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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 June 30, 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 August 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 June 30, 1999 and September 30, 1998 3
Consolidated Statements of Operations for the three months and nine months 4
ended June 30, 1999 and June 30, 1998
Consolidated Statements of Cash Flows for the nine months ended 5
June 30, 1999 and June 30, 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 12
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
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 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY
MANAGEMENT OF THE COMPANY, WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE
INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH
ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES
OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS
THAT MAY CAUSE SUCH DIFFERENCES INCLUDE THE FOLLOWING: (1) INCREASED
COMPETITION; (2) RAPID TECHNOLOGICAL CHANGE; (3) INCREASED COSTS; (4) RISKS
ASSOCIATED WITH THE INTRODUCTION OF NEW PRODUCTS AND PRODUCT UPGRADES AND
DEPENDENCE ON PROPRIETARY TECHNOLOGY; (5) LOSS OR RETIREMENT OF KEY MEMBERS OF
MANAGEMENT; (6) INABILITY OF THE COMPANY TO SUCCESSFULLY INTEGRATE BUSINESSES
ACQUIRED IN THE FUTURE AND TO REALIZE ANTICIPATED REVENUE AND COST SAVINGS
OPPORTUNITIES; (7) INCREASES IN THE COMPANY'S COST OF BORROWINGS OR
UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; AND (8) CHANGES IN GENERAL
ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE COMPANY MAY, FROM TIME TO TIME,
COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND ITS
MANAGEMENT. IN ADDITION, OTHER FACTORS THAT COULD AFFECT THE FUTURE RESULTS OF
THE COMPANY AND COULD CAUSE THOSE RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN THE FORWARD-LOOKING STATEMENTS ARE DISCUSSED AT GREATER LENGTH
UNDER "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)
June 30, September 30,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 343 $ 1,159
Trade accounts receivable, net 43,888 37,774
Inventories 6,833 6,005
Investment in leases 4,183 2,792
Deferred income taxes 1,818 1,818
Prepaid expenses and other current assets 9,793 7,742
------------ ------------
Total current assets 66,858 57,290
Service parts 4,381 3,605
Property and equipment, net 12,121 12,528
Long-term investment in leases 19,727 14,771
Capitalized computer software costs, net 18,016 25,174
Databases, net 14,759 16,824
Deferred financing costs 7,588 6,310
Other intangibles 141,419 153,689
Other assets 9,613 10,658
------------ ------------
Total assets $ 294,482 $ 300,849
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,490 $ 16,249
Payroll related accruals 11,450 9,362
Deferred revenue 9,357 6,269
Current portion of long-term debt 4,976 6,229
Accrued expenses and other current liabilities 15,619 13,080
------------ ------------
Total current liabilities 55,892 51,189
Long-term debt 173,668 177,089
Deferred income taxes 28,811 37,487
Other liabilities 7,685 9,721
------------ ------------
Total liabilities 266,056 275,486
Redeemable Class A Common Stock, par value $.000125,
25,000,000 shares authorized, issued and outstanding;
aggregate liquidation preference of $815,068; net of
issuance costs of $1,059,375 24,756 --
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 (85,328) (63,635)
------------ ------------
Total stockholders' equity: 3,670 25,363
------------ ------------
Total liabilities and stockholders' equity $ 294,482 $ 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 Month Ended Nine Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Systems $ 24,204 $ 20,642 $ 63,014 $ 55,105
Customer support and information services 37,526 36,699 111,238 102,800
Finance 463 1,909 2,247 5,759
--------- --------- --------- ---------
Total revenues 62,193 59,250 176,499 163,664
Cost of revenues:
Systems 15,297 13,802 41,398 38,025
Services and finance 22,765 23,594 69,931 65,952
--------- --------- --------- ---------
Total cost of revenues 38,062 37,396 111,329 103,977
--------- --------- --------- ---------
Gross margin 24,131 21,854 65,170 59,687
Operating expenses:
Sales and marketing 14,771 12,276 40,444 35,533
Product development 3,643 3,684 11,072 11,757
General and administrative 10,221 10,347 29,288 28,530
--------- --------- --------- ---------
Total operating expenses 28,635 26,307 80,804 75,820
Operating loss (4,504) (4,453) (15,634) (16,133)
Interest expense (4,599) (4,108) (13,496) (11,458)
Other income (expense), net 138 81 261 335
--------- --------- --------- ---------
Loss before income taxes and extraordinary charge (8,965) (8,480) (28,869) (27,256)
Income tax benefit (2,613) (2,323) (8,055) (7,982)
--------- --------- --------- ---------
Loss before extraordinary charge (6,352) (6,157) (20,814) (19,274)
Extraordinary charge, net of tax of $1,969 -- -- -- 3,017
--------- --------- --------- ---------
Net loss $ (6,352) $ (6,157) $ (20,814) $ (22,291)
========= ========= ========= =========
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)
Nine Months
Ended
June 30, 1999 June 30, 1998
------------- -------------
OPERATING ACTIVITIES
Net loss $ (20,814) $ (22,291)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 6,613 5,171
Amortization 33,046 33,183
Loss on write-off of debt issuance costs -- 3,017
Other, net (239) 29
Changes in assets and liabilities, net of effects
of businesses acquired:
Trade accounts receivable (6,113) (6,592)
Inventories (4,203) (6,414)
Investment in leases (6,346) 2,282
Deferred income taxes (8,676) (10,482)
Prepaid expenses and other assets (1,448) 470
Accounts payable (1,759) 5,333
Deferred revenue 3,088 1,284
Accrued expenses and other current liabilities 2,591 (1,489)
--------- ---------
Net cash provided by (used in) operating activities (4,260) 3,501
INVESTING ACTIVITIES
Purchase of property and equipment (2,720) (2,347)
Capitalized computer software costs and databases (9,986) (9,986)
Equity in earnings (loss) of investments 51 131
Purchase of service parts (761) (390)
Acquisitions of businesses, net of cash acquired (375) (9,906)
Other, net (124) (1,391)
--------- ---------
Net cash used in investing activities (13,915) (23,889)
FINANCING ACTIVITIES
Issuance of Class A Common Stock 23,941 --
Proceeds from bond issuance -- 100,000
Proceeds from credit facility 100,050 207,250
Payment on debt facilities (104,654) (279,036)
Debt issuance costs (1,978) (6,082)
Other -- (251)
--------- ---------
Net cash provided by financing activities 17,359 21,881
Net increase (decrease) in cash and cash equivalents (816) 1,493
Cash and cash equivalents, beginning of period 1,159 1,633
--------- ---------
Cash and cash equivalents, end of period $ 343 $ 3,126
========= =========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 10,564 $ 7,553
========= =========
Income taxes $ 441 $ 188
========= =========
Non Cash Transactions:
Transfers from inventory to fixed assets $ 1,830 $ 2,427
========= =========
Transfers from inventory to spare parts $ 1,545 $ 758
========= =========
Accretion of redeemable Class A Common Stock
liquidation preference $ 815 $ 0
========= =========
See accompanying Notes to Consolidated Financial Statements
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COOPERATIVE COMPUTING HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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. Holding was incorporated in Delaware in May 1999 and is the successor
to a Texas company that was incorporated in May 1976. Holding exchanged
35,220,000 shares of it's common stock, par value $.000125 per share, for
35,220,000 shares of its successor's common stock, par value $.000125 per
share. Operating results for the three months and nine months ended June 30,
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.
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 $3.7 million of revenues ($1.6
million of gross margin) for the nine months ended June 30, 1999.
Effective December 15, 1998, the 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 nine months of 1999 and 1998,
total comprehensive loss was as follows (in thousands):
Nine Months Ended
June 30,
----------------------
1999 1998
-------- --------
Net loss $(20,814) $(22,291)
Foreign currency translation adjustment (65) (79)
-------- --------
Comprehensive loss $(20,879) $(22,370)
======== ========
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 ......... 472 4,354
Charges and lease write-offs ...... (770) (4,407)
------- -------
Balance at June 30, 1999 .......... $ 1,483 $ 5,394
======= =======
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 amounts outstanding under its 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 nine months ended
June 30, 1999 at an effective rate of approximately 28%, which is based on the
Company's anticipated results for the full fiscal year. The amount of permanent
differences that 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, which consist primarily of goodwill
amortization.
6. STOCK ISSUANCE AND RELATED PARTY TRANSACTION
On May 27, 1999, Holding issued 25,000,000 shares of its Class A
Common Stock, par value $.000125 per share (the "Class A Common Stock"), for
net proceeds of $23.9 million, which were contributed to the Company and used
primarily to pay amounts outstanding under the Company's senior secured
revolving credit facility. Two of Holding's existing shareholders purchased all
of the Class A Common Stock. The purchasers were Holding's majority
shareholder, Hicks, Muse, Tate & Furst Equity Fund III, L.P. ("Hicks Muse"),
and one of Hicks Muse's affiliates. Another Hicks Muse affiliate received a $1
million financial advisory fee in connection with the transaction.
The Class A Common Stock is senior to Holding's existing common stock
upon liquidation, but votes with the existing common stock as a class. Upon
dissolution of Holding, holders of Class A Common Stock are to receive the
Stated Value (as hereinafter defined) of their shares before any distribution
to common stockholders. Once the holders of Class A Common Stock receive the
Stated Value, the remaining assets are distributed among the common
stockholders pro rata. The "Stated Value" of a share of Class A Common Stock is
$1.00, plus notional interest of 35% per annum, accrued daily and compounded
annually. As long as the Class A Common Stock is outstanding, there may be no
dividends, stock splits, or other distributions declared or paid on Holding's
common stock, as well as no redemptions or other repurchases.
Each holder of Class A Common Stock may put any of its shares to
Holding and Holding may redeem shares of Class A Common Stock at any time for
the Stated Value of those shares, subject to certain conditions, including the
ability of the Company to make advances to Holding for such purpose. It is not
anticipated that the Company will be able to advance to Holding funds to redeem
the Class A Common Stock under the current terms of the Company's senior
secured credit facilities.
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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 the related 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 $0.5 million in
revenues and $0.5 million in cost of revenues for the three months ended June
30, 1999. For the nine months ended June 30, 1999, the impact of SOP 97-2
resulted in the deferral of $3.7 million in revenues and $2.1 million in cost
of revenues, reducing gross profit by $1.6 million.
REVENUES
Revenues for the three months ended June 30, 1999 were $62.2 million, compared
to $59.3 million for the three months ended June 30, 1998, an increase of $2.9
million, or 5%. For the nine months ended June 30, 1999, revenues increased
$12.8 million, or 8%, to $176.5 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 $4.6
million of the increase in revenues for the nine months ended June 30, 1999,
over the comparable period in 1998 as a result of the acquired operations being
included for only four months in 1998.
Systems revenues for the three months ended June 30, 1999 increased $3.6
million, or 17%, to $24.2 million as compared to $20.6 million for the three
months ended June 30, 1998. For the nine months ended June 30, 1999, systems
revenues increased $7.9 million, or 14%, to $63.0 million as compared to $55.1
million for the nine months ended June 30, 1998. For the three months ended
June 30, 1999, automotive systems revenues increased $3.9 million, or 35%, to
$14.8 million, and hardlines systems revenues decreased $0.3 million, or 3%, to
$9.4 million as compared to the corresponding period in 1998. For the nine
months ended June 30, 1999, automotive systems revenues increased $7.6 million,
or 26%, to $36.3 million and hardlines systems revenues increased $0.3 million,
or 1%, to $26.7 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.
Revenues from customer support and information services increased $0.8 million,
or 2%, to $37.5 million for the three months ended June 30, 1999, as compared
to $36.7 million for the three months ended June 30, 1998. For the nine months
ended June 30, 1999, revenues from customer support and information services
increased $8.4 million, or 8%, to $111.2 million as compared to the nine months
ended June 30, 1998. Recurring services revenues from the ARISB acquisition
accounted for $4.6 million of the increase for the nine months ended June 30,
1999, over the comparable period in 1998 as a result of the acquired operations
being included for only four months in 1998. Information services revenues
accounted for $1.6 million and $4.4 million of the increase for the three
months and nine months ended June 30, 1999, respectively, over the comparable
periods in 1998. The increase in information services revenues is primarily due
to growth in the automotive installed base of customers and increases in the
sale of point of sale information products to the hardlines industry.
Revenues from financing activities decreased $1.4 million, or 76%, to $0.5
million for the three months ended June 30, 1999, as compared to the three
months ended June 30, 1998. For the nine months ended June 30, 1999, revenues
from financing activities decreased $3.5 million, or 61%, to $2.2 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 and a
decrease in the gain recorded at the time the leases are sold.
COST OF REVENUES
Cost of revenues were $38.1 million for the three months ended June 30, 1999,
compared to $37.4 million for the three months ended June 30, 1998, an increase
of $0.7 million, or 2%. For the nine months ended June 30, 1999, cost of
revenues increased $7.4 million, or 7%, to $111.3 million as compared to the
corresponding period in 1998. As a percentage of revenues, cost of revenues
decreased 2% and remained flat for the three months and nine months ended June
30, 1999, respectively, over the comparable periods in 1998.
Cost of systems revenues for the three months ended June 30, 1999 increased
$1.5 million, or 11%, to $15.3 million as compared to $13.8 million for the
three months ended June 30, 1998. For the nine months ended June 30, 1999, cost
of systems revenues
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increased $3.4 million, or 9%, as compared to the nine months ended June 30,
1998. This increase was due to the increase in revenues, partially offset by a
reduction in costs as a percentage of revenues.
Cost of revenues for services and finance for the three months ended June 30,
1999 decreased $0.8 million, or 4%, to $22.8 million, as compared to $23.6
million for the three months ended June 30, 1998. For the nine months ended
June 30, 1999, cost of revenues for services and finance increased $4.0
million, or 6%, to $69.9 million, as compared to the corresponding period in
1998. The ARISB acquisition accounted for $2.8 million of the increase for the
nine months ended June 30, 1999, over the corresponding period in 1998 as a
result of the acquired operations being included for only four months in 1998.
As a percentage of revenues, cost of revenues for services and finance
decreased 1% and increased 1% for the three months and nine months ended June
30, 1999, respectively, over the comparable periods in 1998. For the three
months ended June 30, 1999, the decrease in cost of revenues as a percentage of
revenues was primarily due to the low incremental costs associated with the
increased information services revenues. For the nine months ended June 30,
1999, the increase in cost of revenues as a percentage of revenues was 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 the improvement in cost of revenue as a percentage of
revenue for information services.
EXPENSES AND OTHER INCOME
Operating expenses for the three months ended June 30, 1999 were $28.6 million,
an increase of $2.3 million, or 9%, as compared to $26.3 million for the three
months ended June 30, 1998. For the nine months ended June 30, 1999, operating
expenses increased $5.0 million, or 7%, as compared to the corresponding period
in 1998. The inclusion of operations from the ARISB acquisition increased
operating expenses by $0.9 million for the nine months ended June 30, 1999,
over the comparable period in 1998 as a result of the acquired operations being
included for only four months in 1998. Operating expenses for the three months
and nine months ended June 30, 1998 include $0.5 million in severance and
related expenses associated with a right sizing which took place on June 1,
1998. Product development expense for the three months and nine months ended
June 30, 1999 was $3.6 million and $11.1 million, respectively, compared to
$3.7 million and $11.8 million for the corresponding periods of fiscal 1998.
Sales and marketing expense for the three months and nine months ended June 30,
1999 was $14.8 million and $40.4 million, respectively, compared to $12.3
million and $35.5 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, increased variable marketing
expenses associated with the increase in automotive systems sales, and
increased expenses for bad debt reserves for the Company's leasing activities.
General and administrative expenses for the three months and nine months ended
June 30, 1999 were $10.2 million and $29.3 million, respectively, compared to
$10.3 million and $28.5 million for the corresponding periods of fiscal 1998.
The increase in general and administrative expenses for the nine month
comparison periods primarily is due to investments in staffing, infrastructure,
and communications to support internal information systems.
Interest expense for the three months and nine months ended June 30, 1999 was
$4.6 million and $13.5 million, respectively, an increase of $0.5 million and
$2.0 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 nine months ended June 30,
1999 were $0.1 million and $0.3 million, respectively, no change as compared to
the corresponding periods in 1998.
The Company recorded a benefit from income taxes of $2.6 million and $8.1
million for the three months and nine months ended June 30, 1999, respectively,
compared to a benefit of $2.3 million and $8.0 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 nine months ended June 30, 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 $6.4
million, an increase of $0.2 million, or 3%, for the three months ended June
30, 1999, compared to a net loss of $6.2 million for the three months ended
June 30, 1998. For the nine months ended June 30, 1999, the Company experienced
a net loss of $20.8 million, a decrease of $1.5 million from the comparable
period in fiscal 1998. The net loss for the nine months ended June 30, 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 June 30, 1999, the Company had $178.6 million in indebtedness, a decrease of
$20.1 million from March 31, 1998 and a decrease of $4.7 million from September
30, 1998. The decrease in indebtedness was due to $23.9 million in net proceeds
from the sale of Class A Common Stock discussed below, offset by increases in
working capital and capital expenditures.
For the nine months ended June 30, 1999, operating activities used
approximately $4.3 million of cash. Cash provided from operations was reduced
by a $6.3 million increase in investment in leases, a $6.1 million increase in
accounts receivable, and a $1.8 million reduction in accounts payable. The
Company periodically liquidates its lease portfolio through lease lending
arrangements with banks and other lease lending institutions. The $6.3 million
increase in investment in leases is net of $19.2 million in leases liquidated
during the nine months ended June 30, 1999.
The Company believes that its cash flow from operations 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.
(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 and was able to secure one additional funding
source during the three months ended June 30, 1999. 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 currently faced 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.
Net cash used in investing activities totaled $13.9 million for the nine months
ended June 30, 1999. Net cash used in investing activities primarily represents
capital expenditures. For the nine months ended June 30, 1999, the Company's
capital expenditures were $16.8 million, which includes approximately $10.0
million in capitalized computer software and database costs.
Net cash provided by financing activities totaled $17.4 million for the nine
months ended June 30, 1999, which reflects $23.9 million contributed to the
Company by its parent company, Cooperative Computing Holding Company, Inc.
("Holding"), which is the net proceeds from the May 27, 1999 sale by Holding of
its 25,000,000 shares of Class A Common Stock. The Company estimates that,
based on expected debt levels, the Company's amended senior secured credit
facilities will require interest payments of $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 its 9%
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Senior Subordinated Notes due 2008. The Company's revolving credit facility
allows the Company to borrow up to $50 million, of which approximately $18.4
million was outstanding as of June 30, 1999.
Repayment of the Company's $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 Company's $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 June 30, 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.
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. With the exceptions stated below,
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. The Company is in the process of
contacting the suppliers that provide the Company with significant goods or
services needed to produce the Company's products.
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 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 also 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 also
has also communicated with 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.
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Contingency plans for dealing with the Year 2000 problem that arise are being
developed.
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 does not believe
that these expenditures can be estimated 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 in a timely manner, the Year 2000
issue could have a material impact on the operations of the Company.
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 -- Third Amendment to Credit Agreement, dated as of May 25,
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 -- Cooperative Computing Holding Company, Inc. 1998 Stock
Option Plan (amended 6/14/99).
10.3 -- Amendment, dated March 31, 1999, among the Company, Triad
Systems Financial Corporation, CCI/Triad Financial Holding
Corporation, and Hellar Financial Leasing, Inc.
10.4 -- Employment Agreement, dated as of June 14, 1999, between
the Company and Michael A. Aviles.
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
June 30, 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: August 16, 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
- ----------- -----------
10.1 Third Amendment to Credit Agreement, dated as of May 25,
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 Cooperative Computing Holding Company, Inc. 1998 Stock Option
Plan (amended 6/14/99).
10.3 Amendment, dated as of March 31, 1999, among the Company,
Triad Systems Financial Corporation, CCI/Triad Financial
Holding Corporation, and Hellar Financial Leasing, Inc.
10.4 Employment Agreement, dated as of June 14, 1999, between the
Company and Michael A. Aviles
27.1 Financial Data Schedule.