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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2002
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 333-49389
COOPERATIVE COMPUTING, INC.
(Exact name of registrant as specified in its charter)
| Delaware |
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94-2160013 |
| (State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification
No.) |
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| 804 Las Cimas Parkway, Suite 200 Austin, Texas |
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78746 |
| (Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: 512/328-2300
Securities registered
pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. Yes x
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
No established published
trading market exists for the Common Stock, par value $0.01 per share, of Cooperative Computing, Inc. All of the outstanding shares of Common Stock, par value $0.01 per share, of Cooperative Computing, Inc., are held by Cooperative Computing Holding
Company, Inc.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock,
as of the latest practicable date.
| Class
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Outstanding at December 30, 2002
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| Common Stock |
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1,000 shares |
FORWARD-LOOKING STATEMENTS
INFORMATION SET FORTH IN THIS ANNUAL REPORT ON FORM 10-K 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 ITEM 1. “BUSINESS” AND ITEM 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” AND APPEAR ELSEWHERE IN
THIS ANNUAL 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.
USE OF TRADEMARKS AND TRADENAMES
Several trademarks and tradenames appear in this Annual Report on Form 10-K. Automotive Aftermarket Information Highway, J-CON,
A-DIS, Triad Prism, ServiceExpert, Series 12, The Paperless Warehouse, InterChange, Checkmate, Telepricing, VISTA, Lasercat, Lasercat 2000, Triad Servicewriter and CCITRIAD Autobahn are federally registered trademarks of the Company. Other
trademarks of the Company include CCITRIAD Ultimate, AConneX, CCITRIAD Prism, Eclipse, Triad Eagle, Pace, LaborGuide, True Start, CCITRIAD, Triad, ePartInsight, ePartExpert, LOADSTAR, Orion, Compass, Triad CSD, Triad Falcon, Triad Eagle for Windows,
and Triad Gemini. Other trademarks and tradenames are used in this Annual Report on Form 10-K that identify other entities claiming the marks and names of their products. The Company disclaims proprietary interest in such marks and names of others.
References herein to Snap-on, TruServ, Ace Hardware, AutoZone, Discount Auto Parts, Pep Boys, Home Depot, Lowe’s, Mitchell, Sears, Midas and Aamco mean, respectively, Snap-on Incorporated, Cotter & Company, Ace Hardware Corporation,
AutoZone, Inc., Discount Auto Parts, CSK Auto, The Home Depot, Inc., Lowe’s Home Centers, Inc., Mitchell Repair Information Company, Sears, Roebuck and Co., Midas International Corporation and Aamco Transmissions, Inc.
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PART I
Item 1. Business.
Overview
Cooperative Computing, Inc., a Delaware corporation (hereinafter referred to as the “Company” or “CCITRIAD”), is a leading designer and
provider of management information systems and services for the automotive parts aftermarket and the hardlines and lumber industry. The automotive parts aftermarket consists of the production, sale and installation of both new and remanufactured
parts used in the maintenance and repair of automobiles and light trucks. The hardlines and lumber industry consists of the sale of products for residential and commercial building construction, maintenance and repair, lawn and garden and
agribusiness.
The Company’s products are designed to improve the operating efficiency and profitability of distributors and
retailers through enhanced information, control and inventory management. The Company’s products enable users to conduct computerized identification, location and selection of parts, to manage inventory and to obtain sales history and
point-of-sale information. The system offerings are enhanced by extensive information services featuring specialized database products and by customer support and maintenance services. Interconnectivity throughout the distribution channel is
provided by the Company’s network of electronically linked customers, which adds to the efficiency and functionality of the Company’s products and enhances customer profitability.
The Company is a leading provider of industry-specific management information solutions to every level of the wholesale distribution channel in the automotive parts aftermarket, which
includes manufacturers, warehouse distributors, parts sales outlets (“PSOs”) and service dealers. By servicing all of these levels, the Company has acquired substantial industry knowledge to improve and support the information products and
services that are made available to its customers. For the hardlines and lumber industry, the Company provides point of sale movement information services to manufacturers.
Company History and Ownership
As used herein, unless the context otherwise
requires, the Company and CCITRIAD represent the combined businesses of Cooperative Computing, Inc., a Texas corporation (“Old CCI”), and Triad Systems Corporation, a Delaware corporation (“Triad”).
Old CCI was founded in 1976 with a focus on a diverse segment of businesses, including the automotive parts aftermarket. As the automotive parts aftermarket
began to experience significant growth and moved toward computerization, the Company expanded its automotive parts customer base and developed a wider range of products and services.
Triad was founded in 1973 as a provider of business and management information solutions. Over the years, Triad established a presence in the automotive parts aftermarket throughout the United States,
Canada, Puerto Rico, and the United Kingdom. Triad also developed a significant presence in the hardlines and lumber industry throughout the United States and Canada. From 1979 until February 27, 1997, Triad was a publicly held company, with its
common stock quoted on the NASDAQ National Market.
On February 27, 1997, Old CCI joined with Hicks, Muse, Tate & Furst Incorporated
(“Hicks Muse”) to acquire 100% of the stock of Triad (the “Triad Acquisition”). Prior to the Triad Acquisition, Old CCI maintained a strong relationship with warehouse distributors and a growing relationship with Parts Sales
Outlets (“PSOs”) and service dealers. The Triad Acquisition was consummated, in part, to broaden Old CCI’s relationship with PSOs in order to provide a platform to further penetrate the service dealer market and to establish a
presence in the hardlines and lumber industry.
On March 1, 1998, the Company acquired certain assets of ADP Claims Solutions Group, Inc.
for total consideration (including the assumption of certain liabilities) of approximately $9.3 million. These assets comprise the Automotive Division’s automotive recycling products enabling automotive recyclers to manage their assets and
communicate with customers and suppliers more effectively.
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Automotive Division
Automotive Parts Aftermarket Industry Overview
The automotive parts aftermarket industry consists of the
sale of automotive parts, accessories, lubricants, chemicals, tires, and repair services. The industry is estimated to have generated approximately $175 billion in revenue for 2001 according to the Automotive Aftermarket Industry Association.
Distribution Channels. There are three distinct vertical distribution channels through which auto parts distribution occurs: the
traditional wholesale channel, the retail channel, and the new car manufacturer channel. Additionally, within each of these three channels there are varying levels of distribution. In the wholesale channel there are generally four primary levels of
distribution: manufacturers, warehouse distributors, PSOs (wholesale PSOs, retailers and new car dealers) and service dealers. Manufacturers supply automotive parts to warehouse distributors, which distribute automotive parts to PSOs, which stock
and sell the automobile parts used by service dealers and “do-it-yourself” purchasers. The retail channel is similarly structured, but with fewer intermediaries. In the retail channel, parts flow directly from the manufacturer to the
retailer. In turn, the retailer sells directly to the “do-it-yourself” market, as well as to many service dealers. Parts in the new car manufacturer channel are distributed directly from the manufacturer to new car dealers, often through a
feeder warehouse. Additionally, new car dealers sell parts to independent service dealers.
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Wholesale Channel. The wholesale channel is the predominant distribution channel in the automotive parts aftermarket. Warehouse distributors sell to
service dealers through PSOs. PSOs, which are smaller than warehouse distributors and positioned geographically near the service dealers they serve, are utilized due to the time-critical nature of the repair business and the inability of the service
dealer to stock an extensive part selection. |
Historically, the wholesale channel has involved
the four distribution levels described above in a three-step process. However, this channel has various hybrid distribution methods with the predominant of these hybrids being the two-step distribution process. The two-step process consolidates the
warehouse distributor and PSO into an operation that sells directly to service dealers.
Apart from the shift
toward a two-step distribution process in recent years, many warehouse distributors have purchased and continue to purchase PSOs both from independent owners and from small wholesale chains. This consolidation improves warehouse distributors’
buying power with manufacturers and, therefore, strengthens their competitive position in the market. The Company’s Automotive Division, as the leading provider of systems and services to the U.S. and Canadian warehouse distributor market, has
benefited from the industry consolidation as many warehouse distributors have replaced acquired PSOs’ existing systems with the Automotive Division’s systems.
Service dealers consist of independent professional dealer/installers and specialized shops affiliated with national chains, such as Midas and Aamco. The service dealer
segment has experienced slow consolidation over the last 10 to 15 years. Throughout the 1970s, full service stations providing gasoline, automotive accessories and repairs, and independent repair garages had the largest share of the service dealer
market. During the early 1980s, service stations lost market share to general repair national chain stores and specialized shops.
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Retail Channel. The retail channel is made up of large specialty retailers, “mom and pop” stores and regional chains that sell to
“do-it-yourself” customers. Larger specialty retailers, such as AutoZone, Discount Auto Parts, O’Reilly and CSK, carry a greater number of parts and accessories at more attractive prices than smaller retail outlets and are gaining
market share. The management information systems used to communicate between levels in this channel are generally developed internally for the large specialty retailers and purchased from third parties for the smaller organizations.
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New Car Manufacturer Channel. New car manufacturers distribute parts through a feeder warehouse to new car dealers. New car dealers purchase information
systems from a variety of third party system providers including Reynolds and Reynolds Company, Automatic Data Processing, Inc., Universal Computer Systems, Inc. and several car manufacturers themselves. |
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Automotive Recycling Industry Overview
The automotive recycling industry consists of the sale of used auto parts that have been reclaimed from wrecked automobiles. Buyers of these parts are auto body
and collision repair shops, service dealers and “do-it-yourselfers.”
Products and Services
The Automotive Division’s software and systems, together with its database products, provide comprehensive business solutions targeted to the automotive
parts aftermarket. The Automotive Division provides standard application programs that include user options allowing the selective structuring of application files and reports to meet customers’ specific requirements. These software products
also allow the Automotive Division’s customers to access the Automotive Division’s proprietary databases. Automotive Division supplied hardware components include central processing units (“CPUs”), disk drives, video display
terminals, DVD-ROM storage devices, point-of-sale terminals, communication devices, printers and other peripherals. The Automotive Division’s systems also have communication capabilities allowing users to exchange purchase orders and pricing
and inventory information with suppliers and, in some cases, customers. The Automotive Division also provides software and hardware support services for its management systems.
Automotive Parts Aftermarket Systems
The Automotive Division’s
automotive parts aftermarket products have been designed to provide interconnectivity to all levels of the wholesale distribution channel. This electronic network enables the automotive parts aftermarket industry to efficiently market parts
throughout the distribution channel.
The Automotive Division’s principal automotive parts aftermarket industry products, based on
the level of the distribution channel for which such products are targeted, are as follows:
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Manufacturer. CCITRIAD’s AutoBahn system is devoted primarily to the needs of manufacturers. The CCITRIAD AutoBahn system is designed to provide
connectivity between manufacturers of auto parts and warehouse distributors and enables warehouse distributors and manufacturers to place and confirm orders electronically and warehouse distributors to receive parts shipments efficiently into their
inventory. |
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Warehouse Distributor. The Automotive Division has several products available to meet the needs of warehouse distributors. One of these products, the
A-DIS system, provides applications for the management of large warehouse distributors, handling complex inventory management issues, parts purchasing, product pricing, parts returns management, sales history and complete financial management
services. The A-DIS product is fully connected to the CCITRIAD AutoBahn product, as well as to the J-CON product, a PSO product, and to the ServiceExpert EZ and ServiceEstimator II products for service dealers. In addition, the Series 12 and
CCITRIAD Prism PSO products have connectivity and limited integration with A-DIS. A second product, CCITRIAD Ultimate, is designed and targeted at regional and local warehouse distributors or at national distributors that primarily service stores in
a compact geographic area that are looking to manage multiple locations and inventories on a single system. A third product is The Paperless Warehouse product, which is fully integrated with the A-DIS and CCITRIAD Ultimate products. This product
incorporates radio frequency wireless networking, barcode scanning and handheld computing technology to improve the efficiency of the receiving, picking and shipping functions of the warehouse. The last product in this category is the ePartInsight
Data Warehouse. The product can be connected to all the Auto Division’s warehouse and PSO applications as well as third party applications. It provides a data hub capability to allow large buying groups to have inventory information on a
virtual entity basis. |
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Parts Sales Outlet. The Automotive Division currently markets several products to PSOs: J-CON, Eclipse, CCITRIAD Prism and LaserCat 2000. The J-CON
product was developed for the management of PSOs that are members of a national account program, trade principally with a single warehouse and are connected to that warehouse by an A-DIS system. The J-CON product also allows the PSO to connect with
service dealers through the ServiceExpert EZ and ServiceEstimator II products. The J-CON product serves as an inventory management and electronic purchasing tool. The Eclipse product, which is targeted for independent PSOs, tracks inventory,
performs accounting functions and executes point-of-sale operations such as invoicing and billing. The CCITRIAD Prism product is designed to meet the needs of both national and independent PSOs as well as PSOs in a two-step distribution process. The
LaserCat 2000 product is a stand alone CPU used by the PSO to access and use the Automotive Division’s various data services products. The Automotive Division also maintains and supports Series 12 and LOADSTAR products.
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Service Dealer. The Automotive Division has two groups of products that it markets through value added resellers (“VARs”) and auto parts
distributors, ServiceExpert EZ and PACE, which are focused on specific segments of the service dealer market. |
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The ServiceExpert EZ family of products offers a range of shop management
solutions which blends the Automotive Division’s databases, software applications, detailed labor estimates and recommended vehicle service intervals with the latest in workstation technology, incorporating easy-to-use pull-down windows. The
ServiceExpert EZ products can create printed repair estimates, automated work orders and maintain individual vehicle records and histories, enabling users to notify customers of required preventive maintenance and create other special promotions
tailored to the service dealers’ individual customer base. ServiceExpert EZ can be connected to the Automotive Division’s PSO and warehouse distributor products to allow parts inquiry and ordering functions in the service dealer’s
parts supplier network. The ServiceExpert EZ products, which are available as software only and as hardware/software bundled products, can be configured from a simple estimator product (marketed as ServiceEstimator II) to a full shop management
system that includes inventory management. The PACE product is specifically tailored to the Canadian service dealer market and is exclusively marketed in Canada. The Automotive Division also services and maintains the Triad ServiceWriter, Triad
Service System, and Triad ServiceCat Products.
Automotive Recycling Systems
The Automotive Division’s automotive recycling products provide yard management and parts locator functionality that fits the needs of the smallest to the
largest automotive recycling yards as follows:
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Checkmate. The Checkmate system is a complete yard management system that provides inventory control, point of sales and back office accounting
functions. This system is delivered with the industry standard Hollander Interchange, which the Automotive Division licenses from ADP Claim Solutions Group, Inc. The Checkmate system also can integrate the Orion satellite based parts locator system.
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Orion. The Orion system is sold either as a stand-alone terminal or is integrated with the Checkmate yard management system. The Orion system uses a
publicly accessible Kband satellite to communicate with regional and national yards that are also on the system to locate parts not in their local inventory. Nightly, yards that are on the network are polled for their yard’s inventory by the
Automotive Division’s central server creating a central database of parts that is available each day for part sourcing by the network members. |
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Compass. The Compass product is an open line “spoke and hub” telephone system that yards within the same geographic area can join. This phone
network is used by yards to source recycled parts to meet customer demands from other than their own yard inventory. The Automotive Division provides monitoring and settlement services to each of the Compass networks.
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Customer Support Services
The Automotive Division’s customer support services organization provides service, training and support to its customers. The Automotive Division’s system owners are principally small business proprietors without
the internal staffing or expertise to train users or to maintain computer systems on a consistent basis. These customers generally require a high level of service, training and support.
The Automotive Division sells a variety of post sale support programs through its system support agreements, including on-site preventive and remedial maintenance, hardware engineering
modifications, depot repair services and daily system operating support by phone. The Automotive Division’s customers can call the Automotive Division’s AdviceLine service, which gives them access to trained personnel able to perform
on-line diagnostics or to field engineers if on-site service is necessary. CCITRIAD has developed a Web-based product called EntryPoint that allows customers direct access to a call tracking system, on-line product training courses, and on-line
knowledge base. These features allow customers to request support services, review specific calls or their entire call history, increase employee system knowledge through on-line coursework, or search a knowledge base to obtain immediate answers to
questions. Virtually all new system customers enter into system support agreements, and most retain such service agreements as long as they own the system. Monthly fees vary with the system size and configuration. The agreements are generally month
to month agreements with up to a 90 day cancellation notice period.
The Automotive Division offers training for new and existing
customers at the facilities of both the Automotive Division and its customers. In addition to training on system operations and software enhancements, the Automotive Division offers seminars and workshops to assist customers in understanding the
capabilities of their systems.
For many of the Automotive Division’s large automotive warehouse distributor customers, the
Automotive Division provides information facilities management services. Many of these are facilitated through a limited partnership arrangement. Through these arrangements, the Automotive Division provides customers with on-site managers and
employees experienced in warehouse and store applications to operate the customers’ computer facilities.
The Automotive Division
also offers a premium service package - Professional Services - for Prism and Ultimate customers. This additional fee service provides senior service representatives to specific accounts for a period of six to twelve months to assist the
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customer in utilizing the more advanced features of CCITRIAD’s business management systems.
Data Services
The Company provides electronic catalogs, bar codes, related repair information, and reports based on point-of-sale activity through a variety of data services. These proprietary database products and services generate recurring
revenues through monthly subscription fees and differentiate the Company’s products from those of its competitors. The Company offers data services to its automotive parts aftermarket industry customers, including distributors, manufacturers
and retail parts and services chains.
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Electronic Catalog. The Company’s electronic catalog products provide access to a database of over 58 million unique automobile part applications
for approximately 6,100 automotive aftermarket product lines. These products virtually eliminate the time consuming and cumbersome use of printed catalogs and are designed to increase productivity and accuracy in parts selection and handling.
Software on the warehouse distributor, PSO and service dealer systems enables the user to access the electronic catalog database. Customers use the catalog feature within their warehouse distributor, PSO, or service dealer system to identify parts
associated with a specific vehicle. The Company charges a monthly subscription fee for its electronic catalog database and provides customers with periodic updates. At September 30, 2002, approximately 12,300 distributor locations, 3,400 retail
locations, and 9,700 service locations subscribed to the Company’s electronic catalogs service. |
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ePartExpert. The Company’s electronic catalog database is available in a format designed for Internet use. Named ePartExpert, the database and
access software have been modified to enable consumers and service professionals to look up automotive product applications for themselves, view diagrams and select the parts for their vehicle. This product is positioned for use by the manufacturer,
warehouse distributor, and service dealer segments of the automotive aftermarket. |
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InterChange. The Interchange database allows the cross reference of original equipment manufacturers’ part numbers to aftermarket manufacturers part
numbers and from one aftermarket supplier to another for the same part. This product, which is sold on a monthly subscription basis, enables the warehouse distributor, PSO or service dealer to identify a suitable replacement part when only the part
number of the old part is known. Interchange replaces a cumbersome paper-based process that can involve many different catalogs to identify the correct part. Customers are provided updates to the InterChange product monthly.
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TelePricing and A-PRICE. These services provide electronic price updates directly to the warehouse distributor, PSO or service dealer system for
automotive parts following a manufacturer’s price change, eliminating a customer’s need to input this data manually. Customers are provided updates to the TelePricing service daily and weekly. |
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LaborExpert Database. The Company has licensed from Mitchell the LaborExpert database, which provides authorized guidance of labor hours for car repairs.
This database, which can be integrated with the Company’s PSO systems and the ServiceExpert EZ family of products, is targeted to the service dealers. LaborExpert permits users to comply more easily with regulations in many states that require
written estimates of repair costs. The repair functions within the LaborExpert product have been mapped to the appropriate parts in the electronic parts catalog database, providing for a seamless, efficient process of gathering of parts and labor
information by the service dealer in preparing a repair estimate. Customers are provided updates to the LaborExpert database monthly. |
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Manufacturer Services. CCITRIAD provides a number of fee based services to the manufacturer segment of the market. These services include catalog
application coverage analysis compared to similar product groups from other manufacturers, pricing comparison to similar parts available in the market, and electronic catalog data mapping and format conversion. These products and services are
provided as needed to manufacturers to assist them with their marketing initiatives. |
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Sales and Marketing
The Automotive Division markets its products to the automotive parts aftermarket through a direct sales force and a telesales/telemarketing organization with approximately 40 employees. Incentive pay
is a significant portion of the total compensation package for all sales representatives and sales managers. Additionally, the Automotive Division leverages its relationships with large warehouse distributors through its National Account Program
(and other VARs), in which these accounts resell PSO and service dealer systems to either company owned stores or to other customers that are closely associated to the warehouse distributor.
Automotive Division VAR programs include sales of store management systems (J-CON, via the National Account program), service dealer management systems (through distributors to their
customers and technology solution providers) and Data Services (through both distribution and service dealer solution providers).
Internet Initiatives
On May 31, 2000, the Company, along with its majority stockholder, Hicks Muse,
entered into a joint venture arrangement with certain customers and other investors, including directors Glenn and Preston Staats, to form Internet Autoparts, Inc. (“IAP”). IAP will provide the automotive aftermarket with a Web-based parts
ordering and communications platform linking automotive service providers with wholesale distributors and other trading partners. CCITRIAD granted certain non-exclusive licenses to IAP in return for a one-third interest in IAP. IAP is powered by
CCITRIAD’s Web-based parts catalog, ePartExpert, and has access to CCITRIAD’s internet communications gateway, AConneX, which provides seamless communications among the various CCITRIAD business platforms and third-party management
systems. AConneX is available for licensing to third-party management systems in addition to IAP.
Three Internet related products are
ePartInsight, EntryPoint, and AConneX. ePartInsight, CCITRIAD’s data warehouse product, has been Web enabled providing improved user access. ePartInsight assists companies in managing their business through providing business intelligence
solution sets in areas of sales, margin, national accounts, customers and inventory analysis. EntryPoint is a new Web support application portal that provides customers online problem submission, issue tracking, access to support knowledge base,
product manuals, and online product training courses.
Hardlines and Lumber Division
Hardlines and Lumber Industry Overview
The hardlines and lumber industry consists of the sale of products for residential and commercial building construction, maintenance and repair, lawn and garden, and agribusiness. Management estimates that this industry, comprised
primarily of hardware retailers, home centers, lumber and building materials suppliers, agribusiness retailers, lawn and garden retailers and paint retailers, generated over $200 billion in revenues in 2001. This market is segmented primarily into
three groups:
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Top 10 Market. The ten largest retailers in the hardlines and lumber industry (the “Top 10”) represent over 6,700 stores and account for
approximately 47% of the annual industry sales volume. The Top 10 include mass merchandisers such as Home Depot, Lowe’s and Sears. As a result of their size, it is generally more cost effective for the Top 10 to develop and support their own
systems, and, therefore, the Top 10 do not purchase systems from the Hardlines and Lumber Division. The Hardlines and Lumber Division believes that the growth of the Top 10 generally has driven the need to reduce costs and pursue consolidation
strategies throughout the industry. The Top 10 have been able to reduce costs and improve merchandising efficiency through economies of scale and the implementation of automated retail systems. In order to remain competitive, companies outside the
Top 10 need to increase their merchandising efficiencies and productivity. |
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Top 11-500 Market. The 500 largest retailers in the hardlines and lumber industry, excluding the Top 10, are estimated to account for approximately 17%
of the industry’s annual sales volume. There are approximately 6,500 stores in this market, of which a majority are lumber and home center businesses. This market is fragmented and has experienced consolidation as firms try to compete with the
Top 10. In addition, this market has experienced significant upgrading of existing systems and a shifting from in-house systems to turnkey systems produced by the Hardlines and Lumber Division. The Hardlines and Lumber Division believes that
retailers will continue to upgrade systems as the industry continues to respond to competition and innovation by the Top 10. |
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Top 500+ Market. The hardlines and lumber retailers which do not rank in the Top 500 (the “Top 500+”) are typically smaller, independent stores
with a niche focus. Management believes that there are approximately 51,000 stores in this market, which accounted for nearly 36% of the industry annual sales volume. This market is fragmented and has experienced limited consolidation. The Hardlines
and Lumber Division believes the majority of this market is affiliated with cooperatives, which encourage their members to install computerized point-of-sale and store management systems to more effectively compete |
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with the rest of the industry. The Hardlines and Lumber Division believes the
larger stores in this segment will continue to represent a large portion of the Hardlines and Lumber Division’s revenue base as firms upgrade their computer systems in order to protect their niche market positions.
Drivers of Computerization. Computerization within the hardlines and lumber industry has been predominantly driven by the Top 10 which have expanded their
business throughout the United States by providing products and services using a mass merchandising format. As a result of this strategy, hardlines and lumber consumers have been able to purchase products and services cheaper from the Top 10 than
was traditionally available. This has driven the Top 11-500 Market and the Top 500+ to computerize or upgrade their existing systems in order to reduce costs and improve service to maintain their market positions.
Products and Services
The Hardlines and
Lumber Division’s software and systems, together with its full range of support services, provide comprehensive business solutions targeted to the hardlines and lumber and related industries. The Hardlines and Lumber Division provides standard
application programs that include user options allowing the selective structuring of applications files and reports to meet customers’ specific requirements. In addition, the Hardlines and Lumber division provides point of sale product movement
information services to manufacturers.
Principal Products
The Hardlines and Lumber Division’s hardlines and lumber systems automate inventory control, point-of-sale accounting and supplier communications. The Hardlines and Lumber Division’s
principal systems products are as follows:
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Triad Eagle for Windows. The Triad Eagle system blends the power and flexibility of the Hardlines and Lumber Division’s management information
systems with applications and features created to meet the unique needs of hardware stores and lumber and building materials operations. It manages the flow of a customer’s typical sales transaction, including estimating, ordering, inventory
management, shipping, invoicing and tracking accounts receivable. |
| |
• |
|
Triad Falcon. The Triad Falcon system is the Hardlines and Lumber Division’s product targeted at large multi-location lumber and building material
and home center retailers. Triad Falcon provides flexibility in tailoring the system to meet the needs required of individuals, groups, departments and single or multiple store locations. |
| |
• |
|
Inet. Inet works with Triad Eagle, Triad Falcon, Triad Gemini (see below), and Triad CSD (see below) system products to give retailers online access to
their customers for ordering and account information. |
In addition to the above principal products, the Hardlines and
Lumber Division also services and maintains several products. The Hardlines and Lumber Division expects the customers of these products to migrate to the Triad Eagle or Triad Falcon over the next few years.
| |
• |
|
Triad CSD. The Triad CSD series of systems is designed for mid- to large-sized hardlines and lumber dealers due to its greater power and functionality.
Triad CSD products allow for product offerings suitable for hardlines and building materials chains with up to 20 stores and $150 million in annual sales. |
| |
• |
|
Triad Gemini. The Triad Gemini system is designed for large hardlines and lumber dealers. Triad Gemini customers represent some of the largest companies
in the hardlines and lumber industry. Gemini’s customers have revenue up to $1 billion. |
Customer Support
Services
The Hardlines and Lumber Division’s customer support services organization provides service, training and support
to the Hardlines and Lumber Division’s customers. The Hardlines and Lumber Division’s system owners are principally small and medium business proprietors without complete internal staffing or expertise to train users or to maintain
computer systems on a consistent basis. These customers require a high level of service, training and support.
The Hardlines and Lumber
Division typically provides a limited warranty on its systems ranging from 30 to 90 days. The Hardlines and Lumber Division also sells a variety of post sale support programs through its system support agreements, including on-site maintenance,
depot repair services and daily system operating support by phone. The Hardlines and Lumber Division’s customers can call the Hardlines and Lumber Division’s AdviceLine service which gives them access to trained personnel able to perform
on-line diagnostics or to field engineers if on-site service is necessary. Virtually all new system customers enter into system support agreements, and most retain such service agreements as long as they own the system. Monthly fees vary with the
system size and configuration and service agreements are generally month to month.
9
The Hardlines and Lumber Division offers training for new and existing customers at both its facilities
and the facilities of its customers. In addition to training in system operations and software enhancements, the Hardlines and Lumber Division offers seminars and workshops to assist customers in understanding the capabilities of their systems.
Information Services
The Hardlines and Lumber Division markets database services to manufacturers with products called VISTA, IDW, and IDX. VISTA information services provide product manufacturers with ongoing measurement of brand and item movement with
major product classifications using point-of-sale business analysis data from independent hardware stores, home centers and lumber and building materials outlets. Information provided by VISTA gives manufacturers insight into how a specific product
or brand performs against its competitors and the market in general. IDW and IDX are information services provided to the electrical distribution industry.
Sales and Marketing
The Hardlines and Lumber Division markets its products and services to the
hardlines and lumber industry through a geographically-based direct and telesales/telemarketing sales force of approximately 68 employees. Incentive pay is a significant portion of the total compensation package for all sales personnel.
The Hardlines and Lumber Division’s marketing approach in the hardlines and lumber industry has been to develop close relationships
with key market influencers. This strategy includes obtaining endorsements and developing exclusive relationships, distributor partnerships and other alliances. Currently, the Hardlines and Lumber Division enjoys over 30 such relationships in the
industry. The goal of this relationship program is to enhance the productivity of the field sales team and create leveraged selling opportunities for system sales, information services and support revenues.
CCITRIAD has exclusive agreements to develop, market, and support modified versions of the Triad Eagle system to the two largest buying cooperatives in the
hardlines and lumber industry, representing over 10,000 retailers. These agreements have allowed a streamlining of the distribution channel and reductions in direct sales costs.
Corporate Services
Customer Financing
The Company believes having a lease financing option for its customers shortens the sales cycle and provides a competitive advantage in marketing the
Company’s products. Effective June 2001, the Company began offering such financing through an outsourcing partner. Leases provided through the outsourcing agency are originated and funded by that agency. Accordingly, the Company has neither
ownership interest in nor credit related contingent liability for these particular leases.
Prior to June 2001, the Company offered lease
financing directly to its customers. The Company usually aggregated lease receivables into a pool and sold these lease receivable pools via short-term lending agreements with banks and other financial institutions. At the time of sale, the Company
recorded the newly created servicing liabilities (lease servicing obligation and recourse obligation) at their estimated fair value. Gains resulting from the sale of lease receivables are reflected in finance revenue. At September 30, 2002, the
Company had a remaining portfolio of outstanding leases to over 3,500 customers with a balance of approximately $31.3 million.
The
Company’s short-term financing agreements contain restrictive covenants, which allow the Company to sell leases only while in compliance with covenants contained in the agreements. In the event of noncompliance, the banks and lending
institutions could assume administrative control (servicing) of the lease portfolio. During the year ended September 30, 2002, the Company was in compliance with such covenants, and management believes that it will be able to maintain compliance
with such covenants in the foreseeable future.
Pursuant to the short term financing agreements, the Company is contingently liable for
losses in the event of lessee nonpayment up to stated recourse limits and full recourse on lease receivables financed that do not meet certain requirements established by the bank or lending institutions.
At September 30, 2002, the maximum stated contingent liability for leases sold was approximately $19.2 million. The stated contingent liability is fixed as a
percentage of the original financed amount and decreases as obligations are met under the contingent liability but does not proportionally decrease as the financed amount decreases. The Company provides for the fair value of the recourse obligation
based upon an analysis that considers among other things, the remaining size of the financed leases versus the initial financing amount, the creditworthiness of the lease receivable, the recourse provision the lease receivable is subject to and the
Company’s historical experience, which includes loss recoveries through resale of repossessed systems.
10
System Integration and Distribution
The Company does not manufacture the hardware components of its systems, but the Company does integrate some of its products with hardware components and software products of third party
vendors. The Company uses Dell Computer Corporation’s industry standard server and workstation hardware to power most CCITRIAD software solutions. As of September 30, 2002, the Company employed approximately 32 employees in its system
integration and distribution operation.
The Company utilizes a just-in-time inventory system to help ensure that efficient cost controls
are in place. The commodity nature of the component business ensures a consistent supply of required components.
Software Development
and Technology
The Company has approximately 200 copyrights and approximately 70 registered trademarks. The Company attempts to
protect its proprietary information in a number of ways. First, the Company distributes its software through licensing agreements, which require licensees to acknowledge the Company’s ownership of the software and the confidential nature of the
Company’s proprietary information. Secondly, all Company personnel are required to assign all rights of such personnel to inventions, patents and confidential information to the Company and to agree to keep confidential and not disclose to
third parties the Company’s proprietary information. Finally, the Company requires that all other third parties producing or receiving proprietary information of the Company execute an assignment, confidentiality and non-disclosure agreement.
Product development expense in fiscal 2000, 2001, and 2002 was $12.2 million, $17.5 million, and $17.4 million, respectively.
Customers and Suppliers
No single customer accounted for more than 10% of the Company’s revenues during the years ended September 30, 2000, 2001, and 2002. Dell Computer Corporation accounted for more than 10% of the supplies used in the Company’s
integration operations.
Employees
As of September 30, 2002, the Company had approximately 1,300 employees, none of whom were represented by unions. The Company has not experienced any labor problems resulting in a work stoppage and believes it has good
relations with its employees.
Segment Reporting
See Note 14 of Notes to Consolidated Financial Statements.
Item 2.
Properties.
During fiscal 2002, the Company sold its Newton, New Jersey facility, and no longer owns any real
property. The Company’s properties include integration and distribution, software development and data entry facilities and administrative, executive, sales, and customer support offices. The Company’s principal executive offices are
located at 804 Las Cimas Parkway, Suite 200, Austin, Texas 78746. The Company considers its properties to be suitable for their present and intended purposes and adequate for the Company’s current level of operations.
11
Listed below are the principal properties operated by the Company as of December 30, 2002.
| Location
|
|
Approx. Size
(Sq. ft.)
|
|
Description of Use
|
|
Lease Termination
|
| Livermore, California |
|
79,000 |
|
Divisional executive offices; software development; data entry; sales; administrative |
|
2012 |
| Austin, Texas |
|
74,000 |
|
Principal and divisional executive offices; software development; sales; administrative |
|
2006 |
| Tracy, California |
|
36,500 |
|
Hardware computer repair |
|
2006 |
| Denver, Colorado |
|
25,000 |
|
Administrative; software development |
|
2005 |
| Austin, Texas |
|
23,000 |
|
Systems integration and distribution |
|
2008 |
| Longford, Ireland |
|
21,000 |
|
Data entry; administrative; sales |
|
2027 |
| Austin, Texas |
|
19,000 |
|
Dormant |
|
2005 |
| Florence, Alabama |
|
6,000 |
|
Administrative; sales; customer support |
|
2003 |
| San Antonio, Texas |
|
5,600 |
|
Customer Support |
|
2003 |
In addition, the Company has short-term leases on over 50 offices and field service
locations in the United States, Canada, the United Kingdom, and France.
Item 3. Legal Proceedings.
The Company is a party to various legal proceedings and administrative actions, all of which are of an ordinary or routine nature
incidental to the operation of the Company, except as noted below. In the opinion of the Company’s management, such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on the Company’s
results of operations, financial condition or cash flows.
The Company is a defendant in a lawsuit that was filed by Preston Staats, a
director of the Company, on December 9, 2002 in the United States District Court for the Western District of Texas, Austin Division. The suit alleges that Mr. Staats was constructively terminated by the Company in violation of the Age Discrimination
in Employment Act and that such alleged termination constituted a breach of contract. The lawsuit seeks monetary damages in excess of $75,000 as well as attorney’s fees, court costs, and interest. Although the Company has not yet filed a
responsive pleading in this matter, it intends to do so within the applicable time limits, and to defend itself vigorously.
Item 4.
Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company’s
security holders in the Company’s fourth fiscal quarter in 2002.
12
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
There is no established public trading market for any class of the Company’s common equity. All of the Company’s common stock is held by Cooperative Computing Holding Company, Inc., a Delaware corporation
(“Holding”). Neither the Company nor Holding paid any dividends in fiscal 2002, nor do they anticipate paying any dividends in the foreseeable future. The Company’s ability to pay such dividends is limited by the terms of the
Company’s Restated Senior Credit Facilities (as herein defined). See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 6. Selected Financial Data.
The following table sets
forth selected financial data of the Company for the years ended September 30, 1998, 1999, 2000, 2001 and 2002. The balance sheet data as of September 30, 2001 and 2002, and the statement of operations data for the years ended September 30, 2000,
2001, and 2002 set forth below are derived from the audited consolidated financial statements of the Company included elsewhere herein. The balance sheet data as of September 30, 1998, 1999, and 2000 and the statement of operations data for the
years ended September 30, 1998 and 1999 set forth below are derived from the audited consolidated financial statements of the Company that are not included herein. The selected financial data below should be read in conjunction with Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the audited consolidated financial statements of the Company included elsewhere herein.
The consolidated financial statements filed on Form 10-K and 10-Q prior to September 30, 2002 included the accounts of Holding and its wholly owned subsidiary CCITRIAD. Holding has no assets
or liabilities other than (1) its wholly owned subsidiary CCITRIAD and (2) its Redeemable Class A Common Stock, the net proceeds of which were contributed in full to CCITRIAD. The difference between the financial statements of Holding and those of
CCITRIAD relate solely to the Class A Common Stock. The Class A Common Stock is an obligation of Holding and not of the registrant and the registrant does not guarantee the Class A Common Stock. Prior years’ financial presentation resulted in
the inclusion of the accretion of Holding’s Redeemable Common Stock of $3.0 million, $9.8 million and $13.2 million for the fiscal years ended September 30, 1999, 2000 and 2001, respectively, as well as its net loss to shareholders of $40.0
million, $32.9 million and $26.2 million, respectively. Additionally, Holding’s balances for stockholders’ deficit of $15.6 million, $49.5 million and $75.8 million as of September 30, 1999, 2000 and 2001, respectively, were depicted. The
cash flow for both companies was identical in each year presented. CCITRIAD, as the registrant, is presented in the following financial data table.
13
| |
|
Year Ended September 30,
|
|
| |
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
| |
|
(in thousands) |
|
| Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues |
|
$ |
227,221 |
|
|
$ |
240,745 |
|
|
$ |
223,919 |
|
|
$ |
211,035 |
|
|
$ |
218,705 |
|
| Cost of revenues |
|
|
145,071 |
|
|
|
153,205 |
|
|
|
133,215 |
|
|
|
113,743 |
|
|
|
111,764 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin |
|
|
82,150 |
|
|
|
87,540 |
|
|
|
90,704 |
|
|
|
97,292 |
|
|
|
106,941 |
|
| Sales and marketing |
|
|
49,391 |
|
|
|
63,152 |
|
|
|
47,437 |
|
|
|
39,491 |
|
|
|
33,909 |
|
| Product development |
|
|
15,881 |
|
|
|
15,997 |
|
|
|
12,209 |
|
|
|
17,470 |
|
|
|
17,435 |
|
| General and administrative |
|
|
24,903 |
|
|
|
26,665 |
|
|
|
29,574 |
|
|
|
26,166 |
|
|
|
26,420 |
|
| Goodwill amortization |
|
|
10,510 |
|
|
|
11,535 |
|
|
|
11,484 |
|
|
|
10,589 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
100,685 |
|
|
|
117,349 |
|
|
|
100,704 |
|
|
|
93,716 |
|
|
|
77,764 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income (loss) |
|
|
(18,535 |
) |
|
|
(29,809 |
) |
|
|
(10,000 |
) |
|
|
3,576 |
|
|
|
29,177 |
|
| Interest expense |
|
|
(15,868 |
) |
|
|
(18,512 |
) |
|
|
(18,872 |
) |
|
|
(17,804 |
) |
|
|
(14,054 |
) |
| Other income (expense), net |
|
|
766 |
|
|
|
175 |
|
|
|
1,108 |
|
|