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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER 333-49389
COOPERATIVE COMPUTING, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2160013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6207 BEE CAVE ROAD 78746
AUSTIN, TEXAS (Zip Code)
(Address of principal executive offices)
(512) 328-2300
(Registrant's telephone number,
including area code)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at May 15, 1999
----- ---------------------------
Common Stock 1,000 shares
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COOPERATIVE COMPUTING, INC.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
Consolidated Balance Sheets as of March 31, 1999 and September 30, 1998 3
Consolidated Statements of Operations for the three months and six months 4
ended March 31, 1999 and March 31, 1998
Consolidated Statements of Cash Flows for the six months ended 5
March 31, 1999 and March 31, 1998
Notes to Consolidated Financial Statements 6
ITEM 2.- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 8
RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
FORWARD-LOOKING STATEMENTS
INFORMATION SET FORTH IN THIS QUARTERLY REPORT ON FORM 10-Q REGARDING EXPECTED
OR POSSIBLE FUTURE EVENTS, INCLUDING STATEMENTS OF THE PLANS AND OBJECTIVES OF
MANAGEMENT FOR FUTURE GROWTH, OPERATIONS, PRODUCTS AND SERVICES AND STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE, IS FORWARD-LOOKING AND SUBJECT TO RISKS
AND UNCERTAINTIES. FOR THOSE STATEMENTS, THE COMPANY CLAIMS THE PROTECTION OF
THE SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS PROVIDED FOR BY SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON
ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY, WHICH, ALTHOUGH
BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE
SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE
GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY
THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE THE
FOLLOWING: (1) INCREASED COMPETITION; (2) RAPID TECHNOLOGICAL CHANGE; (3)
INCREASED COSTS; (4) RISKS ASSOCIATED WITH THE INTRODUCTION OF NEW PRODUCTS AND
PRODUCT UPGRADES AND DEPENDENCE ON PROPRIETARY TECHNOLOGY; (5) LOSS OR
RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (6) INABILITY OF THE COMPANY TO
SUCCESSFULLY INTEGRATE THE OLD CCI AND TRIAD BUSINESSES OR BUSINESSES ACQUIRED
IN THE FUTURE AND TO REALIZE ANTICIPATED REVENUE AND COST SAVINGS OPPORTUNITIES;
(7) INCREASES IN THE COMPANY'S COST OF BORROWINGS OR UNAVAILABILITY OF
ADDITIONAL DEBT OR EQUITY CAPITAL; AND (8) CHANGES IN GENERAL ECONOMIC
CONDITIONS IN THE MARKETS IN WHICH THE COMPANY MAY, FROM TIME TO TIME, COMPETE.
MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND ITS
MANAGEMENT. IN ADDITION, OTHER FACTORS THAT COULD AFFECT THE FUTURE RESULTS OF
THE COMPANY AND COULD CAUSE THOSE RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN THE FORWARD-LOOKING STATEMENTS ARE DISCUSSED AT GREATER LENGTH
UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" AND APPEAR ELSEWHERE IN THIS QUARTERLY REPORT. THESE RISKS,
UNCERTAINTIES AND OTHER FACTORS SHOULD NOT BE CONSTRUED AS EXHAUSTIVE, AND THE
COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION TO UPDATE,
ANY FORWARD-LOOKING STATEMENTS TO REFLECT OCCURRENCES OR UNANTICIPATED EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
March 31, September 30,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 1,159
Trade accounts receivable, net 40,305 37,774
Inventories 6,880 6,005
Investment in leases 2,762 2,792
Deferred income taxes 1,818 1,818
Prepaid expenses and other current assets 9,930 7,742
------------ ------------
Total current assets 61,695 57,290
Service parts 4,224 3,605
Property and equipment, net 12,369 12,528
Long-term investment in leases 18,024 14,771
Capitalized computer software costs, net 20,574 25,174
Databases, net 15,536 16,824
Deferred financing costs 7,849 6,310
Other intangibles 145,004 153,689
Other assets 9,847 10,658
------------ ------------
Total assets $ 295,122 $ 300,849
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,578 $ 16,249
Payroll related accruals 8,753 9,362
Deferred revenue 8,884 6,269
Current portion of long-term debt 3,382 6,229
Accrued expenses and other current liabilities 13,293 13,080
------------ ------------
Total current liabilities 47,890 51,189
Long-term debt 195,363 177,089
Deferred income taxes 31,499 37,487
Other liabilities 9,071 9,721
------------ ------------
Total liabilities 283,823 275,486
Stockholders' equity:
Common Stock, par value $.000125, authorized 50,000,000
shares, issued and outstanding 35,220,000 4 4
Additional paid-in capital 88,994 88,994
Retained deficit (77,699) (63,635)
------------ ------------
Total stockholders' equity: 11,299 25,363
------------ ------------
Total liabilities and stockholders' equity $ 295,122 $ 300,849
============ ============
See accompanying Notes to Consolidated Financial Statements
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COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues:
Systems $ 20,595 $ 16,977 $ 38,810 $ 34,463
Customer support and information services 37,070 33,718 73,712 66,101
Finance 893 1,804 1,784 3,850
------------ ------------ ------------ ------------
Total revenues 58,558 52,499 114,306 104,414
Cost of revenues:
Systems 13,548 12,203 26,101 24,489
Services and finance 24,474 21,609 47,166 42,092
------------ ------------ ------------ ------------
Total cost of revenues 38,022 33,812 73,267 66,581
------------ ------------ ------------ ------------
Gross margin 20,536 18,687 41,039 37,833
Operating expenses:
Sales and marketing 13,005 11,448 25,673 23,257
Product development 3,697 3,842 7,429 8,073
General and administrative 9,546 9,014 19,067 18,183
------------ ------------ ------------ ------------
Total operating expenses 26,248 24,304 52,169 49,513
Operating loss (5,712) (5,617) (11,130) (11,680)
Interest expense (4,459) (3,830) (8,897) (7,350)
Other income (expense), net 366 359 123 254
------------ ------------ ------------ ------------
Loss before income taxes and extraordinary charge (9,805) (9,088) (19,904) (18,776)
Income tax benefit (2,381) (2,761) (5,442) (5,659)
------------ ------------ ------------ ------------
Loss before extraordinary charge -- (6,327) -- (13,117)
Extraordinary charge, net of tax of $1,969 -- 3,017 -- 3,017
------------ ------------ ------------ ------------
Net loss $ (7,424) $ (9,344) $ (14,462) $ (16,134)
============ ============ ============ ============
See accompanying Notes to Consolidated Financial Statements
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COOPERATIVE COMPUTING HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Six Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
OPERATING ACTIVITIES
Net loss $ (14,462) $ (16,134)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 4,501 2,931
Amortization 22,225 22,054
Loss on write-off of debt issuance costs -- 3,017
Other, net 278 (10)
Changes in assets and liabilities, net of effects of businesses
acquired:
Trade accounts receivable (2,531) (3,917)
Inventories (3,452) (7,104)
Investment in leases (3,223) 352
Deferred income taxes (5,989) (7,926)
Prepaid expenses and other assets (1,742) (1,178)
Accounts payable (2,671) 4,193
Deferred revenue 2,615 585
Accrued expenses and other current liabilities (1,046) (2,164)
------------ ------------
Net cash used in operating activities (5,497) (5,301)
INVESTING ACTIVITIES
Purchase of property and equipment (1,788) (1,318)
Capitalized computer software costs and databases (6,859) (6,328)
Equity in earnings (loss) of investments 104 131
Purchase of service parts (497) (242)
Acquisitions of businesses, net of cash acquired (375) (9,000)
Other, net 214 (1,021)
------------ ------------
Net cash used in investing activities (9,201) (17,778)
FINANCING ACTIVITIES
Proceeds from bond issuance -- 100,000
Proceeds from credit facility 72,600 148,350
Payment on debt facilities (57,130) (220,850)
Debt issuance costs (1,931) (5,801)
Other -- (251)
------------ ------------
Net cash provided by financing activities 13,539 21,448
Net decrease in cash and cash equivalents (1,159) (1,631)
Cash and cash equivalents, beginning of period 1,159 1,633
------------ ------------
Cash and cash equivalents, end of period $ 0 $ 2
============ ============
Supplemental disclosures of cash flow information
Cash paid (received) during the period for:
Interest $ 8,424 $ 5,794
============ ============
Income taxes $ 241 $ 188
============ ============
Non Cash Transactions:
Transfers from inventory to fixed assets $ 1,457 $ 2,040
============ ============
Transfers from inventory to spare parts $ 1,017 $ 590
============ ============
See accompanying Notes to Consolidated Financial Statements
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COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Cooperative Computing Holding Company, Inc. ("Holding") have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months and six months ended March 31,
1999 may not be indicative of the results for the full fiscal year ending
September 30, 1999. Holding has no assets or liabilities other than its
investment in its wholly owned subsidiary, Cooperative Computing, Inc. (the
"Company"); accordingly, these consolidated financial statements represent the
operations of the Company and its subsidiaries.
Reclassification
Certain prior period amounts have been reclassified to correspond with
current period classification.
2. CHANGES IN ACCOUNTING PRINCIPLES
On October 1, 1998, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position 97-2 ("SOP 97-2"),
"Software Revenue Recognition", and SOP 98-4, which was effective for the
transactions that the Company entered into on and after that date. In accordance
with SOP 97-2, prior period financial statements have not been restated to
reflect the change in accounting principle. The adoption of SOP 97-2 resulted in
the deferral of approximately $3.5 million of revenues ($1.8 million of gross
margin) for the six months ended March 31, 1999.
Effective December 15, 1998, AICPA issued SOP 98-9, Modification of SOP
97-2, "Software Revenue Recognition", With Respect to Certain Transactions. SOP
98-9 amends SOP 97-2 and 98-4, extending the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning
on or before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company does not believe that the adoption of SOP 98-9 will have a material
effect on the Company's financial condition or results of operations.
As of October 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components, however, the adoption of
this Statement had no impact on the Company's net loss or stockholders' equity.
Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in stockholders' equity, to be
included in comprehensive loss. During the first six months of 1999 and 1998,
total comprehensive loss was as follows (in thousands):
Six Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
Net loss $ (14,462) $ (16,134)
Foreign currency translation adjustment 398 (80)
------------ ------------
Comprehensive loss $ (14,064) $ (16,214)
============ ============
For the fiscal year ending September 30, 1999, the Company must adopt SFAS
131, "Disclosures about Segments of an Enterprise and Related Information". This
statement establishes information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company has not yet
determined the impact, if any, of adopting this standard.
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3. SALE OF LEASE RECEIVABLES
Activity in the following servicing liability accounts (recorded in other
liabilities in the Company's balance sheet) was as follows (in thousands):
LEASE SERVICING RECOURSE
OBLIGATION OBLIGATION
------------ ------------
Balance at September 30, 1998 ......................... $ 1,781 $ 5,447
Newly-created liabilities ............................. 348 2,617
Charges and lease write-offs .......................... (529) (2,141)
------------ ------------
Balance at March 31, 1999 ............................. $ 1,600 $ 5,923
============ ============
4. LONG TERM DEBT
On February 12, 1999, the Company amended its existing $100 million senior
secured credit facilities by adding a new $30 million senior secured term loan B
and prepaying $20 million of the Company's existing $50 million senior secured
term loan A. The Company also paid down approximately $8.1 million of the
outstanding amounts under the existing $50 million senior secured revolving
credit facility. After giving effect to the amendment, the Company now has $110
million senior secured credit facilities, consisting of the new $30 million term
loan B, the remaining $30 million term loan A, and the existing $50 million
revolving credit facility. Other modifications included revisions to the
financial covenants and an increased interest rate.
5. INCOME TAXES
The Company recorded an income tax benefit for the six months ended March
31, 1999 at an effective rate of approximately 27%, which is based on the
Company's anticipated results for the full fiscal year. The amount of permanent
differences, which impact the effective tax rate, are approximately the same for
each of the periods presented.
The Company's benefit for income taxes differs from the amount computed by
applying the statutory rate to loss before income taxes due to the impact of
permanent differences consisting primarily of goodwill amortization.
6. SUBSEQUENT EVENT
On May 17, 1999, Holding's majority shareholder, Hicks Muse Tate & Furst,
Equity Fund III, L.P., provided to Holding a commitment to invest $25 million
for the purchase of a new Class A Common Stock of Holding. The Class A Common
Stock would be senior to Holding's existing common stock upon liquidation, but
would vote with the existing common stock as a class. The liquidation value of
the Class A Common Stock would increase over time at a contracted rate. The
holders thereof would have the right to put to Holding, and Holding would have
the right to call, the Class A Common Stock at any time at the liquidation value
thereof, subject to the applicable restrictions under the Company's credit
agreement and indenture. The consummation of this transaction is subject to the
amendment of the Company's credit agreement to permit the consummation of the
contemplated transaction (including the use of net proceeds from the sale of the
Class A Common Stock for working capital purposes, rather than to repay bank
debt) and to alter certain financial maintenance covenants.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of the financial condition and results of operations
of Cooperative Computing, Inc. (the "Company") should be read in conjunction
with the historical consolidated financial statements and notes thereto
included elsewhere herein.
The adoption of SOP 97-2 on October 1, 1998 (see Note 2 of Notes to Consolidated
Financial Statements) resulted in the deferral of $0.7 million in customer
services revenues for the three months ended March 31, 1999 and the deferral of
$2.3 million in systems revenues and $0.9 million in customer services revenues
for the six months ended March 31, 1999. Gross profit was reduced by $0.3
million and $1.6 million for the three months and six months ended March 31,
1999, respectively. The future impact of SOP 97-2 is expected to be minimal,
since any deferrals in future quarters are anticipated to be offset by the
recognition of prior period deferrals.
REVENUES
Revenues for the three months ended March 31, 1999 were $58.6 million, compared
to $52.5 million for the three months ended March 31, 1998, an increase of $6.1
million, or 12%. For the six months ended March 31, 1999, revenues increased
$9.9 million, or 9%, to $114.3 million as compared to the corresponding period
in 1998. In March 1998, the Company acquired certain assets of the ADP Claims
Solutions Group (the "ARISB acquisition"), which marketed systems and services
to the automotive recycling industry. The ARISB acquisition accounted for $1.8
million and $4.6 million of the increase in revenues for the three months and
six months ended March 31, 1999, respectively, over the comparable periods in
1998 as a result of the acquired operations being included for only one month in
1998.
Systems revenues for the three months ended March 31, 1999 increased $3.6
million, or 21%, to $20.6 million as compared to $17.0 million for the three
months ended March 31, 1998. For the six months ended March 31, 1999, systems
revenues increased $4.3 million, or 13%, to $38.8 million as compared to $34.5
million for the six months ended March 31, 1998. For the three months ended
March 31, 1998, automotive systems revenues increased $2.6 million, or 31%, to
$11.1 million, and hardlines systems increased $1.0 million, or 11%, to $9.5
million as compared to the corresponding period in 1998. For the six months
ended March 31, 1999, automotive systems revenues increased $3.7 million, or
21%, to $21.5 million and hardlines systems revenues increased $0.7 million, or
4%, to $17.3 million as compared to the corresponding period in 1998. The growth
in automotive systems revenues is due to increases in the sales of systems to
parts stores and service dealer customers, while the growth in hardlines systems
revenues is primarily due to increases in systems sales to new customers, which
were partially offset by decreases in the sales of add-ons and upgrades to the
existing customer base.
Revenues from customer support and information services increased $3.4 million,
or 10%, to $37.1 million for the three months ended March 31, 1999, as compared
to $33.7 million for the three months ended March 31, 1998. For the six month
ended March 31, 1999, revenues from customer support and information services
increased $7.6 million, or 12%, to $73.7 million as compared to the six months
ended March 31, 1998. Recurring services revenues from the ARISB acquisition
accounted for $1.8 million and $4.6 million of the increase for the three months
and six months ended March 31, 1999, respectively, over the comparable periods
in 1998. Information services revenues accounted for $1.9 million and $2.8
million of the for the three months and six months ended March 31, 1999,
respectively, over the comparable periods in 1998. The increase in information
services revenues is primarily due to growth in both the automotive and
hardlines installed base of customers. Revenues from customer support operations
have remained relatively constant.
Revenues from financing activities decreased $0.9 million to $0.9 million for
the three months ended March 31, 1999, as compared to the three months ended
March 31, 1998. For the six months ended March 31, 1999, revenues from financing
activities decreased $2.0 million, or 54%, to $1.8 million as compared to the
corresponding period in 1998. The decrease in financing revenues was primarily
due to the decrease in the amount of leases sold during the period discussed
below.
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COST OF REVENUES
Cost of revenues were $38.0 million for the three months ended March 31, 1999,
compared to $33.8 million for the three months ended March 31, 1998, an increase
of $4.2 million, or 12%. For the six months ended March 31, 1999, cost of
revenues increased $6.7 million, or 10%, to $73.3 million as compared to the
corresponding period in 1998. As a percentage of revenues, cost of revenues were
65% and 64% for the three months and six months ended March 31, 1999,
respectively, which represented no change from the comparable periods in 1998.
Cost of systems revenues for the three months ended March 31, 1999 increased
$1.3 million, or 11%, to $13.5 million as compared to $12.2 million for the
three months ended March 31, 1998. For the six months ended March 31, 1999, cost
of systems revenues increased $1.6 million, or 7%, as compared to the six months
ended March 31, 1998. This increase was due to the increase in revenues,
partially offset by a reduction in costs as a percentage of revenues due to the
implementation of SOP 97-2.
Cost of revenues for services and finance for the three months ended March 31,
1999 increased $2.9 million, or 13%, to $24.5 million, as compared to $21.6
million for the three months ended March 31, 1998. For the six months ended
March 31, 1999, cost of revenues for services and finance increased $5.1
million, or 12%, to $47.2 million, as compared to the corresponding period in
1998. The ARISB acquisition accounted for $0.9 million and $2.8 million of the
increase for the three months and six months ended March 31, 1999, respectively,
over the corresponding periods in 1998. As a percentage of revenues, cost of
revenues for services and finance increased due to the implementation of SOP
97-2 and the decrease in revenues from financing activities, which carry little
or no cost of revenues. This increase was partially offset by improvements in
cost of revenue as a percentage of revenue for information services primarily
due to the low incremental costs associated with the increased revenues.
EXPENSES AND OTHER INCOME
Operating expenses for the three months ended March 31, 1999 were $26.2 million,
an increase of $1.9 million, or 8%, as compared to $24.3 million for the three
months ended March 31, 1998. For the six months ended March 31, 1999, operating
expenses increased $2.7 million, or 5%, as compared to the corresponding period
in 1998. The inclusion of operations from the ARISB acquisition increased
operating expenses by $0.4 million and $0.9 million for the three months and six
months ended March 31, 1999, respectively, over the comparable periods in 1998.
Product development expenses for the three months and six months ended March 31,
1999 were $3.7 million and $7.4 million, respectively, compared to $3.8 million
and $8.1 million for the corresponding periods of fiscal 1998. Sales and
marketing expenses for the three months and six months ended March 31, 1999 were
$13.0 million and $25.7 million, respectively, compared to $11.4 million and
$23.3 million for the corresponding periods of fiscal 1998. The increase in
sales and marketing expenses is due to increased headcount in both the
automotive and hardlines organizations and the inclusion of expenses associated
with the ARISB acquisition. General and administrative expenses for the three
months and six months ended March 31, 1999 were $9.6 million and $19.1 million,
respectively, compared to $9.0 million and $18.2 million for the corresponding
periods of fiscal 1998. The increase in general and administrative expenses
primarily is due to investments in staffing, infrastructure, and communications
to support internal information systems and the additional expenses associated
with the ARISB acquisition.
Interest expense for the three months and six months ended March 31, 1999 was
$4.5 million and $8.9 million, respectively, an increase of $0.6 million and
$1.5 million over the comparable periods in fiscal 1998 due to increased debt,
primarily associated with the growth in working capital and the ARISB
acquisition. Other income for the three months and six months ended March 31,
1999 were $0.4 million and $0.1 million, respectively, no change and a decrease
of $0.1 million for the comparable periods in 1998.
The Company recorded a benefit from income taxes of $2.4 million and $5.4
million for the three months and six months ended March 31, 1999, respectively,
compared to a benefit of $2.8 million and $5.7 million for the corresponding
periods in fiscal 1998. The effective tax rate used to record the benefit for
income taxes for the three months and six months ended March 31, 1999 is based
on the Company's anticipated results for the full fiscal year. The amount of
permanent differences, which impact the effective tax rate, were approximately
the same for each of the periods presented.
As a result of the above factors, the Company experienced a net loss of $7.4
million, a decrease of $1.9 million, or 22%, for the three months ended March
31, 1999, compared to a net loss of $9.3 million for the three months ended
March 31, 1998. For the six months ended March 31, 1999, the Company experienced
a net loss of $14.5 million, a decrease of $1.7 million from the comparable
period in fiscal 1998. The net loss for the three months and six months ended
March 31, 1998 includes an extraordinary charge of $3.0 million, net of a tax
benefit of $2.0 million, due to the write-off of debt issuance costs on February
10, 1998 associated with the refinancing of the Company's debt.
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had $198.7 million in outstanding indebtedness,
an increase of $8.0 million from December 31, 1998 and an increase of $15.4
million from September 30, 1998.
For the six months ended March 31, 1999, operating activities used approximately
$5.5 million of cash. Cash provided from operations was reduced by a $3.2
million increase in investment in leases, a $2.5 million increase in accounts
receivable, a $2.7 million reduction in accounts payable, and a $3.5 million
increase in inventory. The increase in accounts receivable and investments in
leases is primarily due to a combination of the increase in automotive systems
sales which began during the fourth quarter of fiscal 1998 and the disruptions
which occurred as the Company consolidated the billing, collections and customer
relations activities to the Company's headquarters in Austin, Texas. The Company
periodically liquidates its lease portfolio through lease lending arrangements
with banks and other lease lending institutions. The $3.2 million increase in
investment in leases is net of $12.7 million in leases liquidated during the six
months ended March 31, 1999.
Net cash used in investing activities totaled $10.7 million for the six months
ended March 31, 1999. Net cash used in investing activities primarily represents
capital expenditures. For the six months ended March 31, 1999, the Company's
capital expenditures were $12.0 million, which includes approximately $6.9
million in capitalized computer software costs and databases.
Net cash provided by financing activities totaled $13.5 million for the six
months ended March 31, 1999, which reflects additional borrowings under the
Company's amended credit agreement, partially offset by certain debt repayments
and debt issuance costs. On February 12, 1999, the Company amended its existing
$100 million senior secured credit facility by adding a new $30 million senior
secured term loan B, which allowed the Company to prepay $20 million of the
existing $50 million senior secured term loan ("term loan A"). After paying
approximately $1.9 million in fees and expenses related to securing the
amendment and new issuance of debt, the Company used approximately $8.1 million
to pay down outstanding amounts under the existing $50 million revolving credit
facility. The Company estimates that, based on expected debt levels and
assuming the sale of Class A Common Stock discussed below, the amended senior
secured credit facilities will require annual interest payments of approximately
$6.5 million over the next 12 months. Additionally, the Company pays semi-annual
interest payments of $4.5 million on $100.0 million of 9% Senior Subordinated
Notes due 2008. The revolving credit facility allows the Company to borrow up to
$50 million, of which approximately $38.4 million was outstanding as of March
31, 1999.
Repayment of the $30 million term loan A begins on December 31, 1999, starting
at $1.5 million per quarter and increasing by $0.5 million per quarter each
fiscal year. All borrowings under the term loan A are scheduled to be repaid by
March 31, 2003. Repayment of the $30 million term loan B begins on December 31,
1999 at an amount of $0.1 million per quarter, which remains constant until a
final payment of $28.3 million due on March 31, 2004.
The senior credit facilities impose certain restrictions on the Company, the
most significant of which include limitations on additional indebtedness, liens,
guarantees, payment or declaration of dividends, sale of assets, investments,
capital expenditures and transactions with affiliates. The Company must also
meet certain quarterly tests relating to certain financial covenants and ratios.
As of March 31, 1999, the Company was in compliance with the financial tests
required by the senior credit facilities.
The Company's ability to service its debt obligations is subject to future
economic conditions and to financial, business and other factors, many of which
are beyond the Company's control.
A portion of the Company's debt bears interest at floating rates, therefore,
its financial condition is and will be affected by changes in prevailing rates.
The Company believes that its short term liquidity has been negatively impacted
by several factors, the principal ones of which, together with the Company's
responses thereto, are described below:
(i) The Company has experienced substantial growth in the sales
of its automotive store systems, many of which are sold through the
Company's leasing programs. This higher level of system sales outpaced
the Company's system installation and training resources, thereby
extending the typical time period from the sale of a system to the
completion of the installation of, and customer training on, the
system. As a result, the Company has experienced an increase in its
accounts receivable and investment in leases because many customers
withhold payment or acceptance of their lease until the installation
and implementation is complete. In response, the Company has nearly
doubled the number of automotive implementation specialists during the
quarter ended March 31, 1999 in order to reduce the time period for
installation and training and to continue to pursue this growth
opportunity in its business. However, the Company anticipates that it
will take at least two quarters to reduce the time period for
installation and training to its historical level. Short term liquidity
has been further impacted by the fact that the increase in automotive
implementation specialists resulted in an immediate increase in
operating expenses, while it will take time for their efforts to
generate cash.
(ii) The growth in sales of the Company's automotive store
systems was accompanied by the withdrawal of and/or curtailment of
lease lines of credit by certain of the Company's lease lenders as a
result of the consolidation of various lease lenders and the resulting
re-balancing of their lease lending portfolios and expressed caution
over increased leverage at the Company. This contributed to a higher
investment in leases as the Company's lease borrowings declined as
compared to historical levels. The Company is in discussions with its
existing lease funding sources, as well as with certain potential new
lease funding sources. While the Company believes that it will be able
to maintain its existing lease lending arrangements and secure new
lease funding relationships, there can be no assurance that the Company
will be able to do so. If the Company cannot return lease funding to
its historical levels, the Company may be required to seek additional
financing elsewhere. There can be no assurance that such additional
funding will be available.
(iii) The Company has experienced an increase in accounts
receivable related to systems and procedural problems that arose from
the consolidation of its billing and collection functions to Austin.
The Company has identified what it believes are the most important
areas of focus and has developed an action plan and timetable to solve
tactical issues and challenges it currently faces in this area.
(iv) The Company's expenditures to meet Year 2000 issues have
limited its ability to reduce its overall capital and product
development expenditures in response to its financial situation.
As a result of the negative impact of the foregoing factors on the Company's
short term liquidity, the Company believes that it may encounter a deficiency in
short term liquidity and, accordingly, that it may need additional funds as
early as the middle of June 1999. This belief is based on numerous estimates and
assumptions, including an assumption that the Company's initiatives described
above are not successful.
In order to address this potential deficiency in short term liquidity and to
provide additional working capital to fund continued growth in the automotive
store system sales, the Company's parent corporation, Cooperative Computing
Holding Company, Inc. ("Holding"), has secured a financing commitment (the
"Financing Commitment") from Hicks, Muse, Tate & Furst Equity Fund III, L.P.
("Hicks Muse"), which is the majority stockholder of Holding. Under the terms of
the Financing Commitment, Hicks Muse has agreed to purchase 25 million shares of
a new class of common stock of Holding ("Class A Common Stock") for an aggregate
purchase price of $25 million. The net proceeds from the issuance of the Class A
Common Stock will be contributed by Holding to the capital of the Company for
use for working capital purposes. Holding will have a right to call the Class A
Common Stock, and the holders thereof will have the right to put the Class A
Common Stock to Holding, at any time at the liquidation value thereof, subject
to the applicable restrictions under the Company's credit agreement and
indenture. The liquidation value of the Class A Common Stock will increase over
time at a contracted rate.
The Company believes that the net proceeds from the sale of the Class A Common
Stock as contemplated by the Financing Commitment will provide sufficient funds
to address the Company's potential short term liquidity deficiency, as well as
provide additional working capital to fund continued growth in automotive
systems sales. However, the consummation of the transaction contemplated by the
Financing Commitment is subject to certain conditions, including the following:
(i) the negotiation, execution and delivery of definitive documents; and (ii)
the amendment of the Company's credit agreement to permit the consummation the
contemplated transaction (including the use of the net proceeds from the sale of
the Class A Common Stock for working capital purposes, rather than to repay bank
debt) and to alter certain financial maintenance covenants. While the Company
believes that the conditions to the consummation of the transaction contemplated
by the Financing Commitment can be met, and that the Company's initiatives
described above can be successfully implemented, on a timely basis, there can be
no assurance that such will be the case. If those conditions are not timely met
and those initiatives are not successfully implemented on timely basis, the
Company will be forced to immediately pursue one or more alternative strategies,
such as restructuring or refinancing its indebtedness, selling assets, reducing
or delaying capital expenditures or seeking additional equity capital. There can
be no assurance that any of these strategies could be effected on a timely basis
or on satisfactory terms, if at all.
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IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed an assessment of the Year 2000 status of products that
it sells or has installed for customers. The majority of the Company's products
have been reprogrammed over the past year to make them Year 2000 ready. This
programming was completed by December 31, 1998 and has been tested by the
Company. Product releases with the Year 2000 corrections were made available to
customers during the first quarter of 1999 and had been distributed to all
customers with systems that are being made Year 2000 ready by the end of the
second quarter of 1999.
Certain older products that the Company was no longer marketing were determined
not to be upgradable for Year 2000 issues, due either to third party software
vendor constraints or hardware incompatibility. This affects a small number of
the Company's customers. The customers were notified of the situation in writing
during 1998. The Company has converted many of these customers to newer Year
2000 ready products and continues to work with the remaining customers to work
out viable options.
While there can be no assurance, based on currently available information the
Company does not believe that the Year 2000 issue as it relates to the
Company's products will have a material adverse impact on the Company's
business, financial condition or results of operations.
The Company has completed its assessment of its internal systems and has
determined that it was required to modify or replace significant portions of its
software and hardware so that its internal computer systems will function
properly with respect to dates in the year 2000 and thereafter. The Company has
also had formal communications with all of its significant suppliers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remediate their own Year 2000 issues. Some third
party software vendors have notified the Company that their products will not be
compliant. In those cases, the Company has purchased new versions of software or
hardware or has replaced the third party software or hardware completely. The
Company is utilizing internal resources to reprogram or replace and test the
systems for Year 2000 modifications. The Company has completed a portion of the
modifications to its internal systems and expects to have all modifications
completed by September 1999, which is prior to any anticipated impact on its
operating systems.
The Company has not established a separate budget for making either its
products or its internal systems Year 2000 ready. Rather, these expenditures
are part of the Company's regular capital and operating budgets. These
expenditures have not been tracked separately. The Company is in the process of
preparing estimates of its Year 2000 related expenditures; however, the Company
does not believe that they can be established with any degree of accuracy.
The Company believes that with modifications to existing systems and conversions
to new systems, the Year 2000 issue will not pose significant operational
problems for its internal computer systems, the cost of which is not expected to
be material in relation to the Company's operations and historical capital
spending levels. If such modifications and conversions are not successful,
however, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company. The Company intends to engage a third
party expert to verify the results of the Company's own tests of its products
and its internal systems.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures
About Market Risk, in the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 --Second Amendment to Credit Agreement, dated as of February 12,
1999, among the Registrant, Cooperative Computing Holding
Company, Inc., the several banks and other financial
institutions parties thereto, and The Chase Manhattan Bank.
10.2 --Purchase Amendment, dated as of February 1, 1999, between
Triad Systems Financial Corporation and Mellon US Leasing, A
Division of Mellon Leasing Corporation.
27.1 --Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the three months ended March
31, 1999.
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SIGNATURES
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 hereunto duly authorized.
COOPERATIVE COMPUTING, INC.
Dated: May 17, 1999 By: /s/ MATTHEW HALE
---------------------------
Matthew Hale
Vice President of Finance and Chief
Financial Officer
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
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10.1 Second Amendment to Credit Agreement
10.2 Purchase Agreement
27.1 Financial Data Schedule