SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003 |
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 333-49389
Activant Solutions Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 94-2160013 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 804 Las Cimas Parkway Austin, Texas |
78746 | |
| (Address of principal executive offices) | (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 Activant Solutions Inc. All of the outstanding shares of Common Stock, par value $0.01 per share, of Activant Solutions Inc., are held by Activant Solutions Holdings Inc.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
| Class |
Outstanding at December 17, 2003 | |
| Common Stock |
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) loss or obsolescence of the proprietary technology in which the Company depends; (2) changes in the markets in which the Company competes including the manner in which autoparts or hardware and lumber are sourced, sold, distributed or inventoried, and changes in economic conditions in these markets generally; (3) claims by third parties that the Company is infringing on their intellectual property rights; (4) loss of the Company’s executive officers and other key personnel; (5) increased competition or failure to effectively compete; (6) loss of key customers or increase in attrition rates with respect to revenue management views as recurring; (7) manufacturing defects or errors in the Company’s software; (8) prolonged unfavorable general economic and market conditions; (9) failure to recoup the cost of investment in new businesses into which the Company may expend and (10) increases in the company’s cost of borrowings or unavailability of additional debt or equity capital. 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, ServiceExpert EZ, Service Estimator II, Series 12, The Paperless Warehouse, InterChange, Telepricing, VISTA, are federally registered trademarks of the Company. Other trademarks of the Company include Activant’s Prism, Activant’s Ultimate, AConneX, Eclipse, Activant’s Eagle, Activant’s Eagle system for Windows, LaborExpert, Service intervals, Tire by size, ePartInsight, ePartExpert, LOADSTAR, Activant’s CSD, Activant’s Falcon, Inet, IDW, IDX, and Activant’s 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 AutoZone, Discount Auto Parts, O’Reilly, Reynolds and Reynolds, Automatic Data Processing, Universal Computer Systems, Home Depot, Lowe’s, and Sears mean, respectively, AutoZone, Inc., Discount Auto Parts, CSK Auto, O’Reilly Automotive, Inc., Reynolds and Reynolds Company, Automatic Data Processing, Inc., Universal Computer Systems, Inc., The Home Depot, Inc., Lowe’s Home Centers, Inc., and Sears, Roebuck and Co.
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PART I
Item 1. Business.
General
Activant Solutions Inc. (formerly known as Cooperative Computing, Inc.) (the “Company”) is a leading provider of business management solutions designed for companies with complex products in high-service distribution environments (complex distribution environments or “CDE”). The Company’s solutions are designed to improve the operating efficiency and profitability of manufacturers, distributors, retailers and service providers through enhanced business management and information. The Company’s business management solutions include advanced software, professional services, content, supply chain connectivity and analytics. The Company believes that the value added nature of its products and services, its strong customer relationships, its comprehensive solutions and the significant risks and costs associated with switching systems provide it with a stable customer base and a receptive market for new product offerings.
Serving over 18,000 business locations, the Company is a leading provider of business management solutions for the small and medium enterprise (“SME”) market. These specialty manufacturing, wholesale and retail businesses use the Company’s solutions to drive new levels of business performance. Therefore, the Company enjoys strong customer relationships within numerous industry segments, including the automotive aftermarket, hardware, lumber, agribusiness, building and industrial supply. In addition, the Company has a growing customer base in paint, decorating, flooring, lawn, garden, nursery, plumbing supply, HVACR (heating, ventilating, air conditioning and refrigeration) and electrical supply.
The Company began serving the automotive aftermarket in the 1970s. With the success in that market, it expanded into the hardware retail market in the 1980s and then expanded further into lumber and building materials in the 1990s. The Company is increasing its penetration in these core markets and expanding into other large CDE industry segments. These segments tend to be fragmented and consist of a large number of SMEs. The Company believes it is well positioned to leverage its proven technologies and experienced support organization to further penetrate its existing markets and expand into similar CDE segments.
Automotive Group
Group Overview
The Company’s Automotive Group segment develops, implements and supports industry leading technical solutions for automotive manufacturers, wholesalers, retailers, service chains and professional installers in both North America and Europe. This market consists of the manufacturing, distribution, sale and installation of both new and remanufactured parts used in the maintenance and repair of automobiles and light trucks. This market has several characteristics that drive significant inventory management challenges for its participants. The Company provides systems and services that address these challenges and help its customers compete effectively. These tools include four key components:
| • | enterprise management solutions for warehouses and stores in wholesale distribution; |
| • | a comprehensive electronic automotive parts catalog, which is available to all segments of the aftermarket; |
| • | Internet and point-to-point connectivity devices, connecting all levels of the automotive aftermarket from distributors and retailers to service providers. These connectivity products allow for electronic data interchange (“EDI”) and trading partnerships; and |
| • | supply chain analytic solutions for manufacturers and distributors, to assist them in their inventory and marketing decisions. |
With over 25 years of experience serving the automotive aftermarket, the Company has gained significant industry-specific knowledge which it leverages through both expanded relationships with leading industry participants and its ability to drive industry-wide inventory initiatives.
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Automotive parts aftermarket industry overview
The automotive parts aftermarket industry consists of the manufacturing, distribution, sale and installation of both new and remanufactured parts used in the maintenance and repair of automobiles and light trucks. This market is the 11th largest industry in the United States, is believed to have generated approximately $185 billion in sales in 2002 and accounted for approximately 3% of all jobs in the United States. The Company believes that growth in the automotive parts aftermarket will continue to be driven by several favorable trends, including:
| • | growth in the aggregate number of vehicles in use; |
| • | increase in the average age of vehicles in operation; |
| • | growth in the total number of miles driven per vehicle per year; |
| • | increased vehicle complexity; and |
| • | continued proliferation of the number of required parts in the automotive aftermarket. |
In addition, this industry faces severe inventory management challenges. These challenges include:
| • | Limited stocking of parts—over 20% of all parts sold by a retailer or distributor are not stocked locally; |
| • | Unsold products—approximately 25% of the parts stocked are never sold and eventually are returned to the manufacturer; and |
| • | Returned products—more than 25% of parts sold to installers are returned, often after months or years. |
Solving these challenges requires a combination of enterprise management systems, data, supply chain tools and services and connectivity to a critical mass of participants in the industry. The Company believes that its combination of products and services and its large customer base in the automotive parts aftermarket qualify it to provide these solutions.
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; |
| • | stores (wholesalers, retailers and new car dealers); and |
| • | installers. |
Manufacturers supply automotive parts to warehouse distributors, which distribute automotive parts to stores, which stock and sell the automobile parts used by installers 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 installers. 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 installers. In addition to the traditional goods flow from manufacturer through the distribution levels, there is substantial lateral trading between stores and warehouses.
| • | Wholesale channel. The wholesale channel is the predominant distribution channel in the automotive parts aftermarket. Warehouse distributors sell to service dealers through stores. Stores, 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 installer to stock an extensive part selection. |
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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. |
| • | 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, Automatic Data Processing, Universal Computer Systems and several car manufacturers themselves. |
Drivers of computerization.
There are a variety of factors that drive the need for computerization within the automotive parts aftermarket industry.
| • | Inventory complexity. With over 20% of parts sold not stocked, approximately 25% of parts stocked not sold and more than 25% of parts sold eventually returned, there is substantial inefficiency in the automotive aftermarket supply chain. This inefficiency results in direct cost inefficiencies including excess inventory carrying costs, excessive logistical costs and over production of parts at the manufacturer’s level. Overcoming these costly dynamics requires a combination of the Company’s products, including ERP systems, catalog information, connectivity, data warehousing and supply chain analytical tools. |
| • | Volume of data. Participants in the automotive parts aftermarket industry are required to manage large quantities of data. There are over four million different SKUs available to parts sellers, over 200,000 new SKUs introduced each year, and over 150,000 SKUs discontinued each year. The number of parts in the automotive parts aftermarket industry rose by 69% between 1997 and 2002. As a result, most automotive parts aftermarket participants require a comprehensive inventory management system to track this proliferation of new parts. Moreover, manufacturers update catalogs and part prices frequently and installers return many of the parts ordered, furthering the need for strong inventory management. |
| • | Service requirements. Consumer demand for same day repair service and the installers’ incentive to turn repair bays encourage installers to require delivery of specific parts from stores usually within 90 minutes or less. Therefore, the ability of a warehouse distributor or store to access information about parts availability and promptly supply the required product is critical to its success as the preferred provider to the installers it serves. To meet the timing requirements, there is a strong trend to automate the communication and ordering between stores and installers. |
Products and services
The Automotive Group’s software and systems, together with its database products, provide comprehensive business solutions targeted to the automotive parts aftermarket. The Automotive Group 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 Group’s customers to access the Automotive Group’s proprietary databases. The Automotive Group 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 Group’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 Group also provides software and hardware support services for its management systems.
Automotive parts aftermarket systems
The Automotive Group’s 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 Group’s principal automotive parts aftermarket industry products, based on the level of the distribution channel for which such products are targeted, are as follows:
| • | Warehouse distributor. The Automotive Group 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 J-CON product. In addition, the Series 12 and Activant’s Prism store products have connectivity and limited integration with A-DIS. |
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| A second product, Activant’s 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 Activant’s 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. |
| • | Parts sales outlet. The Automotive Group currently markets several products, including J-CON, Eclipse, and Activant’s Prism to stores. The J-CON product was developed to manage stores that are members of a national account program, trading principally with a single warehouse or an A-DIS system. The J-CON product also allows the store to connect with installers through the Company’s and VAR installer automation, 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 stores, tracks inventory, performs accounting functions and executes point-of-sale operations such as invoicing and billing. Activant’s Prism product is designed to meet the needs of both national and independent stores as well as stores in a two-step distribution process. The Automotive Group also maintains and supports Series 12 and LOADSTAR products. |
Customer support services
The Automotive Group provides service, training and support to its customers. The Automotive Group’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 Group 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 Group’s customers can call the Automotive Group’s advice line service, which gives them access to trained personnel able to perform on-line diagnostics or to field engineers if on-site service is necessary. The Company has developed a Web-based product called EntryPoint that allows customers direct access to a call tracking system, and 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 Group offers training for new and existing customers at the facilities of both the Automotive Group and its customers. In addition to training on system operations and software enhancements, the Automotive Group offers seminars and workshops to assist customers in understanding the capabilities of their systems.
Information services
The Automotive Group 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 our products from those of our competitors. The Automotive Group offers data services to the automotive parts aftermarket industry customers, including distributors, manufacturers and retail parts and services chains.
| • | Electronic catalog. The Automotive Group’s electronic catalog products provide access to a database of over 75 million unique automobile part applications for approximately 6,500 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, store and installer systems enables the user to access the electronic catalog database. Customers use the catalog feature within their warehouse distributor, store, or installer system to identify parts associated with a specific vehicle. The Company charges a monthly subscription fee for our electronic catalog database and provides customers with periodic updates. There are approximately 10,000 distributor locations, 1,800 retail locations and 10,000 installer locations subscribed to our electronic catalogs service. |
| • | ePartExpert. The Automotive Group’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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| • | ePartInsight data warehouse. This product can be connected to all the Automotive Group’s warehouse and store 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. |
| • | Manufacturer services. The Automotive Group 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. |
| • | Other products include Interchange, TelePricing, LaborExpert, Service intervals and Tire by size database. |
Connectivity Products
The Automotive Group offers a collection of internet and modem-based communication products that connect the automotive aftermarket from manufacturers through distributors to installers. The Automotive Group’s flagship product, AConneX, uses the internet to allow communication between and among both the Company’s software systems and non-Company related software systems. AConneX enables:
| • | Internet ordering of parts from installers to stores through the Company’s eStore partners; |
| • | the creation of trading networks among stores and warehouses. This enables pooling and trading of inventory at the distribution level; and |
| • | EDI interface between warehouses and manufacturers. |
With its critical mass of installed bases and ability to connect all levels of the aftermarket, the Company believes that AConneX has the potential to become the communication backbone of the aftermarket industry.
Sales and marketing
The Automotive Group 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 Group leverages its relationships with large warehouse distributors through its National Account Program (and other VARs), in which these accounts resell store and service dealer systems to either company owned stores or to other customers that are closely associated to the warehouse distributor.
Automotive Group VAR programs include sales of store management systems (J-CON, via the National Account program),and data products and connectivity services (through both distribution and service dealer solution providers).
Internet Autoparts, Inc.
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 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. The Company granted certain non-exclusive, perpetual, non-transferable licenses to IAP in return for a one-third interest in IAP.
IAP is powered by the Company’s Web-based parts catalog, ePartExpert, and has access to our internet communications gateway, AConneX, which provides seamless communications among the Company’s various business platforms and third-party management systems. AConneX is available for licensing to third-party management systems in addition to IAP. The licenses granted to IAP provide for the payment to the Company of royalties based upon a percentage of net sales made by IAP using the licensed technology.
As part of the Company’s arrangement with IAP, IAP agreed, subject to certain exceptions, not to compete with the Company in the businesses in which the Company is engaged. In addition, the Company agreed, subject to certain exceptions, not to compete with IAP in the business of selling new or rebuilt automotive parts over the Internet to service dealers and consumers. The Company owns, directly or indirectly, approximately 47.5% of the outstanding common stock of IAP.
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Industry Solutions Group
Group Overview
The Company’s Industry Solutions Group provides enterprise management systems and services to hardware, lumber, home improvement, paint, decorating, flooring, lawn, garden, agribusiness, industrial supply, plumbing supply, HVACR and electrical supply retailers and distributors. The hardware and lumber industries generally consist of the sale and distribution of products for a variety of end uses, including residential and commercial building construction, maintenance and repair, lawn and garden and agribusiness. This industry has been driven by several major market participants who have expanded their business throughout the United States by providing products and services using a mass merchandising format. In this environment, the other retailers and wholesalers, which include over 60,000 stores in the Company’s target market, have been required to upgrade or replace their existing management systems in order to reduce costs and improve service levels.
In these segments the Company has generated substantial revenue improvement since 2000. This revenue improvement has been the result of several key initiatives, including:
| • | capitalizing on its existing base of approximately 8,000 customer locations by upgrading them to Activant’s newer generation of software products; |
| • | utilizing its strategic relationships with two major hardware cooperatives to roll out complementary software products to their members; and |
| • | leveraging its sales efforts through other hardware cooperatives, major wholesale marketing groups and lumber and building material distributors and brokers to market the Company’s high end products and services. |
In addition, the Industry Solutions Group has a growing customer base in paint, decorating, flooring, lawn, nursery, industrial supply, plumbing supply, HVACR and electrical supply segments. These segments represent nearly 300,000 businesses, primarily in the SME market. The Company believes its expertise and solution set focused on the special needs for small and medium sized businesses brings tremendous value to this segment of technologically underserved businesses.
Industry Segment Overviews
The hardware and lumber industry consists of the sale of products for residential and commercial building construction, maintenance and repair, lawn and garden, and agribusiness. The Industry Solutions Group 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 approximately $200 billion in revenues in 2002. This market is segmented primarily into three groups:
| • | Mass merchandisers. The ten largest retailers in the hardware and lumber industry (the “Mass Merchandisers”) represent over 6,700 stores and account for approximately 47% of the annual industry sales volume. The Mass Merchandisers 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 Mass Merchandisers to customize and support their own systems, and, therefore, the Mass Merchandisers do not purchase systems from the Industry Solutions Group. The Industry Solutions Group believes that the growth of the Mass Merchandisers generally has driven the need to reduce costs and pursue consolidation strategies throughout the industry. The Mass Merchandisers 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 Mass Merchandisers need to increase their merchandising efficiencies and productivity. |
| • | Lumber and building material dealers. The 500 largest retailers in the hardware and lumber industry, excluding the Mass Merchandisers (the “Lumber and Building Material Dealers”), are estimated to account for approximately 17% of the industry’s annual sales volume. There are approximately 6,500 stores in this market, which are predominantly populated by lumber and building material dealers. This market is fragmented and has experienced consolidation as firms try to compete with the Mass Merchandisers. In addition, this market has experienced significant upgrading of existing systems and a shifting from in-house systems to turnkey systems produced by the Industry Solutions Group. The Industry Solutions Group believes that retailers will continue to upgrade systems as the industry continues to respond to competition and innovation by the Mass Merchandisers. |
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| • | Cooperative dealers. The hardware retailers which are not Mass Merchandisers or Lumber and Building Material Dealers (the “Cooperative Dealers”) are typically smaller, independent stores with a niche focus. The Industry Solutions Group 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 Industry Solutions Group 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 with the rest of the industry. The Industry Solutions Group believes the larger stores in this segment will continue to represent a large portion of the Industry Solutions Group’s revenue base as firms upgrade their computer systems in order to protect their niche market positions. |
The Industry Solutions Group believes that revenue growth in the hardware and lumber industry will continue to be driven by several favorable trends, including:
| • | new home construction and sales and remodeling of existing homes; |
| • | favorable demographic trends, such as an increase in dual income families; and |
| • | continued expansion of product and service offerings by major market participants which drive the rest of the market to rely heavily on MIS solutions to generate operating efficiencies. |
Other segments served by the Industry Solutions Group (agribusiness, industrial supply, plumbing supply, HVACR and electrical supply) are primarily in the wholesale distribution of durable and non-durable goods. Collectively, these segments generated over $1 trillion of revenue in 2002 and consist of over 300,000 SME’s. These market segments tend to be more fragmented than most other industries and require certain specific technology applications to provide value-added service to their customer base.
Drivers of computerization
Computerization within the hardware and lumber industry has been predominantly driven by the Mass Merchandisers which have expanded their business throughout the United States. As a result of this strategy, hardware and lumber consumers have been able to purchase products and services cheaper from Mass Merchandisers than was traditionally available. This has driven the Lumber and Building Material Dealers and the Cooperative Dealers to computerize or upgrade their existing systems in order to reduce costs and improve service to maintain their market positions.
Products and services
The Industry Solutions Group’s software and systems, together with its full range of support services, provide comprehensive business solutions targeted to the hardware and lumber and related industries. The Industry Solutions Group provides standard application programs that include user options allowing the selective structuring of application files and reports to meet customers’ specific requirements. In addition, the Industry Solutions Group provides point of sale product movement information services to manufacturers.
Principal products
The Industry Solutions Group’s systems automate inventory control, point-of-sale accounting and supplier communications. The Industry Solutions Group’s principal systems products are as follows:
| • | Activant’s Eagle. Activant’s Eagle system for Windows® is designed for small and medium sized dealers across multiple segments, including hardware, lumber and building material, paint and agribusiness. Activant’s Eagle system has 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. |
| • | Activant’s Falcon. Activant’s Falcon system is the Industry Solutions Group’s product targeted at large multi-location lumber and building material and home center retailers. Activant’s 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 Activant’s Eagle, Activant’s Falcon, Activant’s Gemini (see below), and Activant’s CSD (see below) system products to give dealers online access to their customers for ordering and account information. |
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In addition to the above principal products, the Industry Solutions Group also services and maintains several products. The Industry Solutions Group expects the customers of these products to migrate to Activant’s Eagle or Activant’s Falcon over the next few years.
| • | Activant’s CSD. Activant’s CSD series of systems is designed for mid- to large-sized hardware and lumber dealers due to its greater power and functionality. Activant’s CSD products allow for product offerings suitable for hardware and building materials chains with up to 20 stores and $150.0 million in annual sales. |
| • | Activant’s Gemini. Activant’s Gemini system is designed for large hardware and lumber dealers. Activant’s Gemini customers represent some of the largest companies in the hardware and lumber industry. Gemini’s customers have revenue up to $1.0 billion. |
Customer support services
The Industry Solutions Group’s customer support services organization provides service, training and support to the Industry Solutions Group’s customers. The Industry Solutions Group’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 Industry Solutions Group typically provides a limited warranty on its systems ranging from 30 to 90 days. The Industry Solutions Group 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 Industry Solutions Group’s customers can call the Industry Solutions Group’s advice line 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.
The Industry Solutions Group 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 Industry Solutions Group offers seminars and workshops to assist customers in understanding the capabilities of their systems.
Information services
The Industry Solutions Group 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 is an industry warehouse of parts descriptions and prices marketed to electrical parts manufacturers and distributors. IDX is an industry data exchange for purchase order and related documents using EDI and internet technologies or electrical manufacturers and distributors.
Sales and marketing
The Industry Solutions Group markets its products and services to the hardware and lumber industry through a geographically-based direct and telesales/telemarketing sales and sales support force of approximately 75 employees. Incentive pay is a significant portion of the total compensation package for all sales personnel.
The Industry Solutions Group’s marketing approach in the hardware 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 Industry Solutions Group 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. The Industry Solutions Group has exclusive agreements to develop, market, and support modified versions of Activant’s Eagle system to two large buying cooperatives in the hardware and lumber industry, representing over 8,000 retail locations. These agreements have allowed a streamlining of the distribution channel and reductions in direct sales costs.
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Corporate services
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 Inc.’s industry standard server and workstation hardware to power most of its software solutions. The Company utilizes a just-in-time inventory system to help ensure that efficient cost controls are in place.
Hardware services and support
The Company provides hardware systems and support through two primary vehicles. The Company’s field service engineering team can be dispatched throughout the United States to diagnose and repair hardware and software on site. In addition, the Company’s depot facility supports remote system and peripheral repair.
Software development and technology
The Company has approximately 200 registered 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 its proprietary information. Second, all of the Company’s personnel are required to assign all of their rights 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 any of the Company’s proprietary information execute an assignment, confidentiality and non-disclosure agreement. Product development expense in fiscal 2001, 2002, and 2003 was $17.4 million, $17.4 million, and $17.0 million, respectively.
Customers and Suppliers
No single customer accounted for more than 10% of the Company’s revenues during the years ended September 30, 2001, 2002, and 2003. Dell Inc. accounted for more than 10% of the supplies used in the Company’s systems integration operations.
Employees
As of September 30, 2003, 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.
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Item 2. Properties.
The Company’s properties are leased, and 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, 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.
Listed below are the principal properties leased by the Company as of December 17, 2003.
| Location |
Approx. Size (Sq. ft.) |
Description of Use |
Lease Termination | |||
| Austin, Texas |
80,000 | Principal and divisional executive offices; software development; sales; administrative | 2006 | |||
| Livermore, California |
79,000 | Divisional executive offices; software development; data entry; sales; administrative | 2012 | |||
| Tracy, California |
36,500 | Hardware computer repair | 2006 | |||
| Denver, Colorado |
25,000 | Administrative; sales; software development | 2005 | |||
| Austin, Texas |
23,000 | Systems integration and distribution | 2008 | |||
| Longford, Ireland |
21,000 | Data entry; administrative; sales | 2027 | |||
| Austin, Texas |
11,000 | Sub-leased | 2005 | |||
| Austin, Texas |
9,000 | Data Center | 2008 |
In addition, the Company has short-term leases on over 40 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. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
The stockholders of Activant Solutions Inc. unanimously consented on August 14, 2003 in lieu of an annual meeting to the appointment or continuation (as applicable) of the following directors: Michael A. Aviles, Peter Brodsky, Jack D. Furst, A. Laurence Jones and James R. Porter. On September 24, 2003, the stockholders of Activant Solutions Inc. unanimously consented in lieu of a special meeting to change the Company’s corporate name and to the execution of a Certificate of Amendment to the Articles of Incorporation effectuating such change.
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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 stock. All of the Company’s common stock is held by Activant Solutions Holdings Inc., a Delaware corporation (“Holding”). The Company paid Holding a $30.0 million dividend in fiscal 2003. The Company’s ability to pay any dividends in the future is limited by the terms of the Company’s Amended and Restated Credit Agreement (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, 1999, 2000, 2001, 2002 and 2003. The balance sheet data as of September 30, 2002 and 2003, and the statement of operations data for the years ended September 30, 2001, 2002, and 2003 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, 1999, 2000 and 2001 and the statement of operations data for the years ended September 30, 1999 and 2000 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.
| (in thousands) | ||||||||||||||||||||
| Year Ended September 30, |
||||||||||||||||||||
| 1999 |
2000 |
2001 |
2002 |
2003 |
||||||||||||||||
| Statement of Operations Data: |
||||||||||||||||||||
| Revenues |
$ | 240,745 | $ | 223,919 | $ | 211,035 | $ | 218,705 | $ | 221,546 | ||||||||||
| Cost of revenues |
153,205 | 133,215 | 113,743 | 111,764 | 111,777 | |||||||||||||||
| Gross profit |
87,540 | 90,704 | 97,292 | 106,941 | 109,769 | |||||||||||||||
| Sales and marketing |
63,152 | 47,437 | 39,491 | 33,909 | 31,961 | |||||||||||||||
| Product development |
15,997 | 12,209 | 17,470 | 17,435 | 16,997 | |||||||||||||||
| General and administrative |
26,665 | 29,574 | 26,166 | 26,420 | 27,406 | |||||||||||||||
| Goodwill amortization |
11,535 | 11,484 | 10,589 | — | — | |||||||||||||||
| Total operating expenses |
117,349 | 100,704 | 93,716 | 77,764 | 76,364 | |||||||||||||||
| Operating income (loss) |
||||||||||||||||||||