Attached files
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EX-31.1 - EX-31.1 - ACTIVANT SOLUTIONS INC /DE/ | d70869exv31w1.htm |
EX-10.2 - EX-10.2 - ACTIVANT SOLUTIONS INC /DE/ | d70869exv10w2.htm |
EX-31.2 - EX-31.2 - ACTIVANT SOLUTIONS INC /DE/ | d70869exv31w2.htm |
EX-10.1 - EX-10.1 - ACTIVANT SOLUTIONS INC /DE/ | d70869exv10w1.htm |
EX-10.3 - EX-10.3 - ACTIVANT SOLUTIONS INC /DE/ | d70869exv10w3.htm |
EX-32.1 - EX-32.1 - ACTIVANT SOLUTIONS INC /DE/ | d70869exv32w1.htm |
EX-32.2 - EX-32.2 - ACTIVANT SOLUTIONS INC /DE/ | d70869exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 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 | 94-2160013 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
7683 Southfront Road | ||
Livermore, CA | 94551 | |
(Address of principal executive offices) | (Zip Code) |
(925) 449-0606
(Registrants telephone number,
including area code)
(Registrants telephone number,
including area code)
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 Web site, 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 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. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Class | Outstanding at February 9, 2010 | |
Common Stock, par value $0.01 per share | 10 shares |
ACTIVANT SOLUTIONS INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2009
FOR THE QUARTER ENDED DECEMBER 31, 2009
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EX-10.2 | ||||||||
EX-10.3 | ||||||||
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EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
Table of Contents
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are subject to safe harbors under the
Securities Act of 1933, as amended (the Securities Act) and the Securities Exchange Act of 1934,
as amended (the Exchange Act). In particular, statements about our expectations, beliefs, plans,
objectives, assumptions or future events or performance contained in this report under Part I,
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations 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
Part I, Item 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations and Part I, Item 1A Risk Factors of our Annual Report on Form 10-K for the fiscal
year ended September 30, 2009.
Some of the key factors that could cause actual results to differ from our expectations are:
| the negative effect of the current credit crisis and unfavorable market conditions on
our customers and on our business; |
||
| the financial crisis in the U.S. and global capital and credit markets; |
||
| our substantial indebtedness and our ability to incur additional indebtedness; |
||
| certain covenants in our debt documents, including covenants that require us to satisfy
a maximum total leverage ratio and a minimum interest coverage ratio; |
||
| failure to anticipate or respond to our customers needs and requirements; |
||
| failure of our proprietary technology to support our customers future needs or it
becoming obsolete; |
||
| failure to develop new relationships and maintain existing relationships with well-known
market participants and/or key customers and/or loss of significant customer revenues; |
||
| shortage or delays in the receipt of equipment or hardware necessary to develop our
business management solutions and systems; |
||
| failure to maintain adequate financial and management processes and controls; |
||
| loss of recurring subscription service revenues; |
||
| failure to integrate and retain our senior management personnel; |
||
| failure of our Activant Eagle and Vision products to gain acceptance within the
automotive parts aftermarket; |
||
| costs and difficulties of integrating current and future acquisitions; |
||
| the amount of any additional impairment charges, including to goodwill, due to the
continuing global economic uncertainty and credit crisis; |
||
| changes in the manner or basis on which we receive third-party information used to
maintain our electronic automotive parts and applications catalog; |
||
| failure by certain of our existing customers to upgrade to our current generation of
systems; |
||
| failure to effectively compete; |
||
| substantial fluctuations in our sales cycles applicable to our systems sales; |
||
| consolidation trends, attrition, migration to competitors products and reductions in
support levels among our customers and in the market segments in which we operate; |
||
| failure to adequately protect our proprietary rights and intellectual property or
limitations on the availability of legal or technical means of effecting such protection; |
||
| claims by third parties that we are infringing on their proprietary rights or other
adverse claims; |
||
| defects or errors in our software or information services; |
||
| failure to obtain software and information we license from third parties; |
||
| interruptions of our connectivity applications and our systems; |
||
| claims for damages against us in the event of a failure of our customers systems; |
||
| fluctuations in the value of foreign currencies; |
||
| natural disasters, terrorist attacks or other catastrophic events; |
||
| differing interests of debt security holders and our controlling stockholders or
investors; and |
||
| the other factors described under the heading Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2009. |
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.
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
December 31, | September 30, | |||||||
(in thousands, except share data) | 2009 | 2009 | ||||||
ASSETS: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 32,317 | $ | 44,573 | ||||
Trade accounts receivable, net of allowance
for doubtful accounts of $4,505 at December
31, 2009 and $4,621 at September 30, 2009 |
34,112 | 34,412 | ||||||
Inventories |
6,198 | 4,985 | ||||||
Deferred income taxes |
2,653 | 4,285 | ||||||
Prepaid expenses and other current assets |
6,838 | 5,524 | ||||||
Total current assets |
82,118 | 93,779 | ||||||
Property and equipment, net |
5,790 | 6,073 | ||||||
Intangible assets, net |
186,579 | 192,394 | ||||||
Goodwill |
543,718 | 543,718 | ||||||
Deferred financing costs |
8,351 | 8,903 | ||||||
Other assets |
3,905 | 3,217 | ||||||
Total assets |
$ | 830,461 | $ | 848,084 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 19,700 | $ | 18,030 | ||||
Payroll related accruals |
15,349 | 17,787 | ||||||
Deferred revenue |
33,157 | 31,654 | ||||||
Current portion of long-term debt |
| 5,886 | ||||||
Accrued expenses and other current liabilities |
12,079 | 18,162 | ||||||
Total current liabilities |
80,285 | 91,519 | ||||||
Long-term debt, net of discount |
506,895 | 517,009 | ||||||
Deferred tax liabilities |
51,896 | 53,837 | ||||||
Other liabilities |
18,131 | 19,189 | ||||||
Total liabilities |
657,207 | 681,554 | ||||||
Commitments and contingencies |
| | ||||||
Common Stock: |
||||||||
Par value $0.01, authorized 1,000 shares, 10
shares issued and outstanding at December
31, 2009 and September 30, 2009 |
| | ||||||
Additional paid-in capital |
258,568 | 257,570 | ||||||
Accumulated deficit |
(76,158 | ) | (80,680 | ) | ||||
Other accumulated comprehensive loss: |
||||||||
Unrealized loss on cash flow hedges |
(7,407 | ) | (8,593 | ) | ||||
Cumulative translation adjustment |
(1,749 | ) | (1,767 | ) | ||||
Total stockholders equity |
173,254 | 166,530 | ||||||
Total liabilities and stockholders equity |
$ | 830,461 | $ | 848,084 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
Table of Contents
ACTIVANT SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended | ||||||||
December 31, | ||||||||
(in thousands) | 2009 | 2008 | ||||||
Revenues: |
||||||||
Systems |
$ | 28,752 | $ | 33,532 | ||||
Services |
62,847 | 62,734 | ||||||
Total revenues |
91,599 | 96,266 | ||||||
Cost of revenues (exclusive of depreciation
and amortization of $4.4 million and $4.5
million for the three months ended December
31, 2009 and 2008, respectively, included in
amounts shown separately below): |
||||||||
Systems (Note 7) |
15,516 | 17,822 | ||||||
Services (Note 7) |
19,992 | 22,005 | ||||||
Total cost of revenues |
35,508 | 39,827 | ||||||
Gross profit |
56,091 | 56,439 | ||||||
Operating expenses: |
||||||||
Sales and marketing (Note 7) |
14,794 | 15,319 | ||||||
Product development (Note 7) |
9,084 | 9,999 | ||||||
General and administrative (Note 7) |
6,218 | 5,730 | ||||||
Depreciation and amortization |
9,562 | 9,705 | ||||||
Impairment of goodwill |
| 25,000 | ||||||
Acquisition related costs |
| 176 | ||||||
Restructuring costs |
910 | 1,758 | ||||||
Total operating expenses |
40,568 | 67,687 | ||||||
Operating income (loss) |
15,523 | (11,248 | ) | |||||
Interest expense |
(7,919 | ) | (12,988 | ) | ||||
Other income (expense), net |
289 | (329 | ) | |||||
Income (loss) before income taxes |
7,893 | (24,565 | ) | |||||
Income tax expense |
3,371 | 236 | ||||||
Net income (loss) |
$ | 4,522 | $ | (24,801 | ) | |||
Comprehensive income (loss): |
||||||||
Net income (loss) |
$ | 4,522 | $ | (24,801 | ) | |||
Unrealized gain (loss) on cash flow hedges |
1,186 | (4,709 | ) | |||||
Foreign currency translation adjustment |
18 | (1,665 | ) | |||||
Comprehensive income (loss) |
$ | 5,726 | $ | (31,175 | ) | |||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
4
Table of Contents
Three Months Ended | ||||||||
December 31, | ||||||||
(in thousands) | 2009 | 2008 | ||||||
Operating activities: |
||||||||
Net income (loss) |
$ | 4,522 | $ | (24,801 | ) | |||
Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |
||||||||
Impairment of goodwill |
| 25,000 | ||||||
Stock-based compensation expense |
998 | 1,063 | ||||||
Depreciation |
1,151 | 1,445 | ||||||
Amortization of intangible assets |
8,411 | 8,260 | ||||||
Amortization of deferred financing costs |
552 | 618 | ||||||
Provision for doubtful accounts |
325 | 193 | ||||||
Deferred income taxes |
(309 | ) | (5,631 | ) | ||||
Changes in assets and liabilities: |
||||||||
Trade accounts receivable |
(25 | ) | (1,245 | ) | ||||
Inventories |
(1,213 | ) | 212 | |||||
Prepaid expenses and other assets |
(2,002 | ) | 2,018 | |||||
Accounts payable |
1,670 | (587 | ) | |||||
Deferred revenue |
1,503 | 775 | ||||||
Accrued expenses and other |
(8,392 | ) | 1,289 | |||||
Net cash provided by operating activities |
7,191 | 8,609 | ||||||
Investing activities: |
||||||||
Purchases of property and equipment |
(853 | ) | (488 | ) | ||||
Capitalized computer software and database costs |
(2,594 | ) | (1,905 | ) | ||||
Net cash used in investing activities |
(3,447 | ) | (2,393 | ) | ||||
Financing activities: |
||||||||
Repurchases of common stock |
| (14 | ) | |||||
Payments on long-term debt |
(16,000 | ) | (3,512 | ) | ||||
Net cash used in financing activities |
(16,000 | ) | (3,526 | ) | ||||
Net change in cash and cash equivalents |
(12,256 | ) | 2,690 | |||||
Cash and cash equivalents, beginning of period |
44,573 | 64,789 | ||||||
Cash and cash equivalents, end of period |
$ | 32,317 | $ | 67,479 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid during the period for interest |
$ | 9,679 | $ | 14,901 | ||||
Cash paid during the period for income taxes |
$ | 6,562 | $ | 620 | ||||
Cash received during the period for income taxes |
$ | (127 | ) | $ | (14 | ) |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
Table of Contents
ACTIVANT SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheets as of December 31, 2009 and September
30, 2009 and the accompanying condensed consolidated statements of operations and comprehensive
income (loss) and cash flows for the three months ended December 31, 2009 and 2008 represent our
financial position, results of operations and cash flows as of and for the periods then ended.
Our accompanying unaudited condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of America (GAAP)
for interim financial information and in accordance with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information and notes required
by GAAP for complete financial statements. GAAP requires our management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. While our management has based their
assumptions and estimates on the facts and circumstances existing at December 31, 2009, actual
results could differ from those estimates and operating results for the three months ended December
31, 2009 are not necessarily indicative of the results that may be achieved for the fiscal year
ending September 30, 2010. Certain reclassifications have been made to the prior period
presentation to conform to the current period presentation.
In the opinion of our management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring adjustments, which are
necessary for a fair presentation of the results for the interim periods presented. These
financial statements should be read in conjunction with our audited consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2009, filed with the Securities and Exchange Commission (the SEC) on December 14,
2009.
In preparing the accompanying condensed consolidated financial statements, we have reviewed, as
determined necessary by our management, events that have occurred after December 31, 2009, up until
the issuance of the financial statements, which occurred on February 9, 2010. As of such date, our
management was not aware of any subsequent events requiring additional disclosure.
NOTE 2 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 2009, the Financial Accounting Standards Board (FASB) issued an Accounting
Standards Update (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. We plan to adopt this ASU in our fiscal year beginning
October 1, 2010, however 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. We plan to
adopt this ASU in our fiscal year beginning October 1, 2010, however early adoption is permitted.
We are currently evaluating whether this update will have an impact on our consolidated financial
statements.
In October 2009, we adopted authoritative accounting guidance providing clarification for measuring
liabilities at fair value. The adoption of this guidance did not have a material impact on our
condensed consolidated financial statements. See Note 5 for additional information.
In October 2009, we adopted revised guidance regarding business combinations. This guidance, among
other things, establishes principles and requirements for how the acquirer in a business
combination (i) recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the acquired business,
(ii) recognizes and
6
Table of Contents
measures the goodwill acquired in the business combination or a gain from a bargain purchase, and
(iii) determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The adoption of this
guidance did not have a material impact on our condensed consolidated financial statements.
NOTE 3 GOODWILL
The carrying amount of goodwill by reportable segments as of both December 31, 2009 and
September 30, 2009 is as follows (in thousands):
Retail Distribution Group |
$ | 207,166 | ||
Wholesale Distribution |
334,288 | |||
Other |
2,264 | |||
Total |
$ | 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 as well as during our annual
impairment testing. Based on these analyses we concluded that during fiscal 2009, the fair value
of the Retail Distribution Group and other were below their respective carrying values, including
goodwill. Consequently, we recorded a goodwill impairment charge of $107.0 million related to
Retail Distribution Group and $7.5 million related to other bringing our total goodwill impairment
charge for fiscal year 2009 to $114.5 million, which includes $25.0 million for the three months
ended December 31, 2008. 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.
Effective October 1, 2009, we combined our Hardlines and Lumber and Automotive segments into a
single segment called the Retail Distribution Group (See Note 9). We have adjusted our prior
period presentation accordingly to conform to the current period presentation.
NOTE 4 DEBT
Total debt consisted of the following (in thousands):
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Senior secured credit facility due 2013 |
$ | 326,241 | $ | 331,227 | ||||
Senior secured credit facility
(incremental term loan) due 2013 |
66,359 | 67,373 | ||||||
Senior subordinated notes due 2016 |
114,295 | 114,295 | ||||||
Revolving credit facility due 2011 |
| 10,000 | ||||||
Total debt |
506,895 | 522,895 | ||||||
Current portion |
| (5,886 | ) | |||||
Total long-term debt, net of discount |
$ | 506,895 | $ | 517,009 | ||||
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 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 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.
7
Table of Contents
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. During
the three months ended December 31, 2009, we 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.
We may be required each year, generally concurrent with the filing of our Annual Report on Form
10-K, to make a mandatory principal repayment for the preceding fiscal year towards term loans
equal to a specified percentage of excess cash flow depending on our actually attained ratio of
consolidated total debt to 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), all as defined in the senior secured credit agreement. Any
mandatory repayments due are reduced dollar-for-dollar by any voluntary prepayments made during the
year. Prior to fiscal year 2008, we did not have to make any mandatory repayments. For the period
ended September 30, 2006 and for the fiscal 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 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. For the
three months ended December 31, 2009, we repaid $6.0 million in principal towards the term loans as
a voluntary prepayment. As of September 30, 2009, we had classified approximately $5.9 million of
term loans as current maturities resulting from our then current mandatory principal repayment
calculations. Our mandatory repayment calculation as of the repayment date indicated that our
earlier prepayments had fully satisfied all fiscal year 2009 excess cash flow-based payments, and,
consequently, no mandatory repayment was due. As mentioned, we proceeded with a $6.0 million
principal payment, all of which is considered a voluntary prepayment of fiscal year 2010 excess
cash flow-based principal payments. Any future excess cash flow- based payments will be dependent
upon our attained ratio of consolidated total debt to adjusted EBITDA, upon us generating excess
cash flow, and/or upon us making voluntary prepayments, all 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. On December 10, 2009,
CIT confirmed that it had emerged from bankruptcy. 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 no amounts were outstanding as of December 31, 2009. 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
0.50%; 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.
As of December 31, 2009, our commitment fee was 0.375% per annum. We must also pay customary
letter of credit fees for issued and outstanding letters of credit. As of December 31, 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
8
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notional amount of
$245.0 million of floating rate debt to fixed rate debt. In November 2007, 2008 and 2009, interest
rate swaps with a notional amount of $25.0 million, $30.0 million and $50.0 million, respectively,
matured. As of December 31, 2009, we had outstanding interest rate swaps with a notional amount of
$140.0 million. As of and for the three months ended December 31, 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 three months ended December 31, 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 three months
ended December 31, 2009 and 2008, we recorded an unrealized gain of $1.8 million ($1.2 million net
of tax) and an unrealized loss of $7.6 million ($4.6 million net of tax), respectively. At
December 31, 2009, cumulative net unrealized losses of approximately $11.9 million, before taxes,
were recorded in OCI, of which an estimated $6.7 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
three months ended December 31, 2009 (in thousands):
Unrealized loss in OCI at September 30, 2009 |
$ | (13,723 | ) | |
Net increase in fair value |
1,825 | |||
Unrealized loss in OCI at December 31, 2009 |
$ | (11,898 | ) | |
The following tables summarize the fair value and realized and unrealized losses of the interest
rate swaps as of and for the three months ended December 31, 2009 (in thousands):
Fair Value of Derivative Instruments | ||||||||||||||||
Derivative Assets | Derivative Liabilities | |||||||||||||||
Location in the | Location in the | |||||||||||||||
Condensed | Condensed | |||||||||||||||
Consolidated | Consolidated | |||||||||||||||
Notional Amount | Balance Sheet | Fair Value | Balance Sheet | Fair Value | ||||||||||||
Interest rate swaps due November 2011 |
$ | 140,000 | Other assets | $ | | Other liabilities | $ | (11,898 | ) |
Effect of Derivative Instruments on Condensed Consolidated Statements of Operations and OCI | ||||||||||||||||
Gain recognized | Gain/(Loss) reclassified from OCI into | |||||||||||||||
Loss recognized in earnings (1) | in OCI | earnings (2) | ||||||||||||||
Location | Amount | Amount | Location | Amount | ||||||||||||
Interest rate swaps |
Interest expense | $ | (2,029 | ) | $ | 1,825 | 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 fiscal year 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). The repurchased notes have been retired. There were
no repurchases of notes during the three months ended December 31, 2009 and 2008. As a result of
these repurchases, senior subordinated notes representing $114.3 million in principal amount were
outstanding as of December 31, 2009.
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, 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
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(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 December 31, 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 forecast for the remainder
of 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.
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.
NOTE 5 FAIR VALUE
We measure fair value based on authoritative accounting guidance, which defines fair value,
establishes a framework for measuring fair value as well as expands on required disclosures
regarding fair value measurements. In October 2009, we adopted authoritative accounting guidance
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 guidance did not have a material impact on our fair value measurements.
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 cash surrender value, and deferred compensation liabilities,
valued based on various publicly traded mutual funds. These assets and liabilities are classified
as Level 1 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 4 as cash flow
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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 December 31, 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 December 31, 2009 (in
thousands):
Quoted Prices in Active | Significant Other | Significant | ||||||||||||||
Markets for Identical | Observable | Unobservable | ||||||||||||||
Assets and Liabilities | Inputs | Inputs | Total | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | Fair Value | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents (1) |
$ | 15,658 | $ | | $ | | $ | 15,658 | ||||||||
Deferred compensation plan assets (2) |
2,472 | | | 2,472 | ||||||||||||
Liabilities: |
||||||||||||||||
Interest rate swap due 2011(3) |
| (11,898 | ) | | (11,898 | ) | ||||||||||
Deferred compensation plan liabilities(3) |
(1,926 | ) | | | (1,926 | ) | ||||||||||
Total |
$ | 16,204 | $ | (11,898 | ) | $ | | $ | 4,306 | |||||||
(1) | Included in cash and cash equivalents in our condensed consolidated balance sheet. |
|
(2) | Included in other assets in our condensed consolidated balance sheet. |
|
(3) | Included in other liabilities in our condensed consolidated balance sheet. |
Other Financial Assets and Liabilities
Financial assets and liabilities with carrying amounts approximating fair value include cash, trade
accounts receivable, accounts payable, 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 as of December 31, 2009 had a carrying amount of $506.9 million and fair value of
$482.9 million. As of September 30, 2009, long-term debt, including current-portion of long-term
debt, had a carrying amount of $522.9 million and fair value of $498.9 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.
NOTE 6 INCOME TAXES
We recorded a provision for income tax expense of $3.4 million and $0.2 million for the three
months ended December 31, 2009 and 2008, respectively. This tax provision was derived by applying
an estimated worldwide effective tax rate against consolidated income before income taxes for the
three months ended December 31, 2009 and 2008, respectively. The estimated worldwide effective
tax rate contemplated estimated variances from the U.S. federal statutory rate for the fiscal year
ending September 30, 2010, including the impact of permanently non-deductible expenses, estimated
changes in valuation allowances against deferred tax assets, and state income taxes. The provision
for income tax was further adjusted by period events occurring during the quarter including
unrecognized tax benefits.
Our condensed consolidated balance sheet included unrecognized tax benefits (excluding interest and
penalties, classified in other non-current liabilities) of approximately $2.6 million as of both
December 31, 2009 and September 30, 2009. The total amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate is approximately $2.3 million and $1.7 million as
of December 31, 2009 and September 30, 2009, respectively. The tax years 2008 and 2009 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.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in
income tax expense. The balance of accrued interest and penalties was approximately $0.3 million as
of December 31, 2009 and September 30, 2009.
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It is reasonably possible as of December 31, 2009 that the unrecognized tax benefits will decrease
by approximately $0.8 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 the valuation allowance.
NOTE 7 EMPLOYEE STOCK PLANS
Stock-based Compensation Expense
The following table summarizes stock-based compensation expense for the three months ended December
31, 2009 and 2008 and its allocation within the condensed consolidated statements of operations and
comprehensive income (loss) (in thousands):
Three Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Cost of revenues |
||||||||
Systems |
$ | 8 | $ | 10 | ||||
Services |
61 | 49 | ||||||
Operating expenses |
||||||||
Sales and marketing |
366 | 228 | ||||||
Product development |
77 | 76 | ||||||
General and administrative |
486 | 700 | ||||||
Total |
$ | 998 | $ | 1,063 | ||||
We also recognized a total income tax benefit in the condensed consolidated statements of
operations and comprehensive income (loss) related to the total stock-based compensation expense
amounts above, of approximately $0.4 million for both the three months ended December 31, 2009 and
2008.
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
2006 Option Plan), during the three months ended December 31, 2009 and 2008 were estimated at the
date of grant using the Black-Scholes option pricing model with the following weighted average
assumptions:
Three Months Ended December 31, | ||||||||
2009 | 2008 | |||||||
Expected term |
6.66 | years | 6.66 | years | ||||
Expected volatility |
55.00 | % | 72.00 | % | ||||
Expected dividends |
0.00 | % | 0.00 | % | ||||
Risk-free rate |
2.69 | % | 1.55 | % |
The weighted-average estimated grant date fair value, as defined by SFAS No. 123(R), for employee
stock options granted under the 2006 Option Plans during the three months ended December 31, 2009
and 2008 were $2.41 per share and $3.10 per share, respectively.
NOTE 8 RESTRUCTURING COSTS
During the three months ended December 31, 2009, our management approved restructuring plans
for eliminating certain employee positions and consolidation of an excess facility with the intent
to continue 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 70 employee positions and the consolidation of space within one
facility location. As of December 31, 2009, approximately a third of the affected employees had
been notified and terminated, and the facility consolidation had been
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completed. In accordance with relevant authoritative accounting principles, we recorded restructuring charges of
approximately $0.9 million for the three months ended December 31, 2009, related to workforce
reductions (comprised of severance and related benefits) and the facility consolidation, including
additional charges for 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.
All restructuring charges were recorded in Restructuring Costs in the condensed consolidated
statements of operations and comprehensive income (loss). During January 2010, substantially all
the remaining affected employees were notified and terminated. Absent any additional restructuring
related actions taken, we estimate recording approximately $0.8 million of additional
Restructuring costs related to this action in the condensed consolidated statement of operation
and comprehensive income (loss) in the three months ending March 31, 2010.
Our restructuring liability at December 31, 2009, was approximately $1.4 million and the changes in
our restructuring liabilities for the three months then ended were as follows (in thousands):
Balance at | Balance at | |||||||||||||||
September 30, | Restructuring | December 31, | ||||||||||||||
2009 | Charges | Payments | 2009 | |||||||||||||
2010 Actions Severance and Related Benefits |
$ | | $ | 721 | $ | (231 | ) | $ | 490 | |||||||
2010 Actions Facility Closings |
| 168 | (11 | ) | 157 | |||||||||||
2009 Actions Severance and Related Benefits |
30 | | (15 | ) | 15 | |||||||||||
2009 Actions Facility Closings |
812 | 21 | (167 | ) | 666 | |||||||||||
2008 Actions Severance and Related Benefits |
45 | | (17 | ) | 28 | |||||||||||
$ | 887 | $ | 910 | $ | (441 | ) | $ | 1,356 | ||||||||
NOTE 9 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 two primary vertical markets: retail distribution
and wholesale distribution, which are considered our segments for reporting purposes. These
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. We
previously considered our segments to represent three primary vertical markets: hardlines and
lumber, wholesale distribution and automotive. On October 1, 2009 we combined our Hardlines and
Lumber and Automotive segments to create our Retail Distribution Group segment. We believe these
segments more accurately reflect the manner in which our management views and evaluates the
business. The prior period has been reclassified to conform to the current period presentation.
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:
| Retail Distribution Group segment The retail distribution
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, as well as 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. |
||
| 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. |
||
| Other Other primarily consists of our productivity tools
business, which is involved with software migration services and application development
tools. |
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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 accounting principles generally accepted in the United States. 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 three months ended December 31, 2009 and 2008
are as follows (in thousands):
Three Months Ended December 31, 2009 | Three Months Ended December 31, 2008 | |||||||||||||||||||||||||||||||
Retail | Retail | |||||||||||||||||||||||||||||||
Distribution | Wholesale | Distribution | Wholesale | |||||||||||||||||||||||||||||
Group | Distribution | Other | Total | Group | Distribution | Other | Total | |||||||||||||||||||||||||
Revenues |
$ | 52,075 | $ | 36,049 | $ | 3,475 | $ | 91,599 | $ | 53,912 | $ | 38,399 | $ | 3,955 | $ | 96,266 | ||||||||||||||||
Contribution margin |
$ | 16,309 | $ | 15,123 | $ | 1,525 | $ | 32,957 | $ | 15,687 | $ | 14,408 | $ | 1,921 | $ | 32,016 |
Certain of our operating expenses are not allocated to segments because they are separately
managed at the corporate level. These unallocated costs include marketing costs other than direct
marketing, general and administrative costs, such as legal and finance, stock-based compensation
expense, acquisition related costs, depreciation and amortization of intangible assets,
restructuring costs, interest expense, and other income.
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.
The reconciliation of total segment contribution margin to our income (loss) before income taxes is
as follows (in thousands):
Three Months Ended December 31, | ||||||||
2009 | 2008 | |||||||
Segment contribution margin |
$ | 32,957 | $ | 32,016 | ||||
Corporate and unallocated costs |
(5,964 | ) | (5,562 | ) | ||||
Stock-based compensation expense |
(998 | ) | (1,063 | ) | ||||
Depreciation and amortization |
(9,562 | ) | (9,705 | ) | ||||
Impairment of goodwill |
| (25,000 | ) | |||||
Acquisition related costs |
| (176 | ) | |||||
Restructuring costs |
(910 | ) | (1,758 | ) | ||||
Interest expense |
(7,919 | ) | (12,988 | ) | ||||
Other income (expense), net |
289 | (329 | ) | |||||
Income (loss) before income taxes |
$ | 7,893 | $ | (24,565 | ) | |||
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NOTE 10 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
Computer Systems, Inc., Speedware Holdings, Inc., CCI/ARD, Inc., Triad Systems Corporation, 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 Service 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 condensed
consolidating balance sheets as of December 31, 2009 and September 30, 2009 and the accompanying
condensed consolidating statements of operations and cash flows for the three months ended December
31, 2009 and 2008 represent the financial position, results of operations and cash flows of our
Guarantors and Non-Guarantors.
Condensed Consolidating Balance Sheet as of December 31, 2009
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
ASSETS: |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 28,625 | $ | 365 | $ | 3,327 | $ | | $ | 32,317 | ||||||||||
Trade accounts receivable, net of allowance for
doubtful accounts |
16,803 | 14,023 | 3,286 | | 34,112 | |||||||||||||||
Inventories |
4,764 | 1,168 | 266 | | 6,198 | |||||||||||||||
Deferred income taxes |
1,779 | 845 | 29 | | 2,653 | |||||||||||||||
Prepaid expenses and other current assets |
5,915 | 650 | 273 | | 6,838 | |||||||||||||||
Total current assets |
57,886 | 17,051 | 7,181 | | 82,118 | |||||||||||||||
Property and equipment, net |
5,087 | 519 | 184 | | 5,790 | |||||||||||||||
Intangible assets, net |
163,662 | 21,440 | 1,477 | | 186,579 | |||||||||||||||
Goodwill |
448,840 | 91,956 | (3,115 | ) | 6,037 | 543,718 | ||||||||||||||
Investments in subsidiaries |
16,769 | | | (16,769 | ) | | ||||||||||||||
Intercompany receivables (payables) |
(88,338 | ) | 93,239 | (4,901 | ) | | | |||||||||||||
Deferred financing costs |
8,351 | | | | 8,351 | |||||||||||||||
Other assets |
3,706 | 181 | 18 | | 3,905 | |||||||||||||||
Total assets |
$ | 615,963 | $ | 224,386 | $ | 844 | $ | (10,732 | ) | $ | 830,461 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | 18,320 | $ | 1,492 | $ | (112 | ) | $ | | $ | 19,700 | |||||||||
Payroll related accruals |
2,829 | 10,941 | 1,579 | | 15,349 | |||||||||||||||
Deferred revenue |
10,520 | 19,712 | 2,925 | | 33,157 | |||||||||||||||
Accrued expenses and other current liabilities |
11,977 | 974 | (872 | ) | | 12,079 | ||||||||||||||
Total current liabilities |
43,646 | 33,119 | 3,520 | | 80,285 | |||||||||||||||
Long-term debt |
506,895 | | | | 506,895 | |||||||||||||||
Deferred tax and other liabilities |
75,920 | (3,055 | ) | (2,838 | ) | | 70,027 | |||||||||||||
Total liabilities |
626,461 | 30,064 | 682 | | 657,207 | |||||||||||||||
Total stockholders equity (deficit) |
(10,498 | ) | 194,322 | 162 | (10,732 | ) | 173,254 | |||||||||||||
Total liabilities and stockholders equity
(deficit) |
$ | 615,963 | $ | 224,386 | $ | 844 | $ | (10,732 | ) | $ | 830,461 | |||||||||
15
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Condensed Consolidating Balance Sheet as of September 30, 2009
Guarantor | ||||||||||||||||||||
Principal | Non-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 | ||||||||
16
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Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2009
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Revenues: |
||||||||||||||||||||
Systems |
$ | 17,017 | $ | 10,605 | $ | 1,130 | $ | | $ | 28,752 | ||||||||||
Services |
34,358 | 24,611 | 3,878 | | 62,847 | |||||||||||||||
Total revenues |
51,375 | 35,216 | 5,008 | | 91,599 | |||||||||||||||
Cost of revenues: |
||||||||||||||||||||
Systems |
9,121 | 5,170 | 1,225 | | 15,516 | |||||||||||||||
Services |
12,537 | 5,602 | 1,853 | | 19,992 | |||||||||||||||
Total cost of revenues |
21,658 | 10,772 | 3,078 | | 35,508 | |||||||||||||||
Gross profit |
29,717 | 24,444 | 1,930 | | 56,091 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing |
8,392 | 5,111 | 1,291 | | 14,794 | |||||||||||||||
Product development |
3,695 | 4,664 | 725 | | 9,084 | |||||||||||||||
General and administrative |
5,693 | 352 | 173 | | 6,218 | |||||||||||||||
Depreciation and amortization |
7,659 | 1,752 | 151 | | 9,562 | |||||||||||||||
Restructuring costs |
277 | 89 | 544 | | 910 | |||||||||||||||
Total operating expenses |
25,716 | 11,968 | 2,884 | | 40,568 | |||||||||||||||
Operating income (loss) |
4,001 | 12,476 | (954 | ) | | 15,523 | ||||||||||||||
Interest expense |
(7,915 | ) | (4 | ) | | | (7,919 | ) | ||||||||||||
Other income (expense), net |
(5,655 | ) | 83 | 5,861 | | 289 | ||||||||||||||
Income (loss) before income taxes |
(9,569 | ) | 12,555 | 4,907 | | 7,893 | ||||||||||||||
Income tax expense |
2,202 | 551 | 618 | | 3,371 | |||||||||||||||
Net income (loss) |
$ | (11,771 | ) | $ | 12,004 | $ | 4,289 | $ | | $ | 4,522 | |||||||||
17
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Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2008
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Revenues: |
||||||||||||||||||||
Systems |
$ | 18,012 | $ | 13,740 | $ | 1,780 | $ | | $ | 33,532 | ||||||||||
Services |
34,766 | 23,999 | 3,969 | | 62,734 | |||||||||||||||
Total revenues |
52,778 | 37,739 | 5,749 | | 96,266 | |||||||||||||||
Cost of revenues: |
||||||||||||||||||||
Systems |
10,093 | 6,420 | 1,309 | | 17,822 | |||||||||||||||
Services |
13,828 | 6,642 | 1,535 | | 22,005 | |||||||||||||||
Total cost of revenues |
23,921 | 13,062 | 2,844 | | 39,827 | |||||||||||||||
Gross profit |
28,857 | 24,677 | 2,905 | | 56,439 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing |
8,737 | 5,578 | 1,004 | | 15,319 | |||||||||||||||
Product development |
4,121 | 5,204 | 674 | | 9,999 | |||||||||||||||
General and administrative |
5,058 | 390 | 282 | | 5,730 | |||||||||||||||
Depreciation and amortization |
7,708 | 1,821 | 176 | | 9,705 | |||||||||||||||
Impairment of goodwill |
25,000 | | | | 25,000 | |||||||||||||||
Acquisition related costs |
41 | 33 | 102 | | 176 | |||||||||||||||
Restructuring costs |
923 | 53 | 782 | | 1,758 | |||||||||||||||
Total operating expenses |
51,588 | 13,079 | 3,020 | | 67,687 | |||||||||||||||
Operating income (loss) |
(22,731 | ) | 11,598 | (115 | ) | | (11,248 | ) | ||||||||||||
Interest expense |
(12,983 | ) | (4 | ) | (1 | ) | | (12,988 | ) | |||||||||||
Other expense, net |
(217 | ) | (46 | ) | (66 | ) | | (329 | ) | |||||||||||
Income (loss) before income taxes |
(35,931 | ) | 11,548 | (182 | ) | | (24,565 | ) | ||||||||||||
Income tax expense |
230 | 1 | 5 | | 236 | |||||||||||||||
Net income (loss) |
$ | (36,161 | ) | $ | 11,547 | $ | (187 | ) | $ | | $ | (24,801 | ) | |||||||
18
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Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2009
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash provided by operating activities |
$ | 6,003 | $ | 211 | $ | 977 | $ | | $ | 7,191 | ||||||||||
Investing activities: |
||||||||||||||||||||
Purchase of property and equipment |
(785 | ) | (61 | ) | (7 | ) | | (853 | ) | |||||||||||
Capitalized computer software costs and
databases |
(2,594 | ) | | | | (2,594 | ) | |||||||||||||
Net cash used in investing activities |
(3,379 | ) | (61 | ) | (7 | ) | | (3,447 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Payment on long-term debt |
(16,000 | ) | | | | (16,000 | ) | |||||||||||||
Net cash used in financing activities |
(16,000 | ) | | | | (16,000 | ) | |||||||||||||
Net change in cash and cash equivalents |
(13,376 | ) | 150 | 970 | | (12,256 | ) | |||||||||||||
Cash and cash equivalents, beginning of
period |
42,001 | 215 | 2,357 | | 44,573 | |||||||||||||||
Cash and cash equivalents, end of
period |
$ | 28,625 | $ | 365 | $ | 3,327 | $ | | $ | 32,317 | ||||||||||
Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2008
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash provided by (used in) operating
activities |
$ | 10,063 | $ | (2,149 | ) | $ | 695 | $ | | $ | 8,609 | |||||||||
Investing activities: |
||||||||||||||||||||
Purchase of property and equipment |
(488 | ) | | (488 | ) | |||||||||||||||
Capitalized computer software costs and
databases |
(1,905 | ) | | | | (1,905 | ) | |||||||||||||
Net cash used in investing activities |
(2,393 | ) | | (2,393 | ) | |||||||||||||||
Financing activities: |
||||||||||||||||||||
Payment on long-term debt |
(3,512 | ) | | | | (3,512 | ) | |||||||||||||
Repurchase of Activant Group common stock |
(14 | ) | | | | (14 | ) | |||||||||||||
Net cash used in financing activities |
(3,526 | ) | | | | (3,526 | ) | |||||||||||||
Net change in cash and cash equivalents |
4,144 | (2,149 | ) | 695 | | 2,690 | ||||||||||||||
Cash and cash equivalents, beginning of
period |
55,926 | 2,931 | 5,932 | | 64,789 | |||||||||||||||
Cash and cash equivalents, end of
period |
$ | 60,070 | $ | 782 | $ | 6,627 | $ | | $ | 67,479 | ||||||||||
19
Table of Contents
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our financial
statements and related notes included above. 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 Part I, Item 1A Risk Factors included in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2009.
Overview
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 two primary vertical markets: retail distribution and
wholesale distribution, which we consider our segments for reporting purposes. These 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. We previously
considered our segments to represent three primary vertical markets: hardlines and lumber,
wholesale distribution and automotive. On October 1, 2009, we combined our Hardlines and Lumber
and Automotive segments to create our Retail Distribution Group segment. We believe these segments
more accurately reflect the manner in which our management views and evaluates the business. The
prior period has been reclassified to conform to the current period presentation.
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.
Our revenues are primarily derived from customers that operate in two markets retail distribution
and wholesale distribution. We also derive revenue from our productivity tools business, which we
include in other.
§ | The retail distribution market consists of a range of specialty retail and distribution
vertical markets, primarily in the United States, including 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, 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 three months ended December 31, 2009, we
generated approximately 56.9% of our total revenues from the retail distribution vertical
market. |
||
§ | The wholesale distribution market consists of a range of distributors 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 three months ended December 31, 2009, we generated
approximately 39.3% of our total revenues from the wholesale distribution vertical market. |
||
§ | Other primarily consists of our productivity tools business, which is involved with
software migration services and application development tools. For the three months ended
December 31, 2009, we generated approximately 3.8% of our total revenues from other. |
Using a combination of proprietary software and extensive expertise in these 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 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, and third-party software and which may include hardware and peripherals
and forms. |
||
| Services, which is comprised primarily of product support, content, and supply chain
services. Product support services are comprised of customer support activities, including
software, hardware 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. |
20
Table of Contents
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 related 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 and 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 bonuses, 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 and bonuses, 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 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. Acquisition related costs are not
allocated to our segments. |
||
§ | Restructuring costs Restructuring costs relate to management approved
restructuring actions to eliminate certain employee 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. Restructuring costs are not
allocated to our segments. |
21
Table of Contents
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 2006 merger with Activant Solutions Holdings Inc. and prior
acquisitions. |
||
§ | Other income (expense), net Other income (expense), net primarily consist of interest
income, other non-income based taxes, 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
We believe the U.S. economic recovery will likely be slow and fragile. While producer sentiment,
the residential housing market, and buildup of inventories support economic growth, other
indicators, such as unemployment, consumer confidence, diminished credit quality, the continuing
foreclosure crisis, and a deepening commercial real estate downturn are countervailing factors that
may continue to dampen the recovery. The broader macroeconomic environment has impacted our
performance in the vertical markets we serve, and we expect it will likely affect the industries we
serve and our performance in those industries, for fiscal 2010 and potentially beyond.
We continue to see customer caution in making capital expenditure decisions. This customer caution
resulted in longer selling cycles and in many instances no decision-making 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 macroeconomic weakness first impact
our retail distribution vertical, which is now showing some early signs of improving. Our
wholesale distribution vertical has more recently seen the impact of the slowdown in commercial
real estate, construction and other sectors. At the same time, we have seen larger strategic
transactions across our verticals, as certain larger players begin to invest in their businesses to
enhance their efficiencies in anticipation of an economic recovery.
We have proactively addressed our cost model as we faced these marketplace and revenue
uncertainties. Over the past two years our management implemented restructuring actions primarily
related to eliminating certain employee positions and consolidating certain excess facilities. We
also benefited from our intense focus on managing our discretionary expenses. In addition to the
aforementioned restructuring actions, we have continued to reduce operating expenses wherever
possible; 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 remained strong for the three months ended December 31, 2009.
If the macroeconomic environment recovery continues to be slow, 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
forecast for fiscal year 2010, we currently anticipate that we will be able to meet or exceed these
financial tests and covenants during this period.
Historical Results of Operations
Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008
Total revenues
Our Retail Distribution Group and Wholesale Distribution segments accounted for approximately 56.9%
and 39.3%, respectively, of our revenues during the three months ended December 31, 2009. This
compares to the three months ended December 31, 2008, where our Retail Distribution Group and
Wholesale Distribution segments accounted for approximately 56.0% and 39.9%, respectively, of our
revenues. See Note 9 to our unaudited condensed consolidated financial statements for further
information on our segments, including a summary of our segment revenues and contribution margin.
22
Table of Contents
The following table sets forth, for the periods indicated, our segment revenues by business
management solution and the variance thereof (in thousands):
Three Months Ended December 31, | ||||||||||||||||
2009 | 2008 | Variance $ | Variance % | |||||||||||||
Retail Distribution Group revenues: |
||||||||||||||||
Systems |
$ | 15,979 | $ | 17,372 | $ | (1,393 | ) | (8.0 | )% | |||||||
Services |
36,096 | 36,540 | (444 | ) | (1.2 | )% | ||||||||||
Total Retail Distribution Group revenues |
$ | 52,075 | $ | 53,912 | $ | (1,837 | ) | (3.4 | )% | |||||||
Wholesale Distribution revenues: |
||||||||||||||||
Systems |
$ | 10,661 | $ | 13,740 | $ | (3,079 | ) | (22.4 | )% | |||||||
Services |
25,388 | 24,659 | 729 | 3.0 | % | |||||||||||
Total Wholesale Distribution revenues |
$ | 36,049 | $ | 38,399 | $ | (2,350 | ) | (6.1 | )% | |||||||
Other revenues: |
||||||||||||||||
Systems |
$ | 2,112 | $ | 2,420 | $ | (308 | ) | (12.7 | )% | |||||||
Services |
1,363 | 1,535 | (172 | ) | (11.2 | )% | ||||||||||
Total Other revenues |
$ | 3,475 | $ | 3,955 | $ | (480 | ) | (12.1 | )% | |||||||
Total revenues: |
||||||||||||||||
Systems |
$ | 28,752 | $ | 33,532 | $ | (4,780 | ) | (14.3 | )% | |||||||
Services |
62,847 | 62,734 | 113 | 0.2 | % | |||||||||||
Total revenues |
$ | 91,599 | $ | 96,266 | $ | (4,667 | ) | (4.8 | )% | |||||||
Total revenues for the three months ended December 31, 2009 decreased by $4.7 million, or 4.8%,
compared to the three months ended December 31, 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 slight
decrease in services revenues in the Retail Distribution Group, partially offset by an increase in
services revenues in Wholesale Distribution.
§ | Retail Distribution Group revenues Retail Distribution Group revenues
decreased by $1.8 million, or 3.4%. The systems revenue decrease was attributed to delayed
revenue recognition on certain system sales made during the quarter, a reduction in the
volume of new system sales primarily in the automotive market as a result of our customers
exercising caution on making capital expenditures, extended customer sales cycles, and
access to credit due to the weak economy, partially offset by stronger sales of additional
products and modules. Services revenue experienced a decrease primarily as a result of
contractual price reductions, lower customer retention rates due to the global economic
downturn and known attrition of a major customer, General Parts, Inc. |
§ | Wholesale Distribution revenues Wholesale Distribution revenues decreased
by $2.4 million, or 6.1%. The systems revenue decrease was substantially attributable to
a reduction in the volume and lower average selling price of new system sales,
primarily due to a lagging decline due to the ongoing slowdown in the commercial,
construction and other sectors as well as extended customer sales cycles partially offset
by the sale of additional products and modules. Services revenues increased primarily as a
result of our price increases for support services partially offset by lower customer
retention rates due to the global economic downturn. |
§ | Other revenues Other revenues decreased $0.5 million, or 12.1%, driven
primarily by prospective customers slowing down planned system migrations due to
Hewlett-Packards continued support of one of its legacy systems. |
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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):
Three Months Ended December 31, | ||||||||||||
2009 | 2008 | Variance | ||||||||||
Cost of systems revenues |
$ | 15,516 | $ | 17,822 | $ | (2,306 | ) | |||||
Systems gross margins |
46.0 | % | 46.9 | % | ||||||||
Cost of services revenues |
$ | 19,992 | $ | 22,005 | $ | (2,013 | ) | |||||
Services gross margins |
68.2 | % | 64.9 | % | ||||||||
Total cost of revenues |
$ | 35,508 | $ | 39,827 | $ | (4,319 | ) | |||||
Total gross margins |
61.2 | % | 58.6 | % |
§ | Cost of systems revenues and systems gross margins Cost of systems
revenues decreased by $2.3 million primarily a result of lower direct costs associated with
lower overall systems revenues. System gross margins decreased by 0.9 percentage points in
the three months ended December 31, 2009 from the comparable period a year ago. The
decrease is primarily attributable to a higher mix of hardware equipment sales with lower
gross margins than our license sales. |
§ | Cost of services revenues and services gross margins Cost of services
revenues decreased by $2.0 million primarily a result of labor related cost reductions on
legacy platforms and reductions in third party maintenance and support costs. Services
gross margins increased by 3.3 percentage points in the three months ended December 31,
2009 from the comparable period a year ago as a result of service price increases and
reductions in labor related costs in legacy products and third party maintenance and
support costs. |
Total operating expenses
The following table sets forth, for the periods indicated, operating expenses and the variance
thereof (in thousands):
Three Months Ended December 31, | ||||||||||||||||
2009 | 2008 | Variance $ | Variance % | |||||||||||||
Sales and marketing |
$ | 14,794 | $ | 15,319 | $ | (525 | ) | (3.4 | )% | |||||||
Product development |
9,084 | 9,999 | (915 | ) | (9.1 | )% | ||||||||||
General and administrative |
6,218 | 5,730 | 488 | 8.5 | % | |||||||||||
Depreciation and amortization |
9,562 | 9,705 | (143 | ) | (1.5 | )% | ||||||||||
Impairment of goodwill |
| 25,000 | (25,000 | ) | (100.0 | )% | ||||||||||
Acquisition related costs |
| 176 | (176 | ) | (100.0 | )% | ||||||||||
Restructuring costs |
910 | 1,758 | (848 | ) | (48.2 | )% | ||||||||||
Total operating expenses |
$ | 40,568 | $ | 67,687 | $ | (27,119 | ) | (40.1 | )% | |||||||
Total operating expenses decreased by $27.1 million, or 40.1%, for the three months ended
December 31, 2009, compared to the three months ended December 31, 2008. The decrease was driven
primarily by the impairment of goodwill in the prior year, lower restructuring costs, reduced
salary related expenses in sales and marketing and product development and increased software
development capitalization, partially offset by higher legal, bonus and insurance costs.
§ | Sales and marketing Sales and marketing expenses decreased by $0.5 million,
or 3.4%, for the three months ended December 31, 2009 compared to the three months ended
December 31, 2008. The decrease was primarily the result of a $0.7 million reduction in
salary related expenses and a $0.2 million reduction in travel expenses, partially offset by
a $0.5 million increase in commissions. |
§ | Product development Product development expenses decreased $0.9 million, or
9.1%, for the three months ended December 31, 2009 compared to the three months ended
December 31, 2008. The decrease was primarily the result of a $0.4 million reduction in
salary related costs and lower software development expenses of $0.6 million as a result of
more of these costs being capitalized. |
§ | General and administrative General and administrative expenses increased by
$0.5 million, or 8.5%, for the three months ended December 31, 2009 compared to the three
months ended December 31, 2008. The increase is primarily the result of $0.3 million in a
one-time insurance cost reduction in the prior year, $0.3 million in bonus expense and $0.2
million in legal fees and outsourced services partially offset by $0.2 million in stock
compensation expenses and $0.1 million in relocation expenses. |
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§ | Depreciation and amortization Depreciation and amortization is not allocated
to our segments. Depreciation and amortization expense was $9.6 million for the three
months ended December 31, 2009 compared to $9.7 million for the three months ended December
31, 2008. |
§ | Acquisition related costs There were no acquisition related costs for the
three months ended December 31, 2009 compared to $0.2 million in the three months ended
December 31, 2008. The prior year costs primarily included consulting fees and other
professional services incurred in connection with systems integration activities related to
Eclipse. |
§ | Impairment of goodwill Due to the continuing 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 determined it necessary to evaluate
goodwill for impairment as of December 31, 2008. We recorded a goodwill impairment charge
of $25.0 million in the Retail Distribution Group during the three months ended December
31, 2008. See Note 3 to our unaudited condensed consolidated financial statements. We had
no similar charges in the three months ended December 31, 2009. |
§ | Restructuring costs During fiscal years 2010 and 2009, 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.
During the three months ended December 31, 2009 and 2008, we recorded restructuring charges
of approximately $0.9 million and $1.8 million, respectively. See Note 8 to our unaudited
condensed consolidated financial statements. |
Interest expense
Interest expense for the three months ended December 31, 2009 and 2008 was $7.9 million and $13.0
million, respectively. 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 past twelve months totaling approximately $106.7 million.
Other income (expense), net
Other income (expense), net for the three months ended December 31, 2009 was income of $0.3 million
compared to an expense of $0.3 million in the three months ended December 31, 2008. The increase
was primarily a result of foreign currency gains of approximately $0.4 million for the three months
ended December 31, 2009 compared to $0.2 million of foreign currency losses during the three months
ended December 31, 2008.
Income tax expense
We recognized income tax expense of $3.4 million, or 42.7% of pre-tax income, for the three months
ended December 31, 2009 compared to income tax expense of $0.2 million, or 54.3% of pre-tax income,
excluding goodwill impairment, in the comparable period in 2008. During the three months ended
December 31, 2009, the increase in income tax expense is due primarily to higher pre-tax income and
lower interest expense partially offset by a decrease in the effective tax rate. Our effective tax
rate for the three months ended December 31, 2009 differed from the statutory rate primarily due to
state taxes, net of U.S. federal income tax benefit. Substantially all of our operating income was
generated from domestic operations during the three months ended December 31, 2009 and 2008. As of
December 31, 2009, we had $24.4 million of federal and state loss carry-forwards that expire
between 2010 and 2028 and $2.0 million of foreign business tax credit carry-forwards that expire
between 2014 and 2018, if not utilized earlier. As of December 31, 2009, we also had foreign net
operating loss carry-forwards of $2.7 million expiring between 2026 and 2028, and $20.8 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 6 to our unaudited condensed consolidated financial
statements for additional information about income taxes.
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 accounting principles generally accepted in the United States of America (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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Certain of our operating expenses are not allocated to segments because they are separately managed
at the corporate level. These unallocated costs include marketing costs other than direct
marketing, general and administrative costs, such as legal and finance, stock-based compensation
expense, acquisition related costs, depreciation and amortization of intangible assets,
restructuring costs, interest expense, and other income.
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.
Contribution margin for the three months ended December 31, 2009 and 2008 is as follows (in
thousands):
Three Months Ended December 31, | ||||||||||||||||
2009 | 2008 | Variance $ | Variance % | |||||||||||||
Retail Distribution Group |
$ | 16,309 | $ | 15,687 | $ | 622 | 4.0 | % | ||||||||
Wholesale Distribution |
15,123 | 14,408 | 715 | 5.0 | % | |||||||||||
Other |
1,525 | 1,921 | (396 | ) | (20.6 | )% | ||||||||||
Total contribution margin |
$ | 32,957 | $ | 32,016 | $ | 941 | 2.9 | % | ||||||||
§ | Retail Distribution Group contribution margin The contribution margin
for Retail Distribution Group increased by $0.6 million primarily as a result of support
price increases, lower headcount related expenses and increased software and database
capitalization. Gross margins dollars declined as a result of lower systems revenues and
higher mix of hardware equipment sales, however gross margin percentage increased due to
reduced salary related expenses, improved hardware equipment and installation margins and
support price increases as well as additional database capitalization. Sales and marketing
expenses decreased primarily as a result of lower salary related, travel and marketing
expenses as well as lower bad debt expenses, partially offset by higher commission
expenses. Product development expenses decreased primarily as a result of increased
software and database capitalization costs. |
§ | Wholesale Distribution contribution margin The contribution margin for Wholesale
Distribution increased by $0.7 million primarily as the result of support price increases,
lower headcount related expenses and third party maintenance and support costs. Gross
margins dollars declined as a result of lower systems revenues, however gross margin
percentage increased due to reduced salary related expense and support price increases.
Sales and marketing and product development expenses decreased primarily as a result of
lower salary related expenses. |
§ | Other contribution margin The contribution margin for other decreased by $0.4 million,
primarily due to $0.5 million in lower revenues, partially offset by reduced outside
service costs as a result of prospective customers slowing down planned system migrations
due to Hewlett-Packards continued support of one of its legacy systems. |
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The reconciliation of total segment contribution margin to our income (loss) before income taxes is
as follows (in thousands):
Three Months Ended December 31, | ||||||||
2009 | 2008 | |||||||
Segment contribution margin |
$ | 32,957 | $ | 32,016 | ||||
Corporate and unallocated costs |
(5,964 | ) | (5,562 | ) | ||||
Stock-based compensation expense |
(998 | ) | (1,063 | ) | ||||
Depreciation and amortization |
(9,562 | ) | (9,705 | ) | ||||
Impairment of goodwill |
| (25,000 | ) | |||||
Acquisition related costs |
| (176 | ) | |||||
Restructuring costs |
(910 | ) | (1,758 | ) | ||||
Interest expense |
(7,919 | ) | (12,988 | ) | ||||
Other income (expense), net |
289 | (329 | ) | |||||
Income (loss) before income taxes |
$ | 7,893 | $ | (24,565 | ) | |||
Liquidity and Capital Resources
Overview
Our principal liquidity requirements are for debt service, capital expenditures and working
capital. Our ability to service our indebtedness will depend on our ability to generate cash in
the future.
Our cash and cash equivalents balance at December 31, 2009 was $32.3 million. As of December 31,
2009, we had $506.9 million in outstanding indebtedness comprised primarily of $392.6 million
aggregate principal amount of senior secured term loans (including an incremental term loan) due
2013 pursuant to our senior secured credit agreement and $114.3 million aggregate principal amount
of senior subordinated notes due 2016.
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 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 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. During
the three months ended December 31, 2009, we 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.
We may be required each year, generally concurrent with the filing of our Annual Report on Form
10-K, to make a mandatory principal repayment for the preceding fiscal year towards term loans
equal to a specified percentage of excess cash flow depending on our actually attained ratio of
consolidated total debt to 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), all as defined in the senior secured credit agreement. Any
mandatory repayments due are reduced dollar-for-dollar by any voluntary prepayments made during the
year. Prior to fiscal year 2008, we did not have to make any mandatory repayments. 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 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. For the
three months ended December 31, 2009, we repaid $6.0 million in principal towards the term loans as
a voluntary prepayment. As of September 30, 2009, we had classified approximately $5.9 million of
term loans as current maturities resulting from our then current mandatory principal repayment
calculations. Our mandatory repayment calculation as of the repayment date indicated that our
earlier prepayments had fully satisfied all fiscal year 2009 excess cash flow-based payments, and,
consequently, no mandatory repayment was due. As mentioned, we proceeded with a $6.0 million
principal payment, all of which is considered a voluntary prepayment of fiscal year 2010 excess
cash flow-based principal payments. Any future excess cash flow- based payments will be dependent
upon our attained ratio of consolidated total debt to adjusted EBITDA, upon us generating excess
cash flow, and/or upon us making voluntary prepayments, all 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
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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. On December 10, 2009, CIT
confirmed that it had emerged from bankruptcy. 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 no amounts were outstanding as of December 31, 2009. 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
0.50%; 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.
As of December 31, 2009, our commitment fee was 0.375% per annum. We must also pay customary
letter of credit fees for issued and outstanding letters of credit. As of December 31, 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.
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.
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
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notional amount of $245.0 million of floating
rate debt to fixed rate debt. In November 2007, 2008 and 2009, interest rate swaps with a notional
amount of $25.0 million, $30.0 million and $50.0 million, respectively, matured. As of December
31, 2009, we had outstanding interest rate swaps with a notional amount of $140.0 million. As of
and for the three months ended December 31, 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 U.S. Securities and Exchange Commission (SEC), pursuant to a
registration rights agreement entered into in connection with the indenture under which these notes
were issued.
During fiscal year 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). The repurchased notes have been retired. There were
no repurchases of notes during the three months ended December 31, 2009 and 2008. As a result of
these repurchases, senior subordinated notes representing $114.3 million in principal amount were
outstanding as of December 31, 2009.
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, 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 December 31, 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 forecast for the remainder
of 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.
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.
Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008
Our net cash provided by operating activities for the three months ended December 31, 2009
decreased $1.4 million to $7.2 million from $8.6 million for the three months ended December 31,
2008. As compared to the prior year period, the decrease was largely attributable to additional
cash used of $9.7 million for accrued expenses and other, $4.0 million for prepaid expenses and
other assets, and $1.4 million for inventories partially offset by higher net income (after giving
effect to the goodwill impairment charge in the prior year period) of $4.3 million and additional
cash provided by deferred income taxes of $5.3 million, accounts payable of $2.3 million, and
accounts receivable of $1.2 million.
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Our investing activities used net cash of $3.4 million and $2.4 million during the three months
ended December 31, 2009 and 2008, respectively. The increase in cash used in investing activities
from the prior year was primarily due to a slight increase in overall capital expenditures. We
purchased property and equipment of $0.9 million and $0.5 million and capitalized computer software
and database development costs of $2.6 million and $1.9 million for the three months ended December
31, 2009 and 2008, respectively.
Our financing activities used cash of $16.0 million and $3.5 million for the three months ended
December 31, 2009 and 2008, respectively. The increase in cash used in financing activities was due
to payments on our current and long-term debt of $16.0 million during the three months ended
December 31, 2009 compared to $3.5 million during the three months ended December 31, 2008.
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.
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 2 Managements Discussion and Analysis
of Financial Condition and Results of OperationsLiquidity and Capital Resources Senior Secured
Credit Agreement. Based on our forecasts for the remainder of 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 Part I, Item 1A Risk
Factors of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009).
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.
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
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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 December 31, 2009 and 2008 (in thousands).
Twelve Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Net loss |
$ | (62,712 | ) | $ | (21,773 | ) | ||
Acquisition costs |
95 | 854 | ||||||
Deferred revenue purchase accounting adjustment |
| 1,437 | ||||||
Adjusted net loss |
(62,617 | ) | (19,482 | ) | ||||
Interest expense |
35,908 | 50,494 | ||||||
Income tax expense and other income-based taxes |
22,629 | 4,665 | ||||||
Depreciation and amortization |
38,774 | 38,365 | ||||||
Gain on retirement of debt |
(18,958 | ) | | |||||
Non-cash charges (impairment charges and
stock-based compensation expense) |
93,063 | 28,449 | ||||||
Non-recurring cash charges and restructuring charges |
5,084 | 6,985 | ||||||
Deferred compensation payments |
294 | 258 | ||||||
Sponsor payments |
162 | 109 | ||||||
Foreign exchange gain |
(161 | ) | (257 | ) | ||||
Pro- forma adjustments |
| 886 | ||||||
Adjusted EBITDA |
$ | 114,178 | $ | 110,472 | ||||
Our financial covenant requirements and ratios for the twelve months ended December 31, 2009
were as follows:
Covenant | ||||||||
Requirements | Our Ratio | |||||||
Senior Secured Credit Agreement (1) |
||||||||
Maximum consolidated total debt to adjusted EBITDA ratio |
4.50x | 4.22 | ||||||
Minimum adjusted EBITDA to consolidated interest expense |
2.25x | 3.41 | ||||||
Senior Subordinated Notes (2) |
||||||||
Minimum adjusted EBITDA to fixed charges ratio required
to incur additional
indebtedness pursuant to ratio provisions |
2.00x | 3.41 |
(1) | Our senior secured credit agreement requires us to maintain a consolidated total debt to
adjusted EBITDA ratio of a maximum of 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
December 31, 2009, our consolidated total debt was $482.1 million, consisting of total debt
other than certain indebtedness totaling $506.9 million, net of cash and cash equivalents in
excess of $7.5 million totaling $24.8 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 |
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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. |
Recently Issued Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued an Accounting Standards
Update (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. We plan to adopt this ASU in our fiscal year beginning
October 1, 2010, however 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. We plan to adopt this ASU
in our fiscal year beginning October 1, 2010, however early adoption is permitted. We are
currently evaluating whether this update will have an impact on our consolidated financial
statements.
In October 2009, we adopted authoritative accounting guidance providing clarification for measuring
liabilities at fair value. The adoption of this guidance did not have a material impact on our
condensed consolidated financial statements. See Note 5 to our financial statements for additional
information.
In October 2009, we adopted revised guidance regarding business combinations. This guidance, among
other things, establishes principles and requirements for how the acquirer in a business
combination (i) recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the acquired business,
(ii) recognizes and measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business combination. The
adoption of this guidance did not have a material impact on our condensed consolidated financial
statements.
Item 3 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 December 31, 2009, we had $392.6 million aggregate
principal amount outstanding of term loans due 2013 pursuant to our senior secured credit agreement
and $114.3 million of 9.5% senior subordinated notes due. The term loans 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 2009, 2008 and 2007, interest rate swaps with a
notional amount of $50.0 million, $30.0 million and $25.0 million, respectively, matured. As of
December 31, 2009, we had outstanding interest rate swaps with a notional amount of $140.0 million.
Giving effect to the interest rate swaps, a 0.25% increase in floating rates would increase our
interest expense by $0.4 million annually. See Derivative Instruments and Hedging Activities
under Note 4 to our unaudited condensed 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 December 31, 2009, we had no foreign currency contracts outstanding.
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Item 4 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 the end of the period covered by this quarterly report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, have concluded
that our disclosure controls and procedures were effective as of December 31, 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.
Changes in Internal Control over Financial Reporting
During the three months ended December 31, 2009, there have been no changes in our internal control
over financial reporting that have 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.
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PART II OTHER INFORMATION
Item 1 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 1A Risk Factors
There have been no material changes from the risk factors associated with our business,
financial condition and results of operations as set forth in Part I, Item 1A of our Annual Report
on Form 10-K for the fiscal year ended September 30, 2009.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Submission of Matters to a Vote of Security Holders
None.
Item 5 Other Information
Amendment to Incentive Bonus Plan
On February 5, 2010, the Compensation Committee of our board of directors approved our Amended and
Restated Incentive Bonus Plan (IB Plan), which modified and replaced our pre-existing Incentive
Bonus Plan (the Prior IB Plan). Under the Prior IB Plan, incentive bonuses for some participants
were based entirely on the achievement of company-wide performance targets, while incentive bonuses
for other participants were based (i) in part on the achievement of company-wide performance
targets and (ii) in part on the achievement of applicable business unit performance targets and/or
on the achievement of individual performance measures. The IB Plan now provides that incentive
bonuses for all participants will be based solely on the achievement of company-wide performance
targets and/or applicable business unit performance targets. Additionally, while the Prior IB Plan
provided 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 were
attained and for the fourth quarter based on year-to-date performance, the IB Plan now provides
that incentive bonuses will only be paid if financial performance targets for the entire year are
attained. As provided under the Prior IB Plan, the amount of performance-based incentive bonuses
possible under the IB Plan still range from 0% to 200% of the applicable participants annual
target bonus amount; however under the IB Plan, our Chief Executive Officer and our board of
directors (or the Compensation Committee of our board of directors) may reduce such percentage for
a plan year and/or delay incentive bonuses for a plan year if they determine that such reduction or
delay is financially prudent. In no event will incentive bonuses be paid to any participant under
the IB Plan if the minimum company-wide performance targets have not been attained.
The description of the IB Plan contained herein is qualified in its entirety by the IB Plan, filed
as Exhibit 10.1 to this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Amendment to Executive Severance Plan
On February 5, 2010, the Compensation Committee of our board of directors approved an amended and
restated Activant Executive Severance Plan (the Executive Severance Plan), effective January 1,
2010, which modified and replaced our pre-existing Activant Executive Severance Plan (the Prior
Executive Severance Plan). The changes to the Prior Executive Severance Plan were primarily
intended to ensure that payments under the Executive Severance Plan are not considered deferred
compensation within the meaning of Section 409A of the Internal Revenue Code. The Executive
Severance Plan is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated
herein by reference.
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Amendment to Offer Letter of Kevin V. Roach
On February 8, 2010, we entered into an amendment (the amendment) to our letter agreement (the
Offer Letter) with Mr. Kevin V. Roach, our Executive Vice President and General Manager of
Wholesale Distribution. The amendment terminates our obligation to reimburse up to $200,000 in
relocation related expenses and to provide a tax gross-up payment on taxable relocation
reimbursements, and provides for (i) a lump-sum payment of $200,000 less (A) relocation and lodging
expenses already paid to Mr. Roach pursuant to the Offer Letter (other than shipping costs as
described below) and (B) applicable tax withholdings and (ii) the payment of up to $16,000 (less
amounts reimbursed or paid by the company to date) in certain shipping costs incurred by Mr. Roach
through June 30, 2011. In addition, the amendment provides that if Mr. Roach resigns his
employment within 30 months following his employment start date, he will reimburse the company in
full for all amounts paid to him or on his behalf pursuant to the amendment.
The description of the amendment contained herein is qualified in its entirety by the Amendment to
Offer Letter, dated February 8, 2010, by and between Activant Solutions Inc. and Kevin V. Roach,
filed as Exhibit 10.3 to this Quarterly Report on Form 10-Q, which is incorporated herein by
reference.
Item 6 Exhibits
See Exhibit Index on the page immediately preceding the exhibits for a list of exhibits files
as part of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by
reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the
9th day of February 2010.
ACTIVANT SOLUTIONS INC. |
||||
By: | /s/ KATHLEEN M. CRUSCO | |||
Kathleen M. Crusco | ||||
Senior Vice President and Chief Financial Officer (Principal Financial and Duly Authorized Officer) |
||||
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EXHIBIT INDEX
Incorporated by Reference | ||||||||||||||||||||||||
Date of | ||||||||||||||||||||||||
Exhibit | File | First | Exhibit | Provided | ||||||||||||||||||||
Number | Exhibit Description | Form | Number | Filing | Number | Herewith | ||||||||||||||||||
10.1 | * | Amended and Restated Incentive Bonus Plan |
| | | | X | |||||||||||||||||
10.2 | * | Activant Executive Severance Plan, as |
| | | | X | |||||||||||||||||
amended and restated, effective January
1, 2010 |
||||||||||||||||||||||||
10.3 | * | Amendment to Offer Letter, dated |
| | | | X | |||||||||||||||||
February 8, 2010, by and between
Activant Solutions Inc. and Kevin V.
Roach |
||||||||||||||||||||||||
31.1 | Certification pursuant to Section 302 of |
| | | | X | ||||||||||||||||||
the Sarbanes-Oxley Act of 2002 by Pervez
A. Qureshi |
||||||||||||||||||||||||
31.2 | Certification pursuant to Section 302 of |
| | | | X | ||||||||||||||||||
the Sarbanes-Oxley Act of 2002 by
Kathleen M. Crusco |
||||||||||||||||||||||||
32.1 | ** | Certification pursuant to Section 906 of |
| | | | X | |||||||||||||||||
the Sarbanes-Oxley Act of 2002 by Pervez
A. Qureshi |
||||||||||||||||||||||||
32.2 | ** | Certification pursuant to Section 906 of |
| | | | X | |||||||||||||||||
the Sarbanes-Oxley Act of 2002 by
Kathleen M. Crusco |
* | Represents a management contract or compensatory plan or arrangement. |
|
** | This certification is not deemed filed for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended (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 of 1933, as amended, or the Exchange Act, except to the extent that the
registrant specifically incorporates it by reference. |
37