock Incentive Plan; (ii) a signing bonus of
$100,000, which Ms. Crusco was required to reimburse in full if she voluntarily terminated her
employment with us prior to 12 months from her start date; and (iii) severance of (A) nine months
of base salary and target incentive bonus and (B) nine months of COBRA premium payments under our
health plans, in the event Ms. Cruscos termination of employment with us constitutes an Executive
Qualified Termination under the terms of our Executive Severance Plan (as described above under
Activant Executive Severance Plan). In addition, Ms. Crusco is provided with employee benefits
in accordance with our programs as in effect from time to time and applicable to our executive
officers.
Kevin V. Roach. On September 10, 2008, we entered into a letter agreement with Mr. Roach for the
position of Executive Vice President and General Manager of Wholesale Distribution, with an
effective start date of September 29, 2008. Pursuant to Mr. Roachs employment arrangement with
us, Mr. Roach is paid an annual base salary of $400,000 and is eligible to receive a target
incentive bonus under the IB Plan of $200,000, with a guaranteed bonus of 60% of target for the
first year (subject to continued employment with us). The offer letter with Mr. Roach also
provides for (i) a stock option grant for 450,000 shares of common stock of Activant Group under
the Stock Incentive Plan; (ii) a signing bonus of up to $281,000, less any amounts paid to Mr.
Roach by his former employer under such employers restricted stock unit and bonus plans; (iii) up
to $60,000 to attend an executive education program after 24 months of employment with us; (iv) up
to $200,000 in relocation related expenses, which must be reimbursed in full if Mr. Roach
voluntarily resigns from his employment with us within 24 months after relocation; (v) a tax
gross-up payment on taxable relocation reimbursements; and (vi) severance of (A) nine months of
base salary and target incentive bonus and (B) nine months of COBRA premium payments under our
health plans, in the event Mr. Roachs termination of employment with us constitutes an Executive
Qualified Termination under the terms of our Executive Severance Plan. In addition, Mr. Roach is
provided with employee benefits in accordance with our programs as in effect from time to time and
applicable to our executive officers.
Paul H. Salsgiver, Jr. On September 3, 2008, we entered into a letter agreement with Mr. Salsgiver
for the position of Executive Vice President and General Manager of Hardlines and Lumber, with an
effective start date of September 8, 2008. Pursuant to Mr. Salsgivers employment arrangement with
us, Mr. Salsgiver is paid an annual base salary of $350,000 and is eligible to receive a target
incentive bonus under the IB Plan of $175,000, with a guaranteed bonus of 60% of target for the
first year (subject to continued employment with us). The offer letter with Mr. Salsgiver also
provides for (i) a stock option grant for 500,000 shares of common stock of Activant Group under
the Stock Incentive Plan; and (ii) severance of (A) nine months of base salary and target incentive
bonus and (B) nine months of COBRA premium payments under our health plans, in the event Mr.
Salsgivers termination of employment with us constitutes an Executive Qualified Termination under
the terms of our Executive Severance Plan. In addition, Mr. Salsgiver is provided with employee
benefits in accordance with our programs as in effect from time to time and applicable to our
executive officers.
William Wilson. Pursuant to Mr. Wilsons employment arrangement with us, Mr. Wilson is paid an
annual base salary of $250,000 and is eligible to receive a target incentive bonus under the IB
Plan of $125,000. On February 14, 2005, we entered into a letter agreement with Mr. Wilson
containing the terms of our severance obligations to him. The letter agreement provides severance
of (i) nine months of base salary and target incentive bonus and (ii) nine months of COBRA premium
payments under our health plans, in the event we terminate Mr. Wilsons employment without cause
or Mr. Wilson resigns for good reason, as such terms are defined in the letter agreement. For
purposes of the letter agreement, cause means (A) conviction of certain crimes, (B) violation of
certain agreements, (C) dishonesty or fraud, (D) gross negligence, incapacitation or
insubordination or (E) willful acts detrimental to the company; and good reason means (A) a
significant reduction in title, responsibilities, and/or total compensation or (B) a requirement to
relocate
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more than 50-miles from the companys
Livermore, California facility. In addition, Mr. Wilson is
provided with employee benefits in accordance with our programs as in effect from time to time and
applicable to our executive officers.
2006 Stock Incentive Plan
Following the completion of the merger,
Activant Group terminated all of Holdings outstanding
equity incentive plans and established the Stock Incentive Plan, which governs, among other things,
the grant of options to purchase common stock of Activant Group to members of management and other
service providers following the completion of the mergers. Each grant of options under the Stock
Incentive Plan specifies the applicable option exercise period, option exercise price and such
other terms and conditions as deemed appropriate. A total of 7,961,958 shares have been reserved
for issuance under the Stock Incentive Plan of which 45,000 options have been exercised. All
options granted under the Stock Incentive Plan will expire no later than ten years from the date of
grant, but generally will terminate earlier upon termination of employment. The options that have
been granted under the Stock Incentive Plan are subject to a five-year vesting schedule, with 20%
vesting on the first anniversary of the vesting commencement date and the remaining 80% vesting in
equal quarterly installments over the next four years such that the option will be fully vested on
the fifth anniversary of the vesting commencement date. In the event of a sale of substantially
all of the assets of the company, or a merger or acquisition of the company, the board of directors
of Activant Group may provide that awards granted under the Stock Incentive Plan will be cashed
out, continued, replaced with new awards or terminated; provided that all outstanding options will
accelerate upon such a change of control. Each Named Executive Officer who exercises his or her
options is also required to become a party to the stockholders agreement described in this report,
unless he or she has already been made a party to such agreement. See Item 13 Certain
Relationships and Related Transactions, and Director Independence Stockholders Agreement.
Rollover Options
Pursuant to a letter agreement entered into in
connection with the merger agreement on May 2, 2006,
Mr. Qureshi rolled over $1.0 million of the in the money value of his options in Holdings into
333,334 vested stock options to purchase shares of common stock of Activant Group at an exercise
price of $1.00 per share. See Employment and Severance Agreements and Arrangements with our Named
Executive Officers Pervez A. Qureshi above.
Change of Control Agreements
Except with regard to the applicable provisions of
the Executive Severance Plan, Cash Retention
Bonus Plan and the Stock Incentive Plan and the foregoing described employment agreements with the
Named Executive Officers described above, we have not entered into any agreements with regard to a
change in control of the company with our Named Executive Officers.
Accounting and Tax Implications
The accounting and tax treatment of particular forms of
compensation do not materially affect our
compensation committees decisions. However, we evaluate the effect of such accounting and tax
treatment on an ongoing basis and will make appropriate modifications to compensation policies
where appropriate.
Stock Ownership
We do not have a formal policy requiring stock
ownership by management.
Stock Option Grant Practices
All grants of stock options under the 2006 Stock
Incentive Plan have had an exercise price equal to
or higher than the fair market value of Activant Groups common stock on the date of grant. Because
we are a privately-held company and there is no market for Activant Groups common stock, the fair
market value of its common stock is determined by its compensation committee based on available
information that is material to the value of Activant Groups common stock, including the value of
the company immediately prior to the merger, the principal amount of the companys indebtedness,
the companys actual and projected financial results, and fluctuations in the market value of
publicly-traded companies in the software industry. In August 2007, we obtained an independent
valuation of Activant Groups common stock and since that time we continue to obtain an independent
valuation on a quarterly basis in connection with periodic option grants.
Activant Groups compensation committee
approves stock option grants at either a regularly
scheduled compensation committee meeting or by a unanimous written consent signed by all of the
members of the compensation committee. All stock options are granted as of the date of the meeting
or upon execution of the unanimous written consent in lieu of a meeting, as applicable. We
generally grant stock options on a quarterly basis.
Compensation Committee Report
We have reviewed and discussed the foregoing
Compensation Discussion and Analysis with management.
Based on our review and discussion with management, we have recommended to our Board that the
Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
Robert B. Henske, Chairperson | ||
C. Andrew Ballard | ||
S. Scott Crabill |
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Table of Contents
Summary of Executive Compensation
The following table sets forth certain information regarding compensation awarded to, earned by or
paid to the following officers (Named Executive Officers) by us for services rendered during our
fiscal years 2009, 2008 and 2007.
Non-Equity | ||||||||||||||||||||||||||||||||
Option | incentive plan | All other | ||||||||||||||||||||||||||||||
Fiscal | Salary | Bonus | Stock | awards | compensation | compensation | ||||||||||||||||||||||||||
Name and principal position | year | ($) | ($) | awards | (1) | (2) | (3) | Total | ||||||||||||||||||||||||
Pervez A. Qureshi (4) |
2009 | $ | 415,385 | $ | 151,667 | $ | | $ | 1,086,034 | $ | 200,591 | $ | 6,132 | $ | 1,859,809 | |||||||||||||||||
President and Chief |
2008 | $ | 400,000 | $ | 151,667 | $ | | $ | 1,057,199 | $ | 96,700 | $ | 5,792 | $ | 1,711,358 | |||||||||||||||||
Executive Officer |
2007 | $ | 400,000 | $ | 151,667 | $ | | $ | 1,496,837 | $ | 360,000 | $ | 3,000 | $ | 2,411,504 | |||||||||||||||||
Kathleen M. Crusco (5) |
2009 | $ | 309,231 | $ | | $ | | $ | 215,710 | $ | 74,739 | $ | 2,255 | $ | 601,935 | |||||||||||||||||
Senior Vice President |
2008 | $ | 290,000 | $ | | $ | | $ | 231,218 | $ | 35,054 | $ | 7,040 | $ | 563,312 | |||||||||||||||||
and Chief Financial Officer |
2007 | $ | 113,769 | $ | 100,000 | $ | | $ | 92,668 | $ | 32,625 | $ | 1,558 | $ | 340,620 | |||||||||||||||||
Kevin V. Roach (6) |
2009 | $ | 392,308 | $ | 281,000 | $ | | $ | 279,561 | $ | 120,000 | $ | 46,435 | $ | 1,119,304 | |||||||||||||||||
Executive Vice |
2008 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||||||||
President and |
2007 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||||||||
General Manager |
||||||||||||||||||||||||||||||||
of Wholesale |
||||||||||||||||||||||||||||||||
Distribution |
||||||||||||||||||||||||||||||||
Paul H. Salsgiver, Jr.(7) |
2009 | $ | 350,000 | $ | | $ | | $ | 310,624 | $ | 105,000 | $ | 7,175 | $ | 772,799 | |||||||||||||||||
Executive Vice |
2008 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||||||||
President and |
2007 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||||||||
General Manager |
||||||||||||||||||||||||||||||||
of Hardlines |
||||||||||||||||||||||||||||||||
and Lumber |
||||||||||||||||||||||||||||||||
and Automotive |
||||||||||||||||||||||||||||||||
William Wilson (8) |
2009 | $ | 249,231 | $ | 26,250 | $ | | $ | 197,919 | $ | 60,274 | $ | 1,994 | $ | 535,668 | |||||||||||||||||
Senior Vice President |
2008 | $ | 230,000 | $ | 36,250 | $ | | $ | 182,977 | $ | 30,219 | $ | 3,442 | $ | 482,888 | |||||||||||||||||
of Product |
2007 | $ | 222,983 | $ | 26,250 | $ | | $ | 259,069 | $ | 108,000 | $ | 3,000 | $ | 619,302 | |||||||||||||||||
Development |
(1) | The amounts in this column reflect the dollar amount of expense recognized for financial
statement reporting purposes in fiscal year 2009 with respect to stock options granted in fiscal
year 2009 as well as prior years in accordance with relevant authoritative accounting principles.
Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to
service-based vesting conditions. Assumptions used in the calculation of these amounts are included
in Note 9 to our consolidated financial statements for the year ended September 30, 2009. |
|
(2) | The amounts in this column reflect the cash awards earned under the IB Plan, which is discussed
in more detail under Elements of Our Executive Compensation Program Annual Cash Compensation
Performance Based Incentive Bonuses above. |
|
(3) | The amounts include, as applicable, matching 401(k) Plan contributions, term life insurance
premiums, and gross-up payments received for taxable relocation reimbursements. |
|
(4) | Mr. Qureshi received a retention bonus of $151,667 for the fiscal years 2007, 2008 and 2009,
which is discussed in more detail under Elements of Our Executive Compensation Program Cash
Retention Bonus above. |
|
(5) | In fiscal year 2007, Ms. Crusco received a sign-on bonus of $100,000, which is reflected in the
table under the column titled Bonus. |
|
(6) | Mr. Roach received a sign-on bonus of $281,000, which is reflected in the table under the
column titled Bonus. He also earned $120,000 as part of a guaranteed first year bonus, which is
reflected in the table under the column titled Non-Equity incentive plan compensation. In
addition, Mr. Roach received $45,643 as part of a relocation package, which is reflected in the
table under the column titled All other compensation. |
|
(7) | Mr. Salsgiver earned $105,000 as part of a guaranteed first year bonus, which is reflected in
the table under the column titled Non-Equity incentive plan compensation. |
|
(8) | Mr. Wilson received a retention bonus of $26,250 for fiscal years 2007, 2008 and 2009, which is
discussed in more detail under Elements of Our Executive Compensation Program Cash Retention
Bonus above. He also received a $10,000 spot bonus for fiscal year 2008. All of these amounts
are reflected in the table under the column titled Bonus. |
Grant of Plan-Based Awards in Fiscal Year 2009
The following table sets forth certain information with respect to grants of plan-based awards for
the fiscal year ended September 30, 2009 to the Named Executive Officers.
All other | ||||||||||||||||||||||||||||||||||||||||
option | Exercise | |||||||||||||||||||||||||||||||||||||||
awards: | or base | Grant date | ||||||||||||||||||||||||||||||||||||||
number of | price of | fair value | ||||||||||||||||||||||||||||||||||||||
Estimated future payouts under non- | Estimated future payouts under | securities | option | of stock | ||||||||||||||||||||||||||||||||||||
equity incentive plan awards (1) | equity incentive plan awards | underlying | awards | and option | ||||||||||||||||||||||||||||||||||||
Name | Grant date | Threshold | Target | Maximum | Threshold | Target | Maximum | options (2) | ($/share) | awards (3) | ||||||||||||||||||||||||||||||
Pervez A. Qureshi |
| $ | 122,720 | $ | 416,000 | $ | 728,000 | $ | | $ | | $ | | | $ | | $ | | ||||||||||||||||||||||
Kathleen M. Crusco |
| $ | 45,725 | $ | 155,000 | $ | 310,000 | $ | | $ | | $ | | | $ | | $ | | ||||||||||||||||||||||
Kevin V. Roach |
11/20/08 | $ | 59,000 | $ | 200,000 | $ | 400,000 | $ | | $ | | $ | | 450,000 | $ | 4.67 | $ | 1,300,500 | ||||||||||||||||||||||
Paul H. Salsgiver, Jr. |
11/20/08 | $ | 51,625 | $ | 175,000 | $ | 350,000 | $ | | $ | | $ | | 500,000 | $ | 4.67 | $ | 1,445,000 | ||||||||||||||||||||||
William Wilson |
| $ | 36,875 | $ | 125,000 | $ | 250,000 | $ | | $ | | $ | | | $ | | $ | |
(1) | The amounts in this column show the potential value of the payout for each Named Executive
Officer under our IB Plan if the IB Plan EBITDA is achieved at the threshold, target and maximum
levels, with the threshold level determined as the amount payable if the IB Plan bonus pool is
funded at the lowest level above which the Compensation Committee retains the discretion not to
fund possible de minimis or impractical payments. For a further discussion of the IB Plan, see
Elements of Our Executive Compensation Program Annual Cash Compensation Performance Based
Incentive Bonuses above. |
|
(2) | The amounts in this column represent the number of options granted in the current fiscal year
under the 2006 Stock Incentive Plan. |
|
(3) | The amounts in this column represent the aggregate dollar amount of expense that we would be
required to expense in our financial statements over the service period of the award in accordance
with authoritative accounting guidance. |
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Outstanding Equity Awards at Fiscal Year-End
The following table provides information concerning the outstanding equity awards held by our Named
Executive Officers as of September 30, 2009.
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||||||
incentive | Equity | |||||||||||||||||||||||||||||||||||
Market | plan | incentive plan | ||||||||||||||||||||||||||||||||||
Number of | Number of | Number | value of | awards: | awards: | |||||||||||||||||||||||||||||||
securities | securities | of shares | shares of | number of | market or | |||||||||||||||||||||||||||||||
underlying | underlying | of stock | stock | unearned | payout value of | |||||||||||||||||||||||||||||||
unexercised | unexercised | Option | Option | that | that | shares that | unearned | |||||||||||||||||||||||||||||
options | options | exercise | expiration | have not | have not | have not | shares that | |||||||||||||||||||||||||||||
Name | Grant date | exercisable | unexercisable | price | date | vested | vested | vested | have not vested | |||||||||||||||||||||||||||
Pervez A. Qureshi |
05/02/06 | (1) | 333,334 | | $ | 1.00 | 05/02/16 | | $ | | | $ | | |||||||||||||||||||||||
11/16/06 | (2) | 1,408,333 | 758,334 | $ | 4.35 | 11/16/16 | | $ | | | $ | | ||||||||||||||||||||||||
Kathleen M. Crusco |
05/03/07 | (2) | 191,250 | 233,750 | $ | 4.71 | 05/03/17 | | $ | | | $ | | |||||||||||||||||||||||
Kevin V. Roach |
11/20/08 | (2) | 90,000 | 360,000 | $ | 4.67 | 11/20/18 | | $ | | | $ | | |||||||||||||||||||||||
Paul H. Salsgiver, Jr. |
11/20/08 | (2) | 100,000 | 400,000 | $ | 4.67 | 11/20/18 | | $ | | | $ | | |||||||||||||||||||||||
William Wilson |
11/16/06 | (2) | 243,750 | 131,250 | $ | 4.35 | 11/16/16 | | $ | | | $ | |
(1) | These options became fully vested as of May 2, 2006 in connection with the mergers. These
options represent stock options of Holdings prior to the mergers, which options were converted into
stock options to acquire common stock of Activant Group immediately following the mergers. For a
further discussion regarding these rollover options, see the section entitled Employment
Agreements and Severance and Change of Control Benefits Rollover Options above. |
|
(2) | For all Named Executive Officers, time-based stock options vest over five years with 20%
vesting one year from vesting commencement date and 5% vesting on the last day of each three-month
period thereafter. Messrs. Qureshi and Wilsons options were granted with a vesting commencement
date of May 2, 2006, Ms. Cruscos options were granted with a vesting commencement date of May 3,
2007, Mr. Roachs options were granted with a vesting commencement of September 29, 2008 and Mr.
Salsgivers options were granted with a vesting commencement date of September 8, 2008. For a
further discussion regarding time-based stock options, see the section entitled Employment
Agreements and Severance and Change of Control Benefits 2006 Stock Incentive Plan above. |
Option Exercises and Stock Vested
None of our Named Executive Officers exercised stock options during our fiscal year ended September
30, 2009.
Non-Qualified Deferred Compensation for Fiscal Year 2009
Aggregate | ||||||||||||||||||||
Executive | Aggregate | Aggregate | Balance at | |||||||||||||||||
Contributions | Company | Earnings/ | Withdrawals/ | September 30, | ||||||||||||||||
Name | (1) | Contributions | Losses | Distributions | 2009 | |||||||||||||||
William Wilson(2) |
$ | 37,384 | $ | | $ | (7,385 | ) | $ | | $ | 501,639 |
(1) | The amount in this column is included in the Summary Compensation Table in the Salary
column. |
|
(2) | See the section titled Elements of Our Executive Compensation Program Deferred
Compensation Arrangements above for further description of the terms and conditions of this
arrangement. |
Employment and Change of Control Agreements
As discussed above, the companys Executive Severance Plan, Cash Retention Bonus Plan and the Stock
Incentive Plan include provisions with regard to a change in control of the company, and we entered
into definitive employment agreements with certain of the Named Executive Officers, which include
provisions relating to a change in control of the company. The terms of these agreements are
described above under Employment Agreements and Severance and Change of Control
BenefitsEmployment and Severance Agreements and Arrangements with our Named Executive Officers.
Potential Payments Upon Termination or Change of Control
The tables below reflect the amount of potential payments to each of the Named Executive Officers
in the event of termination of employment of the Named Executive Officer. The amounts shown below
assume that the termination was effective as of September 30, 2009, and include estimates of the
amounts, which would be paid to each executive officer upon his or her termination. The actual
amount of any severance or change of control benefits to be paid out to a Named Executive Officer
can only be determined at the time of the termination of employment of the Named Executive Officer.
For a discussion regarding these severance and change of control benefits, see Employment
Agreements and Severance and Change of Control Benefits Employment and Severance Agreements and
Arrangements with our Named Executive Officers.
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Without Cause or for Good Reason
Target | Cash | |||||||||||||||||||||||
Incentive | Retention | Stock | ||||||||||||||||||||||
Name | Base Salary | Bonus | Bonus (3) | Options | Health Benefits | Total | ||||||||||||||||||
Pervez A. Qureshi (1) |
$ | 1,248,000 | $ | 416,000 | $ | | $ | | (4) | $ | 24,408 | $ | 1,688,408 | |||||||||||
Kathleen M. Crusco (2) |
$ | 232,500 | $ | 116,250 | $ | | $ | | $ | 12,204 | $ | 360,954 | ||||||||||||
Kevin V. Roach (2) |
$ | 300,000 | $ | 150,000 | $ | | $ | | $ | 10,899 | $ | 460,899 | ||||||||||||
Paul H. Salsgiver, Jr. (2) |
$ | 262,500 | $ | 131,250 | $ | | $ | | $ | 8,523 | $ | 402,273 | ||||||||||||
William Wilson (2) |
$ | 187,500 | $ | 93,750 | $ | | $ | | $ | 12,204 | $ | 293,454 |
(1) | Represents 300% of the executive officers base salary, target bonus for a period of 12 months,
and the estimated cost of COBRA coverage for the executive officers current health benefits for a
period of 18 months. |
|
(2) | Represents the executive officers base salary for a period of nine months, target bonus for a
period of nine months, and the estimated cost of COBRA coverage for the executive officers current
health benefits for a period of nine months. |
|
(3) | In the event of termination without cause or resignation for good reason not in connection with
a change of control, Mr. Qureshi would be entitled to receive an installment of $151,667 if he
would have been entitled to receive such installment on or prior to the six-month anniversary of
the termination of his employment. None of our other Named Executive Officers is entitled to an
acceleration of their unvested cash retention bonuses in connection with a termination of their
employment. For additional information, see Elements of Our Executive Compensation Program
Cash Retention Bonus above. |
|
(4) | No value has been assigned
to the acceleration of outstanding unvested stock options
that would have occurred had there been a termination without cause or for good reason on September 30, 2009 because
the exercise price of the options is higher than fair market
value of Activant Groups common stock of $4.00 per share for such options as of September 30, 2009
as determined in good faith by the Board. For additional information regarding partial
acceleration of vesting upon a termination without cause or for good reason, see Employment
Agreements and Severance and Change of Control Benefits Employment and Severance Agreements and
Arrangements with our Named Executive Officers Pervez A. Qureshi above. |
Change of Control or Sale of Business
Cash Retention | Stock Options | |||||||||||
Name | Bonus (1) | (2) | Total | |||||||||
Pervez A. Qureshi |
$ | 303,333 | $ | | $ | 303,333 | ||||||
Kathleen M. Crusco |
$ | | $ | | $ | | ||||||
Kevin V. Roach |
$ | | $ | | $ | | ||||||
Paul H. Salsgiver, Jr. |
$ | | $ | | $ | | ||||||
William Wilson |
$ | 52,500 | $ | | $ | 52,500 |
(1) | Represents the unvested portion of the Cash Retention Bonus that accelerates upon a change of
control, as defined in our Stock Incentive Plan. For additional information, see Elements of Our
Executive Compensation Program Cash Retention Bonus above. |
|
(2) | No value has been assigned to the acceleration of outstanding stock options upon a change of
control because the exercise price of the options is higher than the fair market value of
Activant Groups common stock of $4.00 per share as of September 30, 2009, as determined in good
faith by the Board, multiplied by the number of such unvested options that would have accelerated
had a change of control occurred on September 30, 2009. Note that the acceleration of unvested
stock options would occur regardless of whether the executives employment was terminated in
connection with such change of control transaction. For additional information regarding
acceleration of vesting upon a change of control, see Employment Agreements and Severance and
Change of Control Benefits Stock Incentive Plan above. |
Director Compensation
We reimburse non-employee directors for all out-of-pocket expenses incurred in the performance of
their duties as directors, and, except with respect to the agreements with Mr. Bernard described
below, we do not pay any fees to directors for attendance at meetings or their service as members
of the Board.
In connection with the agreement of Marcel Bernard to serve on the board of directors of Activant
Group, Activant Group agreed to grant Mr. Bernard 61,406 options to purchase shares of common stock
of Activant Group, which options will vest over five years. In addition, Mr. Bernard receives a
cash consulting fee of $100,000 per year, payable quarterly in advance. On November 15, 2006, our
Board approved the payment of a cash retention bonus to Mr. Bernard, calculated by the number of
options which had been granted to him times $0.35. The aggregate bonus payment of $21,492 due to
Mr. Bernard vests in three equal installments, commencing on September 30, 2007 provided, however,
that vesting accelerates in the event of a Change in Control, as defined under the Stock Incentive
Plan.
The following table contains compensation received by Mr. Bernard during the fiscal years ended
September 30, 2009, 2008 and 2007.
Change in pension | ||||||||||||||||||||||||||||||||
value and | ||||||||||||||||||||||||||||||||
nonqualified | ||||||||||||||||||||||||||||||||
Fees earned | Non-equity | deferred | ||||||||||||||||||||||||||||||
Fiscal | or paid in | Stock | Option | incentive plan | compensation | All other | ||||||||||||||||||||||||||
Name | Year | cash | awards | awards (1) | compensation | earnings | compensation (2) | Total | ||||||||||||||||||||||||
Marcel Bernard |
2009 | $ | 100,000 | $ | | $ | 32,583 | $ | | $ | | $ | 7,164 | $ | 139,747 | |||||||||||||||||
2008 | $ | 100,000 | $ | | $ | 29,963 | $ | | $ | | $ | 7,164 | $ | 137,127 | ||||||||||||||||||
2007 | $ | 100,000 | $ | | $ | 42,420 | $ | | $ | | $ | 7,164 | $ | 149,584 |
(1) | The amounts in this column reflect the dollar amount of stock-based compensation expense
recognized for financial statement reporting purposes in fiscal years 2009, 2008 and 2007 with
respect to the 61,406 options to purchase shares of Activant Groups common stock granted to Mr.
Bernard on November 16, 2006, in accordance with authoritative accounting guidance. Pursuant to
such guidance, total estimated stock-based compensation expense for this grant is approximately
$150,000. In accordance with SEC rules, the amounts shown exclude the impact of estimated
forfeitures related to service based vesting conditions. Assumptions used in the calculation of
these amounts are included in Note 9 to our consolidated financial statements for the years ended
September 30, 2009, 2008 and 2007. |
|
(2) | Represents 33 1/3% of the cash retention bonus payable to Mr. Bernard pursuant to the terms of
the bonus award letter dated November 17, 2006. |
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Compensation Committee Interlocks and Insider Participation
Compensation decisions are made by our Board and its compensation committee. The Board has
appointed Messrs. Ballard, Crabill and Henske to serve on the compensation committee. None of our
executive officers has served as a member of the compensation committee (or other committee serving
an equivalent function) of any other entity, whose executive officers served as a director of our
company or Activant Group or member of their respective compensation committee. No interlocking
relationships exist between any member of our Board or compensation committee and any member of the
board of directors or compensation committee of any other company nor has any such interlocking
relationship existed in the past. No member of the compensation committee is or was formerly an
officer or an employee of our company.
Messrs. Ballard and Henske are managing directors of Hellman & Friedman LLC and Mr. Crabill is a
managing partner of Thoma Bravo, L.L.C. Affiliates of Hellman & Friedman and Thoma Cressey together
control approximately 95% of the outstanding common stock of Activant Group. See Item 13
Certain Relationships and Related Transactions, and Director Independence.
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ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
We are a wholly-owned subsidiary of Activant Group, which owns all of our issued and outstanding
capital stock. All of Activant Groups issued and outstanding capital stock is owned by funds
affiliated with Hellman & Friedman, Thoma Cressey and JMI Equity, which funds we refer to as the
sponsors and certain members of our management, which we refer to as the management investors.
The sponsors are able to control all actions by the board of directors of Activant Group by virtue
of their being able to appoint a majority of the directors, their rights under the stockholders
agreement to which they and Activant Group are parties and the beneficial ownership by an affiliate
of Hellman & Friedman of the only authorized and outstanding share of Series A preferred stock
issued in connection with the mergers. In addition, as a result of the voting and transfer
provisions of the stockholders agreement, the sponsors may be deemed to constitute a group within
the meaning of Section 13(d)(3) of the Exchange Act. Accordingly, each of the members of this
group may be deemed to beneficially own all of the shares of Activant Group common stock held by
the sponsors and the management investors. Each of the sponsors disclaims any beneficial ownership
of shares of Activant Group common stock held by the other sponsors and the management investors.
See Item 13 Certain Relationships and Related Transactions, and Director
IndependenceAgreements Related to the MergersStockholders Agreement.
All of our issued and outstanding shares of capital stock have been pledged as collateral to the
lenders under the senior secured credit agreement described under Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources. If we were to default on our senior secured credit facilities, the lenders could
foreclose on these shares of our common stock, which would result in a change of control.
The following table sets forth as of December 11, 2009, certain information regarding the
beneficial ownership of the voting securities of Activant Group by:
| each person who beneficially owns more than 5% of Activant Group common stock; |
| each of our directors and Named Executive Officers, individually; and |
| all of our current directors and executive officers as a group. |
Percentage ownership of common stock of Activant Group in the table is based on 61,362,899 shares
of common stock of Activant Group outstanding on December 11, 2009. Except as otherwise noted
below, the address for each person listed on the table is c/o Activant Solutions Inc., 7683
Southfront Road, Livermore, California 94551. Unless otherwise indicated, the persons or entities
identified in this table have sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to applicable community property laws.
Beneficial ownership is determined in accordance with the rules that generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power or investment power with
respect to those securities. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares subject to options held by that person that were
exercisable as of December 11, 2009 or will become exercisable within 60 days after such date are
deemed outstanding, although the shares are not deemed outstanding for purposes of computing
percentage ownership of any other person.
Beneficial Ownership of Activant Group | ||||||||
Common Stock | ||||||||
Number of | ||||||||
Name of Beneficial Owner | Shares | Percentage | ||||||
>5% Stockholders: |
||||||||
Funds affiliated with Hellman & Friedman LLC |
46,440,270 | (1) | 75.7 | % | ||||
Funds affiliated with Thoma Cressey Bravo, Inc. |
12,235,066 | (2) | 19.9 | % | ||||
Directors and Named Executive Officers: |
||||||||
C. Andrew Ballard (1) |
| | ||||||
Paul V. Barber (3) |
2,500,000 | (3) | 4.1 | % | ||||
Marcel Bernard |
46,054 | (4) | * | |||||
S. Scott Crabill (2) |
12,235,066 | 19.9 | % | |||||
Robert B. Henske (1) |
| | ||||||
David R. Tunnell (1) |
| | ||||||
Pervez A. Qureshi |
1,958,334 | (5) | 3.1 | % | ||||
Kathleen M. Crusco |
233,750 | (6) | * | |||||
Kevin V. Roach |
112,500 | (7) | * | |||||
Paul H. Salsgiver, Jr. |
125,000 | (8) | * | |||||
William Wilson |
331,250 | (9) | * | |||||
All current directors and executive officers as a group (13 individuals) |
17,726,954 | (10) | 27.6 | % |
* | Represents less than 1%. |
|
(1) | Consists of 40,830,287 shares held by Hellman & Friedman Capital Partners V, L.P. (HFCP V),
5,586,763 shares held by Hellman & Friedman Capital Partners V (Parallel), L.P. (HFCP V
(Parallel)) and 23,220 shares held by Hellman & Friedman Capital Associates V, LLC (HFCA V, and
together with HFCP V and HFCP V (Parallel), the H&F
Entities). Hellman & Friedman Investors V, LLC (H&F Investors V) is the general partner of
HFCP V and HFCP V (Parallel). Hellman & Friedman LLC (H&F) is the |
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managing member of HFCA V and
H&F Investors V. As the managing member of HFCA V and H&F Investors V, H&F may be deemed to have
beneficial ownership of the shares over which any of the H&F Entities has voting or dispositive
power. The investment committee of H&F has power to vote or to direct the vote of, and to dispose
or to direct the disposition of such shares. Each member of the investment committee of H&F
disclaims beneficial ownership of the shares held by the H&F Entities. The address for the H&F
Entities and Messrs. Ballard, Henske and Tunnell is One Maritime Plaza, 12th Floor, San Francisco,
CA 94111. |
||
(2) | Consists of 6,023,445 shares held by Thoma Cressey Fund VII, L.P. (TCF VII), 94,088 shares
held by Thoma Cressey Friends Fund VII, L.P. (TCFF VII) and 6,117,533 shares held by Thoma
Cressey Fund VIII, L.P. (TCF VIII, and together with TCF VII and TCFF VII, the TCB Entities).
TC Partners VII, L.P. (TC Partners VII), as the general partner of TCF VII and TCFF VII, and TC
Partners VIII, L.P. (TC Partners VIII), as the general partner of TCF VIII may, for purposes of
Rule 13d-3 under the Exchange Act, be deemed to beneficially own the shares held by TCF VII and
TCFF VII, and TCF VIII, respectively. Thoma Cressey Bravo, Inc., as the general partner of TC
Partners VII and TC Partners VIII, may, for purposes of Rule 13d-3, be deemed to own beneficially
the shares held by TCF VII, TCFF VII and TCF VIII. Mr. Crabill disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest in these entities. The address for
the TCB Entities and Mr. Crabill is 600 Montgomery Street, 32nd Floor, San Francisco, CA 94111. |
|
(3) | Consists of 2,363,131 shares held by JMI Equity Fund V, L.P. (JMI V) and 136,869 shares held
by JMI Equity Fund V (AI), L.P. (JMI V (AI), and together with JMI V, the JMI Entities). JMI
Associates V, L.L.C. (JMI Associates V) is the general partner of each of the JMI Entities and
may be deemed the beneficial owner of the shares held by such entities. Paul V. Barber is one of
six managing members of JMI Associates V. Mr. Barber disclaims beneficial ownership of the shares
beneficially owned by JMI Associates V, JMI V and JMI V (AI), except to the extent of his
pecuniary interest therein. The address for the JMI Entities is c/o JMI Management, Inc., 2
Hamill Road, Suite 272, Baltimore, MD 21210 and for Mr. Barber is 7590 Fay Avenue #301, La Jolla,
CA 92037. |
|
(4) | Consists of 46,054 shares of common stock issuable pursuant to options that are exercisable
within 60 days of December 11, 2009. |
|
(5) | Consists of 1,958,334 shares of common stock issuable pursuant to options that are exercisable
within 60 days of December 11, 2009. |
|
(6) | Consists of 233,750 shares of common stock issuable pursuant to options that are exercisable
within 60 days of December 11, 2009. |
|
(7) | Consists of 112,500 shares of common stock issuable pursuant to options that are exercisable
within 60 days of December 11, 2009. |
|
(8) | Consists of 125,000 shares of common stock issuable pursuant to options that are exercisable
within 60 days of December 11, 2009. |
|
(9) | Includes 281,250 shares of common stock issuable pursuant to options that are exercisable
within 60 days of December 11, 2009. |
|
(10) | Includes 2,941,888 shares of common stock of Activant Group issuable pursuant to options that
are exercisable within 60 days of December 11, 2009. |
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ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
Since October 1, 2008, there has not been, nor is there currently planned, any transaction or
series of similar transactions to which we were or are a party in which the amount involved exceeds
$120,000 and in which any director, executive officer or holder of more than 5% of our capital
stock or any member of such persons immediate families had or will have a direct or indirect
material interest, other than agreements and transactions which are described under Item
11Executive CompensationElements of Our Executive Compensation ProgramEmployment Agreements
and Severance and Change of Control Benefits and the transactions described below.
Sole Share of Series A Preferred Stock
In connection with the mergers, on May 2, 2006, Activant Group issued shares of its common stock to
the sponsors, at a price of $4.00 per share, and issued one share of its Series A preferred stock
to a fund affiliated with Hellman & Friedman. The one share of Series A preferred stock, which
ranks senior to Activant Group common stock as to rights of payment upon liquidation, is the only
outstanding share of Series A preferred stock of Activant Group. The share of Series A preferred
stock is not entitled to receive or participate in any dividends. The holder of the Series A
preferred stock, voting as a separate class, has the right to elect one director of Activant Group,
and the director designated by the holder of the Series A preferred stock is entitled at any
meeting of the board of directors to exercise one vote more than all votes entitled to be cast by
all other directors at such time. Activant Group is required to redeem the Series A preferred stock
for $1.00 upon the earliest of the following to occur:
| Hellman & Friedman and its affiliates, in the aggregate, no longer beneficially own a
number of outstanding share equivalents that are at least (a) 40% of Activant Groups
outstanding share equivalents and (b) 200% more than the number of outstanding share
equivalents beneficially owned by Thomas Cressey and its affiliates, in the aggregate; |
| Hellman & Friedman and their affiliates, in the aggregate, no longer beneficially own at
least 20% of the outstanding share equivalents of Activant Group; or |
| the consummation of an underwritten public offering of Activant Group common stock
registered under the Securities Act. |
For purposes of the Series A preferred stock and the stockholders agreement described below, share
equivalents are shares of Activant Group common stock and the number of shares of common stock
issuable, without payment to Activant Group of additional consideration, upon exercise, conversion
or exchange of any other security.
Stockholders Agreement
In connection with the closing of the mergers, we, Activant Group, funds affiliated with Hellman &
Friedman, which we refer to as the Hellman & Friedman Investors, funds affiliated with Thoma
Cressey, which we refer to as the Thoma Cressey Investors, funds affiliated with JMI Equity,
which we refer to as the JMI Investors, and certain members of our management, which we refer to
as the management investors, entered into a stockholders agreement that generally contains the
following provisions:
Board of Directors. The stockholders agreement requires that, until an initial public offering of
shares of Activant Groups common stock, the parties that beneficially own shares of Activant Group
common stock will vote those shares to elect a board of directors of Activant Group comprised of
the following persons:
| the chief executive officer of Activant Group, |
| one board member designated by the Thoma Cressey Investors, |
| one board member designated by the JMI Investors, |
| one board member designated by the holder of the one share of Series A preferred stock, and |
| the remaining board members designated by the Hellman & Friedman Investors. |
In addition, in the event that the Thoma Cressey Investors or the JMI Investors are not entitled to
designate one director, the Thoma Cressey Investors and the JMI Investors will have the right to
each designate one non-voting observer to the board of directors of Activant Group. The board
representation rights of the Thoma Cressey Investors and the JMI Investors are subject to reduction
if their beneficial ownership of Activant Group share equivalents decreases below specified
thresholds and are not transferable in connection with any transfer of Activant Group shares.
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As described in greater detail in the section above titled Sole Share of Series A Preferred
Stock, the share of Series A preferred stock held by one of the Hellman & Friedman Investors
entitles it to elect a director of Activant Group with the power to determine the outcome of all
votes of the board of directors prior to an initial public offering. After an initial public
offering of common stock of Activant Group:
| the Thoma Cressey Investors will have the right to nominate one individual for election to
the board of directors, provided the Thoma Cressey Investors and its permitted transferees
beneficially own at least a specified amount of the outstanding share equivalents of Activant
Group; |
| the JMI Investors will have the right to nominate one individual for election to the board
of directors, provided the JMI Investors and its permitted transferees beneficially own at
least a specified amount of the outstanding share equivalents of Activant Group; and |
| the Hellman & Friedman Investors and their affiliates will have the right to nominate the
number of individuals for election to the board of directors that is equal to the product of
the percentage of share equivalents of Activant Group held by the Hellman & Friedman Investors
and their affiliates, multiplied by the number of directors then on the board, rounded up to
the nearest whole number. |
For so long as the Thoma Cressey Investors, the JMI Investors and/or the Hellman & Friedman
Investors are entitled to nominate an individual for election to the board of directors, Activant
Group is required to nominate such individual for election as a director as part of the slate that
is included in the proxy statement or consent solicitation relating to such election and provide
the highest level of support for the election of such individual as it provides to any other
individual standing for election as part of Activant Groups slate.
Voting Rights and Minority Rights. For as long as the Hellman & Friedman Investors own at least 20%
of all outstanding share equivalents of Activant Group, all of the other sponsors must vote their
shares in the same manner as the Hellman & Friedman Investors vote their shares of common stock
with respect to any of the following:
| altering or amending the Activant Group certificate of incorporation or bylaws (except with
respect to any alteration or amendment that is detrimental to the rights of the Thoma Cressey
Investors or the JMI Investors relative to the Hellman & Friedman Investors); |
| engaging in any liquidation or dissolution; or |
| approving any employee benefit, stock option or equity incentive plan recommended by the
board of directors of Activant Group. |
The stockholders agreement also provides the following minority rights with respect to certain of
the sponsors that will apply prior to an initial public offering:
| the consent of the Thoma Cressey Investors and the JMI Investors is required with respect
to specified types of transactions between the Hellman & Friedman Investors or their
affiliates, on the one hand, and Activant Group or any of its subsidiaries, on the other hand; |
| for so long as the Thoma Cressey Investors beneficially own, in the aggregate, at least 5%
of the outstanding share equivalents of Activant Group, the consent of the Thoma Cressey
Investors is required with respect to any acquisition by Activant Group or its subsidiaries
involving a purchase price of less than $100.0 million; and |
| with respect to certain future issuances of equity securities to the Hellman & Friedman
Investors or their affiliates, the Thoma Cressey Investors are able to require Activant Group
to engage an independent third party to establish the fair market value of such securities. |
Indemnification. We and Activant Group are required to indemnify and hold harmless each of the
stockholders that is party to the stockholders agreement, together with its partners, stockholders,
members, affiliates, directors, officers, fiduciaries, controlling persons, employees and agents
from any losses arising out of either of the following, subject to limited exceptions:
| the stockholders or its affiliates ownership of securities of Activant Group and us or
its ability to control or influence Activant Group and us, and |
| the business, operations, properties, assets or other rights or liabilities of Activant
Group, us or any of our subsidiaries. |
Participation Rights. Subject to specified exceptions, until an initial public offering, Activant
Group may not issue equity securities without permitting each sponsor the opportunity to purchase a
pro rata share of the securities being issued. Also prior to an initial public offering, if
Activant Group or any of its subsidiaries issues debt securities to the Hellman & Friedman
Investors or their affiliates, each
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of the other sponsors will be provided the opportunity to purchase a pro rata portion of such debt
securities, based on the sponsors respective ownership of share equivalents at that time.
Transfer Provisions and Registration Rights. The stockholders agreement also contains (1) transfer
restrictions applicable to the share equivalents held by the Thoma Cressey Investors, the JMI
Investors and the management investors, (2) tag-along rights in favor of the Thoma Cressey
Investors, the JMI Investors and the management investors, (3) drag-along rights in favor of the
Hellman & Friedman Investors, (4) repurchase rights in favor of Activant Group and the sponsors
with respect to the shares equivalents of the management investors, including any share equivalents
they receive upon exercise of options, in the event of the termination of a management investors
employment with Activant Group and (5) certain registration rights (including customary
indemnification) and Rule 144 sale provisions applicable to the sponsors and their affiliates and
the management investors.
Indemnification of Directors and Officers
Activant Group and we agreed that for a period of six years from May 2, 2006, we will indemnify
each of the present and former directors and officers of Holdings to the fullest extent permitted
by Delaware law against claims arising out of or pertaining to the fact that the person is or was
an officer or director of Holdings or any of its subsidiaries prior to the mergers.
Our certificate of incorporation provides that the company will indemnify each of our directors and
officers to the fullest extent permitted under the General Corporation Law of the State of Delaware
for claims arising by reason of the fact that he or she is a director, officer, employee, or agent
of the company or any of its subsidiaries. In addition, each of our executive officers and
directors has entered into an indemnification agreement with Activant Group and us. Each of the
indemnification agreements provides that we will indemnify and advance expenses to the indemnified
officers and directors, or the indemnitees, to the fullest extent provided under our certificate of
incorporation and bylaws, as in effect from time to time. We will not, without the prior written
consent of each indemnitee, adopt any amendment to our certificate of incorporation or that of
Activant Group, which would adversely affect the rights of the indemnitees, except as required by
law. The right of such indemnitee to receive indemnification and advancement of expenses under the
indemnification agreement is not exclusive of any other right to which the indemnitee may at any
time be entitled. The indemnification agreement is valid for so long as such indemnitee serves as
our officer or director or that of Activant Group, or at our request, any other entity, and
terminates upon the later of (a) the expiration of six years after the latest date that such
indemnitee ceases to serve as an officer or director, (b) the final termination of all pending
proceedings in respect of which such indemnitee is granted rights of indemnification or advancement
of expenses, or (c) the expiration of all statutes of limitation applicable to possible claims
arising out of such indemnitees status as an officer or director of Activant Group or us. The
terms and provisions of the indemnification agreements are binding upon our successors and assigns.
Activant Group and we have also entered into indemnification priority agreements with our
non-executive directors, namely Messrs. Ballard, Barber, Bernard, Crabill, Henske and Tunnell.
These agreements clarify that where there is a jointly-indemnifiable claim against these directors
that may arise due to the service of such directors on our board of directors and on behalf of
Activant Group and its controlled affiliates, we will be primarily liable for any indemnification
obligations on account of such service. Any indemnification from other third parties associated
with such directors shall be secondary. The indemnification priority agreements do not create any
new obligations or liabilities for us, Activant Group or our respective controlled affiliates
beyond those already contained in our respective organizational documents and indemnification
agreements described above.
Policies and Procedures for Review and Approval of Related Party Transactions
We do not have a formal policy and related procedures for the review, approval and ratification of
transactions that are required to be disclosed pursuant to this Item 13. Since the completion of
the mergers, if and when any such transactions have been proposed, they have been reviewed by our
board of directors and are subject to its approval. We expect to continue this policy in the
future.
Director Independence
None of the members of our board of directors, audit committee or compensation committee is
independent as defined under Nasdaq Marketplace Rule 5605 (a)(2), which is used by our board of
directors for determining the independence of the directors. Our board of directors is not
comprised of a majority of independent directors, and its committees are not comprised solely of
independent directors, because we are a privately-held company and not subject to applicable
listing standards. The terms of the stockholders agreement described above require that certain
members of our board of directors be comprised of persons affiliated with our company and the one
share of Series A preferred stock held by an affiliate of Hellman & Friedman, entitles the holder
to designate one director with the power to cast one more vote than all votes entitled to be cast
by all other directors.
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ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
The audit committee of our board of directors has selected Ernst & Young LLP (E&Y) as registered
independent public accounting firm to audit our consolidated financial statements for the fiscal
year ended September 30, 2009. E&Y currently serves as our registered independent public
accounting firm. Fees paid to E&Y for each of the last two fiscal years were as follows:
Year Ended September 30, | ||||||||
(in thousands) | 2009 | 2008 | ||||||
Audit fees (1) |
$ | 598,400 | $ | 639,000 | ||||
Audit related fees (2) |
| | ||||||
Tax fees (3) |
148,995 | 137,515 | ||||||
All other fees |
| | ||||||
Total |
$ | 747,395 | $ | 776,515 | ||||
(1) | Audit fees include the annual audit and quarterly reviews of our financial
statements, consultation on new accounting standards and normal assistance with
periodic filings with the SEC. |
|
(2) | Audit-related fees consist of fees for assurance and related services that are
reasonably related to the performance of the audit and the review of our financial
statements and that are not disclosed under Audit fees. These services primarily
relate to consultation on the accounting for proposed transactions and consultations
concerning registration statement filings. |
|
(3) | Tax fees include assistance in the preparation of our federal, state and
foreign income and franchise tax returns and in the periodic examinations thereof by
regulatory authorities and consultation on the tax treatment for transactions. |
Audit Committee Pre-Approval Policy for Services Provided by Independent Registered Public
Accounting Firm
Under the pre-approval policy of our audit committee, all services provided by our registered
independent public accounting firm or by any other big four accounting firm must be pre-approved
by our audit committee. Under the pre-approval policy, the committee pre-approves, by type and
amount, the services expected to be provided by our registered independent public accounting firm
or any other big four accounting firm during the coming year. This pre-approval is done annually
and is documented as an exhibit to the minutes of the audit committee meeting. Any services to be
provided by our registered independent public accounting firm or by any other big four accounting
firm that are not pre-approved as part of the annual process must be separately pre-approved by the
audit committee, including the related fees. The audit committee must separately pre-approve any
significant changes in scope or fees for any approved service. Pre-approval authority may not be
delegated to management. Although pre-approval authority may be delegated to one or more members of
the audit committee, no such delegation has been made.
The types of services the committee pre-approves annually are audit, audit-related and certain tax
services. Audit services include the annual audit and quarterly reviews, statutory audits,
consultation on new accounting standards and normal assistance with periodic filings with the SEC.
Audit-related services include consultation on the accounting for proposed transactions and
consultations concerning registration statement filings. Tax services include assistance in the
preparation of sales tax returns and consultation on related tax matters.
Other Information
E&Y has a business relationship with a company other than us that is also controlled by affiliates
of Hellman & Friedman, our majority stockholder. The other company provides expert services to E&Y
in connection with E&Ys defense of certain professional liability litigation matters. E&Y is not
the auditor of the other company, and does not believe the services provided, or the amounts paid
therefore, are material to either the other company or E&Y. This relationship does not involve us
or have any impact on our consolidated financial statements. Our audit committee and E&Y have
separately considered the impact that this relationship may have had on E&Ys independence with
respect to us. Both our audit committee and E&Y have concluded that this relationship with the
other company does not impact E&Ys independence. In making this determination, both our audit
committee and E&Y considered, among other things, the immaterial, indirect nature of the
relationship as it relates to us.
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PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) | (1) | Financial Statements: The consolidated financial statements of Activant Solutions
Inc. are incorporated by reference to Part II, Item 8 of this report. |
|
(2) | Financial Statement Schedules: See Schedule II Valuation and Qualifying Accounts
below. 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 included in Part II, Item 8 of this
report. |
||
(3) | See Exhibit Index on the
page immediately preceding the exhibits for a list of exhibits filed
as part of this Annual Report on Form 10-K, which Exhibit Index
is incorporated herein by reference. |
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Schedule II Valuation and Qualifying Accounts
ACTIVANT SOLUTIONS INC.
Additions | ||||||||||||||||
Balance at | Charged | Balance | ||||||||||||||
(in thousands) | Beginning of | to Costs and | at End of | |||||||||||||
Description | Period | Expenses | Deductions | Period | ||||||||||||
Year ended September 30, 2007: |
||||||||||||||||
Allowance for doubtful accounts |
$ | 4,108 | $ | 3,657 | $ | | $ | 7,765 | ||||||||
Year ended September 30, 2008: |
||||||||||||||||
Allowance for doubtful accounts |
$ | 7,765 | $ | 2,435 | $ | 4,785 | $ | 5,415 | ||||||||
Year ended September 30, 2009: |
||||||||||||||||
Allowance for doubtful accounts |
$ | 5,415 | $ | 1,609 | $ | 2,403 | $ | 4,621 |
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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.
ACTIVANT SOLUTIONS INC. |
||||
By: | /s/ Kathleen M. Crusco | |||
Name: | Kathleen M. Crusco | |||
Title: | Senior Vice President and Chief Financial Officer | |||
Date: | December 14, 2009 | |||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Pervez A. Qureshi and Kathleen M. Crusco, jointly and severally, his or her
attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities,
to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or
cause to be done by virtue hereof.
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.
Name and Signature | Title | Date | ||
/s/ Pervez A. Qureshi
|
President, Chief Executive Officer
and Director (Principal Executive Officer) |
December 14, 2009 | ||
/s/ Kathleen M. Crusco
|
Senior Vice President and Chief
Financial Officer (Principal Financial and Accounting Officer) |
December 14, 2009 | ||
/s/ Robert B. Henske
|
Chairman of the Board of Directors | December 14, 2009 | ||
/s/ C. Andrew Ballard
|
Director | December 14, 2009 | ||
/s/ Paul V. Barber
|
Director | December 14, 2009 | ||
/s/ Marcel Bernard
|
Director | December 14, 2009 | ||
/s/ S. Scott Crabill
|
Director | December 14, 2009 | ||
/s/ David R. Tunnell
|
Director | December 14, 2009 |
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Table of Contents
EXHIBIT INDEX
Incorporated by Reference | ||||||||||||||
Exhibit | Date of | Exhibit | Provided | |||||||||||
Number | Exhibit Description | Form | File No. | First Filing | Number | Herewith | ||||||||
3.1
|
Amended and Restated Certificate of Incorporation of Activant Solutions Inc. | 8-K | 333-49389 | October 30, 2009 | 3.1 | | ||||||||
3.2
|
Bylaws of Activant Solutions Inc. | 10-K | 333-49389 | December 21, 2007 | 3.2 | | ||||||||
4.1
|
Indenture, dated May 2, 2006, by and among Lone Star Merger Corp., Activant Solutions Inc., Activant Solutions Holdings Inc., the Guarantors named therein and Wells Fargo Bank, National Association, as Trustee, relating to the 91/2% Senior Subordinated Notes due 2016 | S-4 | 333-138081 | October 19, 2006 | 4.1 | | ||||||||
10.1
|
Credit Agreement, dated May 2, 2006, by and among Lone Star Merger Corp., Lone Star Holding Corp., Deutsche Bank Trust Company Americas, as Administrative Agent, Swing Line Lender and an L/C Issuer, each lender from time to time party thereto, JP Morgan Chase Bank, N.A., as Syndication Agent and Lehman Commercial Paper Inc., as Documentation Agent | S-4 | 333-138081 | October 19, 2006 | 10.1 | | ||||||||
10.2
|
Guarantee Agreement, dated May 2, 2006, by and among Lone Star Merger Corp., Lone Star Holding Corp., the Subsidiaries of the Borrower identified therein and Deutsche Bank Trust Company Americas, as Administrative Agent | S-4 | 333-138081 | October 19, 2006 | 10.2 | | ||||||||
10.3
|
Security Agreement, dated May 2, 2006, by and among Lone Star Merger Corp., Lone Star Holding Corp., the Subsidiaries of Holdings identified therein and Deutsche Bank Trust Company Americas, as Collateral Agent for the Secured Parties (as defined therein) | S-4 | 333-138081 | October 19, 2006 | 10.3 | | ||||||||
10.4
|
Intellectual Property Security Agreement, dated May 2, 2006, by and among Lone Star Merger Corp., Lone Star Holding Corp., the Subsidiaries of Holdings identified therein and Deutsche Bank Trust Company Americas, as Collateral Agent for the Secured Parties (as defined therein) | S-4 | 333-138081 | October 19, 2006 | 10.4 | | ||||||||
10.5
|
First Incremental Amendment to Credit Agreement, dated August 17, 2007, by and among Activant Group Inc., Activant Solutions Inc., Deutsche Bank Trust Company Americas, as Administrative Agent and the 2007 Term Lenders (as defined therein) | 8-K | 333-49389 | August 23, 2007 | 10.1 | | ||||||||
10.6
|
Stockholders Agreement, dated May 2, 2006, by and among Lone Star Holding Corp., Lone Star Merger Corp., Hellman & Friedman Capital Partners V, L.P., Hellman & Friedman Capital Partners V (Parallel), L.P., Hellman & Friedman Capital Associates V, LLC, Thoma Cressey Fund VII, L.P., Thoma Cressey Friends Fund VII, L.P., Thoma Cressey Fund VIII, L.P., JMI Equity Fund V, L.P., JMI Equity Fund V (AI), L.P. and the other signatories thereto | S-4 | 333-138081 | October 19, 2006 | 10.7 | | ||||||||
10.7
|
Amended and Restated Employment Agreement, dated December 30, 2008, by and between Activant Group Inc. (f/k/a Lone Star Holding Corp.) and Pervez A. Qureshi* | 10-Q | 333-49389 | February 12, 2009 | 10.1 | | ||||||||
10.8
|
Option Rollover Agreement, dated May 1, 2006, by and among Lone Star Holding Corp., Activant Solutions Holdings Inc. and Pervez A. Qureshi* | 10-K | 333-49389 | December 21, 2007 | 10.8 | | ||||||||
10.9
|
Offer Letter, dated March 19, 2007, by and between Activant Solutions Inc. and Kathleen M. Crusco* | 8-K | 333-49389 | March, 22, 2007 | 10.1 | | ||||||||
10.10
|
Executive Employment Agreement, dated February 14, 2005, by and between Activant Solutions Inc. and William Wilson* | 10-K | 333-49389 | December 22, 2005 | 10.52 | | ||||||||
10.11
|
Agreement with Marcel Bernard, dated April 7, 2006, assumed by Lone Star Holding Corp. on October 13, 2006* | 10-K/A | 333-49389 | January 14, 2008 | 10.12 | | ||||||||
10.12
|
Canadian Executive Retention Bonus Award Letter, dated November 17, 2006, by and between Activant Group Inc. and Marcel Bernard* | 10-K | 333-49389 | December 21, 2007 | 10.13 | | ||||||||
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Incorporated by Reference | ||||||||||||||
Exhibit | Date of | Exhibit | Provided | |||||||||||
Number | Exhibit Description | Form | File No. | First Filing | Number | Herewith | ||||||||
10.13
|
CEO Executive Retention Bonus Award Letter, dated November 17, 2006, by and between Activant Group Inc. and Pervez A. Qureshi* | 10-K | 333-49389 | December 21, 2007 | 10.14 | | ||||||||
10.14
|
U.S. Executive Retention Bonus Award Letter, dated November 17, 2006, by and between Activant Group Inc. and William Wilson* | 10-K | 333-49389 | December 21, 2007 | 10.15 | | ||||||||
10.15
|
Offer Letter, dated September 3, 2008, by and between Activant Solutions Inc. and Paul Salsgiver, Jr.* | | | | | X | ||||||||
10.16
|
Offer Letter, dated September 10, 2008 by and between Activant Solutions Inc. and Kevin V. Roach* | | | | | X | ||||||||
10.17
|
Form of Indemnification Agreement among Activant Group Inc., Activant Solutions Inc. and each of their directors and executive officers | 8-K | 333-49389 | March 8, 2007 | 10.1 | | ||||||||
10.18
|
Form of Indemnification Priority Agreement among Activant Group Inc., Activant Solutions Inc. and each of their non-executive directors | 10-Q | 333-49389 | August 13, 2009 | 10.1 | | ||||||||
10.19
|
Amended and Restated Activant Group Inc. 2006 Stock Incentive Plan* | 10-K | 333-49389 | December 21, 2007 | 10.21 | | ||||||||
10.20
|
Form of Option Agreement (General) under the Amended and Restated Activant Group Inc. 2006 Stock Incentive Plan* | 10-K | 333-49389 | December 21, 2007 | 10.22 | | ||||||||
10.21
|
Form of Option Agreement (for Canadian employees) under the Amended and Restated Activant Group Inc. 2006 Stock Incentive Plan* | 10-K | 333-49389 | December 21, 2007 | 10.23 | | ||||||||
10.22
|
Activant Solutions Holdings Inc. Second Amended and Restated 2000 Stock Option Plan for Key Employees* | 10-K | 333-49389 | December 22, 2004 | 10.46 | | ||||||||
10.23
|
Activant Solutions Inc. Annual Incentive Bonus Plan* | 10-Q | 333-49389 | May 14, 2009 | 10.1 | | ||||||||
10.24
|
Activant Solutions Inc. Deferred Compensation Plan, as amended and restated, effective January 1, 2008* | 10-K | 333-49389 | December 19, 2008 | 10.26 | | ||||||||
10.25
|
Asset Purchase Agreement, dated July 2, 2007, by and among Activant Solutions Inc., Greenland Holding Corp. and Intuit Inc. | 8-K | 333-49389 | July 9, 2007 | 2.1 | | ||||||||
12.1
|
Statement of Computation of Ratio of Earnings to Fixed Charges | | | | | X | ||||||||
14.1
|
Activant Solutions Inc. Code of Ethics for Senior Financial Management | 10-K | 333-49389 | December 21, 2007 | 14.1 | | ||||||||
21.1
|
List of Subsidiaries of Activant Solutions Inc. | | | | | X | ||||||||
24.1
|
Power of Attorney (included on signature page to this report) | | | | | X | ||||||||
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Pervez A. Qureshi | | | | | X | ||||||||
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Kathleen M. Crusco | | | | | X | ||||||||
32.1
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Pervez A. Qureshi** | | | | | X | ||||||||
32.2
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Kathleen M. Crusco** | | | | | X |
* | Represents a management contract or compensatory plan or arrangement. |
|
** | This certification is not deemed filed for purposes of Section 18 of the Exchange Act, or
otherwise subject to the liability of that section. Such certification will not be deemed to
be incorporated by reference into any filing under the Securities Act or the Exchange Act,
except to the extent that the registrant specifically incorporates it by reference. |
102