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EX-32.1 - EX-32.1 - ACTIVANT SOLUTIONS INC /DE/ | d75121exv32w1.htm |
EX-31.2 - EX-31.2 - ACTIVANT SOLUTIONS INC /DE/ | d75121exv31w2.htm |
EX-32.2 - EX-32.2 - ACTIVANT SOLUTIONS INC /DE/ | d75121exv32w2.htm |
EX-31.1 - EX-31.1 - ACTIVANT SOLUTIONS INC /DE/ | d75121exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 333-49389
Activant Solutions Inc.
(Exact name of registrant as specified in its charter)
Delaware | 94-2160013 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
7683 Southfront Road | ||
Livermore, CA (Address of principal executive offices) |
94551 (Zip Code) |
(925) 449-0606
(Registrants telephone number,
including area code)
(Registrants telephone number,
including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ Although
Activant Solutions Inc. is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act, the company has filed all Exchange Act reports for the preceding 12 months.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o Activant
Solutions Inc. is not currently required to submit and post Interactive Data Files pursuant to Rule
405 of Regulation S-T.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Class | Outstanding at August 9, 2010 | |
Common Stock, par value $0.01 per share | 10 shares |
ACTIVANT SOLUTIONS INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010
FOR THE QUARTER ENDED JUNE 30, 2010
INDEX
Table of Contents
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are subject to safe harbors under the
Securities Act of 1933, as amended (the Securities Act) and the Securities Exchange Act of 1934,
as amended (the Exchange Act). In particular, statements about our expectations, beliefs, plans,
objectives, assumptions or future events or performance contained in this report under Part I,
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements. We have based these forward-looking statements on our current
expectations about future events. While we believe these expectations are reasonable, these
forward-looking statements are inherently subject to risks and uncertainties, many of which are
beyond our control. Our actual results may differ materially from those suggested by these
forward-looking statements for various reasons, including those discussed in this report under
Part I, Item 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations and Part I, Item 1A Risk Factors of our Annual Report on Form 10-K for the fiscal
year ended September 30, 2009.
Some of the key factors that could cause actual results to differ from our expectations are:
| the negative effect of the recent credit crisis and unfavorable market conditions on our
customers and on our business; |
||
| the financial situation in the U.S. and global capital and credit markets; |
||
| our substantial indebtedness and our ability to incur additional indebtedness; |
||
| certain covenants in our debt documents, including covenants that require us to satisfy
a maximum total leverage ratio and a minimum interest coverage ratio; |
||
| failure to anticipate, meet or respond to our customers needs or requirements; |
||
| failure of our proprietary technology to support our customers future needs or it
becoming obsolete; |
||
| failure to develop new relationships and maintain existing relationships with well-known
market participants and/or key customers and/or loss of significant customer revenues; |
||
| shortage or delays in the receipt of equipment or hardware necessary to develop our
business management solutions and systems; |
||
| failure to maintain adequate financial and management processes and controls; |
||
| loss of recurring subscription service revenues; |
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| failure to integrate and retain our senior management personnel; |
||
| failure of our Activant Eagle and Vision products to gain acceptance within the
automotive parts aftermarket; |
||
| costs and difficulties of integrating current and future acquisitions; |
||
| the amount of any additional impairment charges, including to goodwill, due to the
continuing global economic uncertainty and credit crisis; |
||
| changes in the manner or basis on which we receive third-party information used to
maintain our electronic automotive parts and applications catalog; |
||
| failure by certain of our existing customers to upgrade to our current generation of
systems; |
||
| failure to effectively compete; |
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| substantial fluctuations in our sales cycles applicable to our systems sales; |
||
| consolidation trends, attrition, migration to competitors products and reductions in
support levels among our customers and in the market segments in which we operate; |
||
| failure to adequately protect our proprietary rights and intellectual property or
limitations on the availability of legal or technical means of effecting such protection; |
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| claims by third parties that we are infringing on their proprietary rights or other
adverse claims; |
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| defects or errors in our software or information services; |
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| failure to obtain software and information we license from third parties; |
||
| interruptions of our connectivity applications and our systems; |
||
| claims for damages against us in the event of a failure of our customers systems or in
the implementation of those systems; |
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| fluctuations in the value of foreign currencies; |
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| natural disasters, terrorist attacks or other catastrophic events; |
||
| differing interests of debt security holders and our controlling stockholders or
investors; and |
||
| the other factors described under the heading Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2009. |
Given these risks and uncertainties, you are cautioned not to place undue reliance on the
forward-looking statements included in this report. The forward-looking statements included in this
report are made only as of the date hereof. Except as required by law, we do not undertake and
specifically decline any obligation to update any such statements or to publicly announce the
results of any revisions to any of such statements to reflect future events or developments.
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
ACTIVANT SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(UNAUDITED)
June 30, | September 30, | |||||||
(in thousands, except share data) | 2010 | 2009 | ||||||
ASSETS: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 68,724 | $ | 44,573 | ||||
Trade accounts receivable, net of allowance for
doubtful accounts of $4,051 at June 30, 2010
and $4,446 at September 30, 2009 |
34,051 | 34,196 | ||||||
Inventories |
4,216 | 4,985 | ||||||
Deferred income taxes |
3,255 | 1,080 | ||||||
Income taxes receivable |
1,387 | | ||||||
Prepaid expenses and other current assets |
5,748 | 5,482 | ||||||
Assets of discontinued operations (Note 10) |
| 7,418 | ||||||
Total current assets |
117,381 | 97,734 | ||||||
Property and equipment, net |
6,089 | 5,968 | ||||||
Intangible assets, net |
173,400 | 190,847 | ||||||
Goodwill |
541,454 | 541,454 | ||||||
Deferred financing costs |
7,246 | 8,903 | ||||||
Other assets |
3,539 | 3,178 | ||||||
Total assets |
$ | 849,109 | $ | 848,084 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 15,879 | $ | 18,030 | ||||
Payroll related accruals |
17,453 | 17,417 | ||||||
Deferred revenue |
34,201 | 28,191 | ||||||
Current portion of long-term debt |
| 5,886 | ||||||
Accrued expenses and other current liabilities |
15,318 | 19,717 | ||||||
Liabilities of discontinued operations (Note 10) |
| 2,278 | ||||||
Total current liabilities |
82,851 | 91,519 | ||||||
Long-term debt, net of discount |
506,895 | 517,009 | ||||||
Deferred tax liabilities |
51,802 | 53,837 | ||||||
Other liabilities |
16,547 | 19,189 | ||||||
Total liabilities |
658,095 | 681,554 | ||||||
Commitments and contingencies |
| | ||||||
Common Stock: |
||||||||
Par value $0.01, authorized 1,000 shares, 10
shares issued and outstanding at June 30,
2010 and September 30, 2009 |
| | ||||||
Additional paid-in capital |
260,414 | 257,570 | ||||||
Accumulated deficit |
(60,263 | ) | (80,680 | ) | ||||
Other accumulated comprehensive loss: |
||||||||
Unrealized loss on cash flow hedges |
(6,133 | ) | (8,593 | ) | ||||
Cumulative translation adjustment |
(3,004 | ) | (1,767 | ) | ||||
Total stockholders equity |
191,014 | 166,530 | ||||||
Total liabilities and stockholders equity |
$ | 849,109 | $ | 848,084 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
Table of Contents
ACTIVANT SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenues: |
||||||||||||||||
Systems |
$ | 30,019 | $ | 26,844 | $ | 90,289 | $ | 88,190 | ||||||||
Services |
60,472 | 62,319 | 183,347 | 187,144 | ||||||||||||
Total revenues |
90,491 | 89,163 | 273,636 | 275,334 | ||||||||||||
Cost of revenues (exclusive of depreciation and
amortization of $4.7 million, $4.3 million, $13.9
million, and $13.3 million for the three months
ended June 30, 2010 and 2009 and nine months
ended June 30, 2010 and 2009, respectively,
included in amounts shown separately below): |
||||||||||||||||
Systems (Note 7) |
15,461 | 15,091 | 49,324 | 48,490 | ||||||||||||
Services (Note 7) |
19,577 | 20,051 | 59,193 | 62,710 | ||||||||||||
Total cost of revenues |
35,038 | 35,142 | 108,517 | 111,200 | ||||||||||||
Gross profit |
55,453 | 54,021 | 165,119 | 164,134 | ||||||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing (Note 7) |
14,456 | 13,399 | 43,010 | 41,054 | ||||||||||||
Product development (Note 7) |
8,520 | 8,757 | 25,886 | 27,412 | ||||||||||||
General and administrative (Note 7) |
6,841 | 6,082 | 19,370 | 17,859 | ||||||||||||
Depreciation and amortization |
9,831 | 9,272 | 29,613 | 28,508 | ||||||||||||
Impairment of goodwill |
| | | 107,000 | ||||||||||||
Restructuring costs |
(59 | ) | (40 | ) | 1,915 | 4,251 | ||||||||||
Total operating expenses |
39,589 | 37,470 | 119,794 | 226,084 | ||||||||||||
Operating income (loss) |
15,864 | 16,551 | 45,325 | (61,950 | ) | |||||||||||
Interest expense |
(7,644 | ) | (9,722 | ) | (23,347 | ) | (32,398 | ) | ||||||||
Gain on retirement of debt |
| 4,631 | | 18,958 | ||||||||||||
Other income (expense), net |
(269 | ) | 22 | 162 | (604 | ) | ||||||||||
Income (loss) from continuing operations before
income taxes |
7,951 | 11,482 | 22,140 | (75,994 | ) | |||||||||||
Income tax expense |
1,901 | 5,218 | 7,544 | 14,435 | ||||||||||||
Income (loss) from continuing operations |
6,050 | 6,264 | 14,596 | (90,429 | ) | |||||||||||
Income (loss) from discontinued operations, net of
income taxes (Note 10) |
(315 | ) | 1,350 | (357 | ) | 3,559 | ||||||||||
Gain from sale of discontinued operations, net of
income taxes (Note 10) |
6,178 | | 6,178 | | ||||||||||||
Net income (loss) |
$ | 11,913 | $ | 7,614 | $ | 20,417 | $ | (86,870 | ) | |||||||
Comprehensive income (loss): |
||||||||||||||||
Net income (loss) |
$ | 11,913 | $ | 7,614 | $ | 20,417 | $ | (86,870 | ) | |||||||
Unrealized gain (loss) on cash flow hedges |
907 | 2,025 | 2,460 | (2,933 | ) | |||||||||||
Foreign currency translation adjustment |
(431 | ) | 290 | (1,237 | ) | (1,253 | ) | |||||||||
Comprehensive income (loss) |
$ | 12,389 | $ | 9,929 | $ | 21,640 | $ | (91,056 | ) | |||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
Table of Contents
ACTIVANT SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(UNAUDITED)
Nine Months Ended June 30, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
Operating activities: |
||||||||
Net income (loss) |
$ | 20,417 | $ | (86,870 | ) | |||
(Income) loss from discontinued operations, net of tax |
357 | (3,559 | ) | |||||
Gain from sale of discontinued operations, net of tax |
(6,178 | ) | | |||||
Income (loss) from continuing operations |
14,596 | (90,429 | ) | |||||
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by operating activities: |
||||||||
Impairment of goodwill |
| 107,000 | ||||||
Gain on retirement of debt |
| (18,958 | ) | |||||
Stock-based compensation expense |
2,827 | 2,810 | ||||||
Depreciation |
3,925 | 3,886 | ||||||
Amortization of intangible assets |
25,688 | 24,622 | ||||||
Amortization of deferred financing costs |
1,657 | 1,781 | ||||||
Provision for doubtful accounts |
1,698 | 1,180 | ||||||
Deferred income taxes |
(4,210 | ) | (1,971 | ) | ||||
Changes in assets and liabilities: |
||||||||
Trade accounts receivable |
(1,553 | ) | 7,504 | |||||
Inventories |
769 | (499 | ) | |||||
Prepaid expenses and other assets |
(2,014 | ) | (1,247 | ) | ||||
Accounts payable |
(2,151 | ) | (2,856 | ) | ||||
Deferred revenue |
6,010 | 2,616 | ||||||
Accrued expenses and other liabilities |
(5,780 | ) | 1,426 | |||||
Net cash provided by operating activities continuing operations |
41,462 | 36,865 | ||||||
Net cash provided by (used in) operating activities discontinued
operations |
(490 | ) | 4,064 | |||||
Net cash provided by operating activities |
40,972 | 40,929 | ||||||
Investing activities: |
||||||||
Purchases of property and equipment |
(4,051 | ) | (1,456 | ) | ||||
Capitalized computer software and database costs |
(8,238 | ) | (6,552 | ) | ||||
Net cash used in investing activities continuing operations |
(12,289 | ) | (8,008 | ) | ||||
Net cash provided by (used in) investing activities discontinued
operations (including proceeds from sale of business) |
11,468 | (2 | ) | |||||
Net cash used in investing activities |
(821 | ) | (8,010 | ) | ||||
Financing activities: |
||||||||
Repurchases of common stock |
| (189 | ) | |||||
Payments on long-term debt |
(16,000 | ) | (13,512 | ) | ||||
Repurchases of debt |
| (39,840 | ) | |||||
Net cash used in financing activities |
(16,000 | ) | (53,541 | ) | ||||
Net cash from continuing operations |
13,173 | (24,684 | ) | |||||
Net cash from discontinued operations |
10,978 | 4,062 | ||||||
Net change in cash and cash equivalents |
24,151 | (20,622 | ) | |||||
Cash and cash equivalents, beginning of period |
44,573 | 64,789 | ||||||
Cash and cash equivalents, end of period |
$ | 68,724 | $ | 44,167 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid during the period for interest |
$ | 24,179 | $ | 38,288 | ||||
Cash paid during the period for income taxes |
$ | 19,602 | $ | 6,873 | ||||
Cash received during the period for income taxes |
$ | (127 | ) | $ | (237 | ) |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
Table of Contents
ACTIVANT SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(UNAUDITED)
June 30, 2010
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheets as of June 30, 2010 and September 30,
2009 and the accompanying condensed consolidated statements of operations and comprehensive income
(loss) for the three and nine months ended June 30, 2010 and 2009 and cash flows for the nine
months ended June 30, 2010 and 2009 represent our financial position, results of operations and
cash flows as of and for the periods then ended.
Our accompanying unaudited condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States (GAAP) for interim
financial information and in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP
for complete financial statements. GAAP requires our management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Management continually evaluates its estimates and judgments
including those related to allowances for doubtful accounts, stock-based compensation, income taxes
and valuation allowances. While our management has based their assumptions and estimates on the
facts and circumstances existing at June 30, 2010, actual results could differ from those estimates
and operating results for the three and nine months ended June 30, 2010 are not necessarily
indicative of the results that may be achieved for the fiscal year ending September 30, 2010.
Certain reclassifications have been made to the prior period presentation to conform to the current
period presentation.
In the opinion of our management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring adjustments, which are
necessary for a fair presentation of the results for the interim periods presented. These
financial statements should be read in conjunction with our audited consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2009, filed with the Securities and Exchange Commission (the SEC) on December 14,
2009.
As further discussed in Note 10, in April 2010, we sold our productivity tools business.
Accordingly, we have separately classified the results of operations, assets and liabilities, and
cash flows of the discontinued operations in the accompanying condensed consolidated financial
statements for all the periods presented. Unless otherwise noted, the accompanying disclosures
pertain to our continuing operations.
NOTE 2 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND OTHER LEGISLATION
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and
Education Reconciliation Act of 2010 (the Act) were enacted. The primary focus of the Act is to
significantly reform health care in the United States. We have determined that this legislation
does not create an immediate financial impact on our condensed consolidated financial statements,
however we will continue to evaluate any prospective effects of the Act.
In January 2010, the FASB issued an ASU further clarifying disclosures regarding measurements of
fair value in financial statements. This guidance clarifies existing fair value guidance as well
as requires new disclosures for significant transfers between Level 1 and Level 2 of the fair value
hierarchy and the reasons for such transfers. Additionally, it requires disclosure of the reasons
for any transfers in or out of Level 3 of the fair value hierarchy. Upon adoption of this guidance
in January 2010, we determined it not to have a material impact on our condensed consolidated
financial statements.
In October 2009, the FASB issued an ASU that amended the accounting rules addressing revenue
recognition for multiple-deliverable revenue arrangements by eliminating the criterion for
objective and reliable evidence of fair value for the undelivered products or services. Instead,
revenue arrangements with multiple deliverables should be divided into separate units of accounting
provided the deliverables meet certain criteria. Additionally, the ASU provides for elimination of
the use of the residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables based on their relative selling
price. A hierarchy for estimating such selling price is included in the update. This ASU will be
effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, however early adoption and retroactive application are
permitted. We plan to adopt this ASU in our fiscal year beginning October 1, 2010. We are
currently evaluating whether this update will have an impact on our consolidated financial
statements.
6
Table of Contents
In October 2009, the FASB also issued an ASU that provides a list of items to consider when
determining whether the software and non-software components function together to deliver a
products essential functionality. This ASU is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, however
early adoption and retroactive application are permitted. We plan to adopt this ASU in our fiscal
year beginning October 1, 2010. We are currently evaluating whether this update will have an impact
on our consolidated financial statements.
In October 2009, we adopted authoritative accounting guidance providing clarification for measuring
liabilities at fair value. The adoption of this guidance did not have a material impact on our
condensed consolidated financial statements. See Note 5 for additional information.
In addition, in October 2009, we adopted revised guidance regarding business combinations. This
guidance, among other things, establishes principles and requirements for how the acquirer in a
business combination (i) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in the acquired
business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain
from a bargain purchase, and (iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business combination. The
adoption of this guidance did not have a material impact on our condensed consolidated financial
statements.
NOTE 3 GOODWILL
The carrying amount of goodwill by reportable segments as of both June 30, 2010 and September
30, 2009 is as follows (in thousands):
Retail Distribution Group |
$ | 207,166 | ||
Wholesale Distribution |
334,288 | |||
Total |
$ | 541,454 | ||
We account for goodwill and other intangibles in accordance with relevant authoritative accounting
principles. Business acquisitions typically result in goodwill and other intangible assets, and
the recorded values of those assets may become impaired in the future. The determination of the
value of these intangible assets requires management to make estimates and assumptions that affect
our consolidated financial statements. Goodwill and other intangibles are tested for impairment on
an annual basis as of July 1, and between annual tests if indicators of potential impairment exist,
using a fair-value-based approach. As a result of the global economic uncertainty and credit
crisis, we determined it necessary to evaluate goodwill for impairment as of December 31, 2008 as
well as during our annual impairment testing. Based on these analyses we concluded that during
fiscal 2009, the fair value of the Retail Distribution Group was below its respective carrying
value, including goodwill. Consequently, we recorded a goodwill impairment charge of $107.0
million related to Retail Distribution Group for fiscal year 2009, all of which was recognized
during the nine months ended June 30, 2009. For the purpose of these analyses, our estimates of
fair value were based on a combination of the income approach, which estimates the fair value of
our reporting units based on the future discounted cash flows, and the market approach, which
estimates the fair value of our reporting units based on comparable market prices. We will not be
required to make any current or future cash payments as a result of these impairment charges. We
will continue to monitor if conditions exist that indicate additional potential impairment has
occurred. If such conditions exist, we may be required to record additional impairments in the
future and such impairments, if any, may be material.
Effective October 1, 2009, we combined our Hardlines and Lumber and Automotive segments into a
single segment called the Retail Distribution Group. See Note 9 for further information. We have
adjusted our prior period presentation accordingly to conform to the current period presentation.
NOTE 4 DEBT
Total debt consisted of the following (in thousands):
June 30, | September 30, | |||||||
2010 | 2009 | |||||||
Senior secured credit facility due 2013 |
$ | 326,241 | $ | 331,227 | ||||
Senior secured credit facility (incremental term loan) due 2013 |
66,359 | 67,373 | ||||||
Senior subordinated notes due 2016 |
114,295 | 114,295 | ||||||
Revolving credit facility due 2011 |
| 10,000 | ||||||
Total debt |
506,895 | 522,895 | ||||||
Current portion |
| (5,886 | ) | |||||
Total long-term debt, net of discount |
$ | 506,895 | $ | 517,009 | ||||
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Senior Secured Credit Agreement
We have a senior secured credit agreement that provides for (i) a seven-year term loan in the
amount of $390.0 million payable on May 2, 2013, and (ii) a five-year revolving credit facility
that permits loans in an aggregate amount of up to $40.0 million, which includes a $5.0 million
letter of credit facility and a swing line facility. Principal amounts outstanding under the
revolving credit facility are due and payable in full on May 2, 2011. In addition, subject to
certain terms and conditions, the senior secured credit agreement provides for one or more
uncommitted incremental term loans and/or revolving credit facilities in an aggregate amount not to
exceed $75.0 million.
In August 2007, we borrowed the $75.0 million incremental term loan, which matures on May 2, 2013,
as well as $20.0 million of the revolving credit facility. During the year ended September 30,
2009, we repaid $10.0 million in principal payments towards the revolving credit facility. During
the nine months ended June 30, 2010, we repaid the $10.0 million remaining outstanding principal
balance on the revolving credit facility. Prior to fiscal year 2009, we did not make any principal
repayments towards the revolving credit facility.
We may be required each year, generally concurrent with the filing of our Annual Report on Form
10-K, to make a mandatory principal repayment for the preceding fiscal year towards term loans
equal to a specified percentage of excess cash flow depending on our actually attained ratio of
consolidated total debt to EBITDA (consolidated earnings before interest, taxes, depreciation and
amortization, further adjusted to exclude unusual items and other adjustments permitted in
calculating covenant compliance under the indenture governing the senior subordinated notes and our
senior secured credit facilities), all as defined in the senior secured credit agreement. Any
mandatory repayments due are reduced dollar-for-dollar by any voluntary prepayments made during the
year. Prior to fiscal year 2008, we did not have to make any mandatory repayments. For the period
ended September 30, 2006 and for the years ended September 30, 2007, 2008 and 2009, we repaid $1.9
million, $25.2 million, $15.8 million, and $23.5 million, respectively, in principal towards the
term loans. The fiscal year 2009 payments included approximately $3.3 million of fiscal year 2008
mandatory principal repayments and approximately $20.2 million of voluntary prepayments. For the
nine months ended June 30, 2010, we repaid $6.0 million in principal towards the term loans as a
voluntary prepayment. As of September 30, 2009, we had classified approximately $5.9 million of
term loans as current maturities resulting from our then current mandatory principal repayment
calculations. Our mandatory repayment calculation as of the repayment date indicated that our
earlier prepayments had fully satisfied all fiscal year 2009 excess cash flow-based payments, and,
consequently, no mandatory repayment was due. As mentioned, we proceeded with a $6.0 million
principal payment, all of which is considered a voluntary prepayment of fiscal year 2010 excess
cash flow-based principal payments. Any future excess cash flow- based payments will be dependent
upon our attained ratio of consolidated total debt to adjusted EBITDA, upon us generating excess
cash flow, and/or upon us making voluntary prepayments, all as defined in the senior secured credit
agreement.
In April 2010, we completed the sale of our productivity tools business for approximately $12.0
million in cash. See Note 10 for further information. The senior secured credit agreement
requires us to reinvest such cash proceeds in our business within 12 months of receipt and to
prepay an aggregate principal amount of term loans equal to the amount of any cash proceeds not
reinvested in our business. We expect to reinvest these cash proceeds in our business within such
12-month period.
The capital and credit markets have been experiencing extreme volatility and disruption during the
past several years. These market conditions have, to a degree, affected our ability to borrow
under our senior secured credit facility. On September 15, 2008, Lehman Brothers Holdings Inc.
(Lehman Brothers) and on November 1, 2009, CIT Group Inc. (CIT), filed petitions under Chapter
11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New
York. On December 10, 2009, CIT confirmed that it had emerged from bankruptcy. A Lehman Brothers
subsidiary, Lehman Commercial Paper Inc. (Lehman CPI) and a CIT subsidiary, The CIT
Group/Equipment Financing, Inc. (CIT Financing), are lenders under our senior secured credit
agreement, having provided commitments of $7.0 million and $7.5 million, respectively, under the
revolving credit facility, of which no amounts were outstanding as of June 30, 2010. Although we
have made no request for funding under the revolving credit facility since the filing of the
bankruptcy petitions by Lehman Brothers or CIT, it is uncertain whether Lehman CPI or CIT Financing
will participate in any future requests for funding or whether another lender might assume their
commitments.
The borrowings under the senior secured credit agreement bear interest at a rate equal to an
applicable margin plus, at our option, either (a) a base rate determined by reference to the higher
of (1) the prime rate of Deutsche Bank Trust Company Americas, and (2) the federal funds rate plus
0.50%; or (b) a reserve adjusted Eurodollar rate on deposits for periods of one-, two-, three-, or
six-months (or, to the extent agreed to by each applicable lender, nine- or twelve-months or less
than one month). The initial applicable margin for the borrowings is:
| under the term loan, 1.00% with respect to base rate borrowings and 2.00% with respect to
Eurodollar rate borrowings; |
|
| under the incremental term loan, 1.50% with respect to base rate borrowings and 2.50% with
respect to Eurodollar rate borrowings; and |
|
| under the revolving credit facility, 1.00% with respect to base rate borrowings and 2.00%
with respect to Eurodollar rate borrowings, which may be reduced subject to our attainment of
certain leverage ratios. |
In addition to paying interest on outstanding principal under the senior secured credit agreement,
we are required to pay a commitment fee to the lenders under the revolving credit facility in
respect of the unutilized commitments thereunder. The initial commitment fee rate is
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0.50% per annum. The commitment fee rate may be reduced subject to our attaining certain leverage
ratios. As of June 30, 2010, our commitment fee was 0.375% per annum. We must also pay customary
letter of credit fees for issued and outstanding letters of credit. As of June 30, 2010, we had
$0.3 million of letters of credit issued and outstanding.
Substantially all of our assets and those of our subsidiaries are pledged as collateral under the
senior secured credit agreement.
Derivative Instruments and Hedging Activities
Our objective in using interest rate swaps is to add stability to interest expense and to manage
and reduce the risk inherent in interest rate fluctuations. To accomplish this objective, we
primarily use interest rate swaps as part of our interest rate risk management strategy. Interest
rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a
counterparty in exchange for our making fixed-rate payments over the life of the agreements without
exchange of the underlying notional amount. At the time we entered into the senior secured credit
agreement, we entered into four interest rate swaps to effectively convert a notional amount of
$245.0 million of floating rate debt to fixed rate debt. In November 2007, 2008 and 2009, interest
rate swaps with a notional amount of $25.0 million, $30.0 million and $50.0 million, respectively,
matured. As of June 30, 2010, we had an outstanding interest rate swap with a notional amount of
$140.0 million.
We account for these interest rate swaps as cash flow hedges in accordance with relevant
authoritative accounting principles. We estimate the fair value of the interest rate swaps based
on quoted prices and market observable data of similar instruments. If the interest rate swap
agreements are terminated prior to maturity or no longer probable of offset, the fair value of the
interest rate swaps recorded in accumulated other comprehensive income (loss) (OCI) may be
recognized in the consolidated statements of operations based on an assessment of the agreements at
the time of terminations. During the nine months ended June 30, 2010, we did not discontinue any
interest rate swaps. The realized gains and losses on these instruments are recorded in earnings
as adjustments to interest expense. The unrealized gains and losses are recognized in OCI. For
the three and nine months ended June 30, 2010 and 2009, we recorded an unrealized gain of $1.4
million ($0.9 million net of tax), unrealized gain of $3.8 million ($2.5 million net of tax),
unrealized gain of $2.5 million ($1.5 million net of tax), and an unrealized loss of $4.9 million
($2.9 million net of tax), respectively. At June 30, 2010, cumulative net unrealized losses of
approximately $9.9 million, before taxes, were recorded in OCI, of which an estimated $6.7 million
are expected to be reclassified to net income within the next twelve months, providing an
offsetting economic impact against the underlying transaction. To the extent any of the interest
rate swaps are deemed ineffective, a portion of the unrealized gains and losses is recorded in
interest expense rather than OCI. As of and for the nine months ended June 30, 2010, there is no
cumulative ineffectiveness related to these interest rate swaps.
The following table summarizes the derivative-related activity, excluding taxes, in OCI for the
nine months ended June 30, 2010 (in thousands):
Unrealized loss in OCI at September 30, 2009 |
$ | (13,723 | ) | |
Net increase in fair value |
3,784 | |||
Unrealized loss in OCI at June 30, 2010 |
$ | (9,939 | ) | |
The following tables summarize the fair value and realized and unrealized losses of the interest
rate swaps as of and for the nine months ended June 30, 2010 (in thousands):
Fair Value of Derivative Instruments | ||||||||||
Derivative Assets | Derivative Liabilities | |||||||||
Location in the | Location in the | |||||||||
Condensed | Condensed | |||||||||
Consolidated | Consolidated | |||||||||
Notional Amount | Balance Sheet | Fair Value | Balance Sheet | Fair Value | ||||||
Interest rate swaps due November 2011 |
$140,000 | Other assets | $ | Other liabilities | $(9,939) | |||||
Effect of Derivative Instruments on Condensed Consolidated Statements of Operations and OCI | ||||||||||
Gain recognized | Gain/(Loss) reclassified from OCI into | |||||||||
Loss recognized in earnings (1) | in OCI | earnings (2) | ||||||||
Location | Amount | Amount | Location | Amount | ||||||
Interest rate swaps |
Interest expense | $(5,650) | $3,784 | Interest expense | $ |
(1) | Includes amounts related to periodic settlements required under our derivative
contracts. |
|
(2) | Represents ineffectiveness related to the interest rate swaps. |
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Senior Subordinated Notes due 2016
We have also issued $175.0 million aggregate principal amount of 9.5% senior subordinated notes due
May 2, 2016. The notes were issued in a private transaction that was not subject to the
registration requirements of the Securities Act. The notes subsequently were exchanged for
substantially identical notes registered with the SEC, pursuant to a registration rights agreement
entered into in connection with the indenture under which these notes were issued.
During the three months ended June 30, 2009, we repurchased approximately $25.0 million in face
value of our senior subordinated notes in open market transactions for an aggregate purchase price
of approximately $19.9 million (including accrued interest of $0.3 million). In connection with
the debt repurchase, we wrote off deferred financing costs and other transaction fees of $0.8
million. As a result of these repurchases we recorded a gain on retirement of debt in the amount
of $4.6 million. During the nine months ended June 30, 2009, we repurchased approximately $60.7
million in face value of our senior subordinated notes in open market transactions for an aggregate
purchase price of approximately $41.1 million (including accrued interest of $1.3 million). In
connection with the debt repurchase, we wrote off deferred financing costs and other transaction
fees of $1.9 million. As a result of these repurchases we recorded a gain on retirement of debt in
the amount of $19.0 million. There were no repurchases of notes during the nine months ended June
30, 2010. As a result of these repurchases, senior subordinated notes representing $114.3 million
in principal amount were outstanding as of June 30, 2010.
Each of our domestic subsidiaries, as primary obligors and not as sureties, jointly and severally,
irrevocably and unconditionally guarantees, on an unsecured senior subordinated basis, the
performance and full and punctual payment when due, whether at maturity, by acceleration or
otherwise, of all of our obligations under the indenture and the notes. The notes are our
unsecured senior subordinated obligations and are subordinated in right of payment to all of our
existing and future senior indebtedness (including the senior secured credit agreement), are
effectively subordinated to all of our secured indebtedness (including the senior secured credit
agreement) and are senior in right of payment to all of our existing and future subordinated
indebtedness.
The terms of the senior secured credit agreement and the indenture governing the senior
subordinated notes restrict certain activities by us, the most significant of which include
limitations on additional indebtedness, liens, guarantees, payment or declaration of dividends,
sale of assets and transactions with affiliates. In addition, the senior secured credit agreement
requires us to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The
senior secured credit agreement and the indenture also contain certain customary affirmative
covenants and events of default. At June 30, 2010, we were in compliance with all of the senior
secured credit agreements and the indentures covenants.
Compliance with these covenants is dependent on the results of our operations, which are subject to
a number of factors including current economic conditions. Based on our forecast for the remainder
of fiscal year 2010, we currently anticipate that we will be able to meet or exceed these financial
tests and covenants during this period. This expectation is based on our cost and revenue
expectations for fiscal year 2010. Should the current economic conditions cause our business or
our vertical markets to deteriorate beyond our expectations or should our cost cutting initiatives
prove insufficient we may not be able to satisfy these financial tests and covenants.
In order to help ensure compliance with our covenants under our senior secured credit facilities,
we may take additional actions in the future, including implementing additional cost cutting
initiatives, making additional repurchases of some of our debt or making further changes to our
operations. In the event of a default of the financial covenants referred to above, we may (but no
more than two times in four fiscal quarters) cure the default by raising equity capital from our
existing investors in an amount sufficient to pass, but not to exceed, the financial covenant.
While we believe that these additional remedies provide us with some additional flexibility in
maintaining compliance with our tests and covenants, they do not assure us that we will not find
ourselves in violation of these tests and covenants. Upon the occurrence of an event of default
under the senior secured credit facilities, the lenders could elect to declare all amounts
outstanding to be immediately due and payable and terminate all commitments to extend further
credit. Any such acceleration would also result in a default under the indenture governing the
senior subordinated notes.
Subject to the restrictions and limitations set forth under the senior secured credit agreement and
the indenture governing the senior subordinated notes, we and our subsidiaries, affiliates or
significant stockholders may from time to time, in our sole discretion, purchase, repay, redeem or
retire additional amounts of our outstanding debt or equity securities (including any publicly
issued debt), in privately negotiated or open market transactions, by tender offer or otherwise.
NOTE 5 FAIR VALUE
We measure fair value based on authoritative accounting guidance, which defines fair value,
establishes a framework for measuring fair value as well as expands on required disclosures
regarding fair value measurements. In October 2009, we adopted authoritative accounting guidance
providing clarification for measuring fair value when a quoted price in an active market for the
identical liability is not available. It also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or adjustment to other
inputs relating to the existence of a restriction that prevents the transfer of the liability.
This guidance did not have a material impact on our fair value measurements.
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Inputs are referred to as assumptions that market participants would use in pricing the asset or
liability. The use of inputs in the valuation process are categorized into a three-level fair
value hierarchy.
| Level 1 uses quoted prices in active markets for identical assets or liabilities we
have the ability to access. |
||
| Level 2 uses observable inputs other than quoted prices in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data. |
||
| Level 3 uses one or more significant inputs that are unobservable and supported by
little or no market activity, and that reflect the use of significant management
judgment. |
Our Level 1 assets and liabilities consist of cash equivalents, which are primarily invested in
money market funds; deferred compensation assets, which consist of corporate-owned life insurance
policies that are valued at their net cash surrender value; and deferred compensation liabilities,
valued based on various publicly traded mutual funds. These assets and liabilities are classified
as Level 1 because they are valued using quoted prices and other relevant information generated by
market transactions involving identical assets and liabilities.
We use derivative financial instruments, specifically interest rate swaps, for non-trading
purposes. We entered into interest rate swaps to manage and reduce the risk inherent in interest
rate fluctuations arising from previously un-hedged interest payments associated with floating rate
debt. We account for the interest rate swaps discussed above under Note 4 as cash flow
hedges. Derivative contracts with negative net fair values are recorded in other liabilities. The
valuation of these instruments is determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative. This analysis
reflects the contractual terms of the derivatives, including the period to maturity, and uses
observable market-based inputs, including interest rate curves. The fair values of interest rate
swaps are determined using the market standard methodology of netting the discounted future fixed
cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The
variable cash payments (or receipts) are based on an expectation of future interest rates (forward
curves) derived from observable market interest rate curves. We have determined that our
derivative valuation in its entirety should be classified as Level 2.
We record adjustments to appropriately reflect our nonperformance risk in our fair value
measurements. As of June 30, 2010, we have assessed the significance of the impact of
nonperformance risk on the overall valuation of our derivative position and have determined that it
is not significant to the overall valuation of the derivatives.
The fair value of our cash equivalents, deferred compensation plan assets and liabilities and
interest rate swaps was determined using the following inputs as of June 30, 2010 (in thousands):
Quoted Prices in Active | Significant Other | Significant | ||||||||||||||
Markets for Identical | Observable | Unobservable | ||||||||||||||
Assets and Liabilities | Inputs | Inputs | Total | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | Fair Value | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents (1) |
$ | 15,658 | $ | | $ | | $ | 15,658 | ||||||||
Deferred compensation plan assets (2) |
2,378 | | | 2,378 | ||||||||||||
Liabilities: |
||||||||||||||||
Interest rate swap due 2011(3) |
| (9,939 | ) | | (9,939 | ) | ||||||||||
Deferred compensation plan liabilities (3) |
(2,084 | ) | | | (2,084 | ) | ||||||||||
Total |
$ | 15,952 | $ | (9,939 | ) | $ | | $ | 6,013 | |||||||
(1) | Included in cash and cash equivalents in our condensed consolidated balance sheet. |
|
(2) | Included in other assets in our condensed consolidated balance sheet. |
|
(3) | Included in other liabilities in our condensed consolidated balance sheet. |
Other Financial Assets and Liabilities
Financial assets and liabilities with carrying amounts approximating fair value include cash, trade
accounts receivable, accounts payable, accrued expenses and other current liabilities. The
carrying amount of these financial assets and liabilities approximates fair value because of their
short maturities.
Long-term debt as of June 30, 2010 had a carrying amount of $506.9 million and fair value of $500.8
million. As of September 30, 2009, long-term debt, including current-portion of long-term debt,
had a carrying amount of $522.9 million and fair value of $498.9 million. The
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carrying amount is
based on interest rates available upon the date of the issuance of debt and is reported in the
consolidated balance sheets.
The fair value is based on interest rates that are currently available to us for issuance of debt
with similar terms and remaining maturities.
NOTE 6 INCOME TAXES
We recorded a provision for income tax expense from continuing operations of $1.9 million and
$7.5 million for the three and nine months ended June 30, 2010, respectively. We recorded a
provision for income tax expense from continuing operations of $5.2 million and $14.4 million for
the three and nine months ended June 30, 2009, respectively. This tax provision was derived by
applying an estimated worldwide tax rate against income (loss) from continuing operations before
income taxes for the three and nine months ended June 30, 2010 and 2009. The estimated worldwide
tax rate contemplated estimated variances from the U.S. federal statutory rate for the fiscal year
ending September 30, 2010, including the impact of permanently non-deductible expenses, estimated
changes in valuation allowances against deferred tax assets, and state income taxes. The provision
for income tax was further adjusted by period events occurring during the quarter including
unrecognized tax benefits.
Substantially all of our operating income was generated from domestic operations during the three
and nine months ended June 30, 2010 and 2009. As of June 30, 2010, we had $10.9 million of federal
and state loss carry-forwards that expire between 2011 and 2028 and $0.1 million of foreign loss
carry-forwards that expire in 2028, if not utilized earlier and $0.2 million of U.S. federal tax
credits that will expire in 2017. As of June 30, 2010, we also had foreign net operating loss
carry-forwards of $16.9 million that are not subject to expiration. Undistributed earnings, if
any, of our foreign subsidiaries are considered to be permanently reinvested and, accordingly, no
U.S. federal or state income taxes have been provided thereon.
Our condensed consolidated balance sheets include unrecognized tax benefits (excluding interest and
penalties, classified in other non-current liabilities) of approximately $2.5 million at both June
30, 2010 and September 30, 2009. The total amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate is approximately $2.2 million and $1.6 million at
June 30, 2010 and September 30, 2009, respectively. The tax years 2008 and 2009 remain open to
examination by the major taxing jurisdictions to which we are subject, and we are not currently
under U.S. federal examination for any tax year.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in
income tax expense. The balance of accrued interest and penalties was approximately $0.3 million
and $0.2 million as of June 30, 2010 and September 30, 2009, respectively.
It is reasonably possible as of June 30, 2010 that the unrecognized tax benefits will decrease by
approximately $0.3 million within the next twelve months, primarily due to tax positions relating
to certain tax credits and positions relating to transfer pricing. A significant portion of these
unrecognized tax benefits would be recorded as an adjustment to the valuation allowance.
NOTE 7 EMPLOYEE STOCK PLANS
Stock-based Compensation Expense
The
following table summarizes stock-based compensation expense from
continuing operations for the three and nine months ended
June 30, 2010 and 2009 and its allocation within the condensed consolidated statements of
operations and comprehensive income (loss) (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of revenues |
||||||||||||||||
Systems |
$ | 18 | $ | 7 | $ | 44 | $ | 24 | ||||||||
Services |
57 | 67 | 175 | 162 | ||||||||||||
Operating expenses |
||||||||||||||||
Sales and marketing |
336 | 182 | 1,026 | 582 | ||||||||||||
Product development |
72 | 75 | 223 | 220 | ||||||||||||
General and administrative |
438 | 603 | 1,359 | 1,822 | ||||||||||||
Total |
$ | 921 | $ | 934 | $ | 2,827 | $ | 2,810 | ||||||||
We also recognized a total income tax benefit in the condensed consolidated statements of
operations and comprehensive income (loss) related to the total stock-based compensation expense
amounts above, of approximately $0.3 million, $1.1 million, $0.4 million, and $1.1 million for the
three and nine months ended June 30, 2010 and 2009, respectively.
Valuation Assumptions
We estimate the fair value of stock options using a Black-Scholes option pricing model that uses
certain assumptions including expected term, expected volatility of the underlying stock, expected
dividend pay-out rate and risk-free rate of return. The expected term is based on
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historical data
and represents the period of time that stock options granted are expected to be outstanding. Due
to the fact that the common
stock underlying the options is not publicly traded, the expected volatility is based on a
comparable group of companies for the period. We do not intend to pay dividends on our common
stock for the foreseeable future, and accordingly, use a dividend yield of zero. The risk-free
rate for periods within the contractual life of the option is based on the Treasury Bill coupon
rate for U.S. Treasury securities in effect at the time of the grant with a maturity approximating
the expected term.
The fair value of each award granted from the Activant Group Inc. 2006 Stock Incentive Plan (the
2006 Option Plan) during the three and nine months ended June 30, 2010 and 2009 were estimated at
the date of grant using the Black-Scholes option pricing model with the following weighted average
assumptions:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Expected term |
6.66 | years | 6.66 | years | 6.66 | years | 6.66 | years | ||||||||
Expected volatility |
41.00 | % | 76.00 | % | 44.29 | % | 72.69 | % | ||||||||
Expected dividends |
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Risk-free rate |
1.79 | % | 2.56 | % | 2.56 | % | 1.73 | % |
The weighted-average estimated grant date fair value, as defined by authoritative accounting
guidance, for employee stock options granted under the 2006 Option Plans was $2.40 per share during
the nine months ended June 30, 2010 and $2.80 per share and $2.87 per share during the three and
nine months ended June 30, 2009, respectively. There were no grants during the three months ended
June 30, 2010, therefore grant date fair value is not available for such period.
NOTE 8 RESTRUCTURING COSTS
During the nine months ended June 30, 2010, our management approved restructuring plans for
eliminating certain employee positions and consolidation of excess facilities with the intent to
continue to streamline and focus our operations and to more properly align our cost structure with
current business conditions and our projected future revenue streams. These plans included the
elimination of approximately 130 employee positions and the consolidation of space within multiple
facilities locations. As of June 30, 2010, all of the affected employees had been notified and
terminated, and the facility consolidation had been completed. In accordance with relevant
authoritative accounting principles, we recorded a credit to restructuring charges of approximately
$0.1 million and restructuring charges of approximately $1.9 million for the three and nine months
ended June 30, 2010, respectively, related to workforce reductions (comprised of severance and
related benefits) and the facility consolidation, including additional charges for past actions
related to certain employee termination benefits that are required to be accrued from the time of
notification through the date specified in the benefit. The negative charge recorded for the three
months ended June 30, 2010, is primarily due to the reversal of severance and related benefits that
will no longer be paid and for revisions to the estimated net present values of remaining net lease
payments associated with consolidated facilities. All restructuring charges were recorded in
Restructuring Costs in the condensed consolidated statements of operations and comprehensive
income (loss).
We also undertook certain restructuring actions in prior years. We recorded a credit to
restructuring charges of less than $0.1 million and restructuring charges of approximately $4.3
million for the three and nine months ended June 30, 2009, respectively, related to workforce
reductions (comprised of severance and related benefits) and consolidation of facilities. The
negative charge recorded for the three months ended June 30, 2009, is primarily due to the reversal
of severance and related benefits that will no longer be paid and for revisions to the estimated
net present values of remaining net lease payments associated with consolidated facilities. All of
the affected employees from prior years actions had been notified and terminated at the times of
those actions.
Our restructuring liability at June 30, 2010 was approximately $0.8 million and the changes in our
restructuring liabilities for the nine months then ended were as follows (in thousands):
Balance at | ||||||||||||||||
September 30, | Restructuring | Balance at | ||||||||||||||
2009 | Charges | Payments | June 30, 2010 | |||||||||||||
2010 Actions Severance and Related Benefits |
$ | | $ | 1,640 | $ | (1,499 | ) | $ | 141 | |||||||
2010 Actions Facility Closings |
| 269 | (78 | ) | 191 | |||||||||||
2009 Actions Severance and Related Benefits |
30 | | (30 | ) | | |||||||||||
2009 Actions Facility Closings |
812 | 6 | (368 | ) | 450 | |||||||||||
$ | 842 | $ | 1,915 | $ | (1,975 | ) | $ | 782 | ||||||||
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NOTE 9 SEGMENT REPORTING
We are a leading provider of business management solutions to wholesale and retail
distribution businesses. We have developed substantial expertise in serving businesses with
complex distribution and retail requirements in two primary vertical markets: retail distribution
and wholesale distribution, which are considered our segments for reporting purposes. These
segments are determined in accordance with how our management views and evaluates our business and
based on the criteria as outlined in authoritative accounting guidance regarding segments. We
previously considered our segments to represent three primary vertical markets: hardlines and
lumber, wholesale distribution and automotive. On October 1, 2009 we combined our Hardlines and
Lumber and Automotive segments to create our Retail Distribution Group segment. We believe these
segments more accurately reflect the manner in which our management views and evaluates the
business. Additionally, as further discussed in Note 10, in April 2010, we sold our productivity
tools business which was previously presented in Other. These amounts have been separately
presented in discontinued operations in the condensed consolidated statements of operations and
comprehensive income (loss). The prior periods have been reclassified to conform to the current
period presentation.
Because these segments reflect the manner in which our management reviews our business, they
necessarily involve judgments that our management believes are reasonable in light of the
circumstances under which they are made. These judgments may change over time or may be modified to
reflect new facts or circumstances. Segments may also be changed or modified to reflect
technologies and applications that are newly created, or that change over time, or other business
conditions that evolve, each of which may result in reassessing specific segments and the elements
included within each of those segments. Future events, including changes in our senior management,
may affect the manner in which we present segments in the future.
A description of the businesses served by each of our reportable segments follows:
| Retail Distribution Group segment The retail distribution
vertical market consists of independent hardware retailers; home improvement centers;
paint, glass and wallpaper stores; farm supply stores; retail nurseries and garden centers;
independent lumber and building material dealers; pharmacies; and other specialty
retailers, primarily in the United States, as well as customers involved in the
manufacture, distribution, sale and installation of new and remanufactured parts used in
the maintenance and repair of automobiles and light trucks; and includes manufacturers,
warehouse distributors, parts stores, professional installers in North America, the United
Kingdom and Ireland, as well as several chains in North America. |
||
| Wholesale Distribution segment The wholesale distribution
vertical market consists of distributors of a range of products including electrical
supply; plumbing; medical supply; heating and air conditioning; tile; industrial machinery
and equipment; industrial supplies; fluid power; janitorial and sanitation products; paper
and packaging; and service establishment equipment vendors, primarily in the United States. |
||
| Other Other primarily consisted of our productivity tools
business, which was involved with software migration services and application development.
As further discussed in Note 10, in April 2010 we sold our productivity tools business
which historically represented substantially all of Other. Amounts associated with the
productivity tools business have been presented as discontinued operations in our financial
statements. In the fiscal 2009 periods there was an immaterial amount of remaining revenue
in Other that was not allocated to the other segments. In fiscal 2010, all revenues were
recorded in either the Retail Distribution Group segment or the Wholesale Distribution
segment. |
Segment Revenue and Contribution Margin
The results of the reportable segments are derived directly from our management reporting system.
The results are based on our method of internal reporting and are not necessarily in conformity
with GAAP. Our management measures the performance of each segment based on several metrics,
including contribution margin as defined below, which is not a financial measure calculated in
accordance with GAAP. Asset data is not reviewed by our management at the segment level and
therefore is not included.
Segment contribution margin includes all segment revenues less the related cost of sales, direct
marketing, sales expense, and product development expenses. A significant portion of each segments
expenses arises from shared services and centrally managed infrastructure support costs that we
allocate to the segments to determine segment contribution margin. These expenses primarily include
information technology services, facilities, and telecommunications costs.
14
Table of Contents
Our reportable segment financial information for the three and nine months ended June 30, 2010 and
2009 is as follows (in thousands):
Three Months Ended June 30, 2010 | Nine Months Ended June 30, 2010 | |||||||||||||||||||||||||||||||
Retail | Retail | |||||||||||||||||||||||||||||||
Distribution | Wholesale | Distribution | Wholesale | |||||||||||||||||||||||||||||
Group | Distribution | Other | Total | Group | Distribution | Other | Total | |||||||||||||||||||||||||
Revenues |
$ | 53,621 | $ | 36,870 | $ | | $ | 90,491 | $ | 161,635 | $ | 112,001 | $ | | $ | 273,636 | ||||||||||||||||
Contribution margin |
$ | 16,625 | $ | 16,370 | $ | | $ | 32,995 | $ | 50,760 | $ | 47,509 | $ | | $ | 98,269 |
Three Months Ended June 30, 2009 | Nine Months Ended June 30, 2009 | |||||||||||||||||||||||||||||||
Retail | Retail | |||||||||||||||||||||||||||||||
Distribution | Wholesale | Distribution | Wholesale | |||||||||||||||||||||||||||||
Group | Distribution | Other | Total | Group | Distribution | Other | Total | |||||||||||||||||||||||||
Revenues |
$ | 50,989 | $ | 38,075 | $ | 99 | $ | 89,163 | $ | 158,068 | $ | 116,998 | $ | 268 | $ | 275,334 | ||||||||||||||||
Contribution margin |
$ | 16,597 | $ | 15,946 | $ | 99 | $ | 32,642 | $ | 51,112 | $ | 46,795 | $ | 268 | $ | 98,175 |
Certain of our operating expenses are not allocated to segments because they are separately
managed at the corporate level. These unallocated costs include marketing costs other than direct
marketing, general and administrative costs, such as legal and finance, stock-based compensation
expense, acquisition related costs, depreciation and amortization of intangible assets,
restructuring costs, interest expense, and other income.
There are significant judgments that our management makes with respect to the direct and indirect
allocation of costs that may affect the calculation of contribution margins. While our management
believes these and other related judgments are reasonable and appropriate, others could assess such
matters in ways different than our companys management.
The exclusion of costs not considered directly allocable to individual business segments results in
contribution margin not taking into account substantial costs of doing business. We use
contribution margin, in part, to evaluate the performance of, and allocate resources to, each of
the segments. While our management may consider contribution margin to be an important measure of
comparative operating performance, this measure should be considered in addition to, but not as a
substitute for, net income (loss), cash flow and other measures.
of financial performance prepared in accordance with GAAP that are otherwise presented in our
financial statements. In addition, our calculation of contribution margin may be different from the
calculation used by other companies and, therefore, comparability may be affected.
The reconciliation of total segment contribution margin to our income from continuing operations
before income taxes is as follows:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Segment contribution margin |
$ | 32,995 | $ | 32,642 | $ | 98,269 | $ | 98,175 | ||||||||
Corporate and unallocated costs |
(6,438 | ) | (5,925 | ) | (18,589 | ) | (17,556 | ) | ||||||||
Stock-based compensation expense |
(921 | ) | (934 | ) | (2,827 | ) | (2,810 | ) | ||||||||
Depreciation and amortization |
(9,831 | ) | (9,272 | ) | (29,613 | ) | (28,508 | ) | ||||||||
Impairment of goodwill |
| | | (107,000 | ) | |||||||||||
Restructuring costs |
59 | 40 | (1,915 | ) | (4,251 | ) | ||||||||||
Interest expense |
(7,644 | ) | (9,722 | ) | (23,347 | ) | (32,398 | ) | ||||||||
Gain on retirement of debt |
| 4,631 | | 18,958 | ||||||||||||
Other income (expense), net |
(269 | ) | 22 | 162 | (604 | ) | ||||||||||
Income from continuing operations before income taxes |
$ | 7,951 | $ | 11,482 | $ | 22,140 | $ | (75,994 | ) | |||||||
15
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NOTE 10 DISCONTINUED OPERATIONS
On April 16, 2010, we completed the sale of our productivity tools business for approximately
$12.0 million in cash. The gain recorded on
the sale was approximately $6.2 million, net of $3.0 million in taxes. Accordingly, we have
separately classified the results of operations, assets and liabilities, and cash flows of the
discontinued operations in the condensed consolidated financial statements for all periods
presented.
Income (loss) from discontinued operations, net of income taxes, for the three and nine months
ended June 30, 2010 and 2009 is summarized as follows (in thousands):
Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue from discontinued operations |
$ | 267 | $ | 1,762 | $ | 6,452 | $ | 7,810 | ||||||||
Expenses from discontinued operations |
258 | 1,728 | 4,661 | 5,635 | ||||||||||||
Income from discontinued operations
before income taxes |
9 | 34 | 1,791 | 2,175 | ||||||||||||
Income tax expense (benefit) |
324 | (1,316 | ) | 2,148 | (1,384 | ) | ||||||||||
Income (loss) from discontinued
operations, net of income taxes |
$ | (315 | ) | $ | 1,350 | $ | (357 | ) | $ | 3,559 | ||||||
The summarized balance sheets of discontinued operations consisted of the following (in thousands):
June 30, | September 30, | |||||||
2010 | 2009 | |||||||
Trade accounts receivable, net of allowance for doubtful accounts |
$ | | $ | 216 | ||||
Deferred income taxes |
| 3,205 | ||||||
Prepaid expenses and other current assets |
| 42 | ||||||
Property and equipment, net |
| 105 | ||||||
Intangible assets, net |
| 1,547 | ||||||
Goodwill |
| 2,264 | ||||||
Other assets |
| 39 | ||||||
Assets of discontinued operations |
$ | | $ | 7,418 | ||||
Payroll related accruals |
$ | | $ | 370 | ||||
Deferred revenue |
| 1,771 | ||||||
Accrued expenses and other current liabilities |
| 137 | ||||||
Liabilities of discontinued operations |
$ | | $ | 2,278 | ||||
The cash receipts and payments related to the discontinued operations have been reflected as cash
inflows and outflows, respectively in the condensed consolidated statements of cash flows.
NOTE 11 LITIGATION
We are a party to various legal proceedings and administrative actions, all of which are of
an ordinary or routine nature incidental to our operations, except as otherwise described below. We
do not believe that such proceedings and actions will, individually or in the aggregate, have a
material adverse effect on our business, financial condition, results of operations or cash flows,
except as otherwise described below.
On July 12, 2010, Internet Autoparts, Inc. (IAP) filed a complaint in the District Court of
Travis County, Texas against Activant Solutions Inc. In the complaint, IAP alleged that we aided
and abetted breach of fiduciary duties by our appointee directors of IAP, and that we tortiously
interfered with a contractual relationship of IAP by licensing catalogs and catalog services to
General Parts, Inc. (GPI), which then allegedly used such catalogs and services to breach a
covenant not to compete in IAPs stockholders agreement. Both Activant Solutions Inc. and GPI are
parties to IAPs stockholders agreement. IAP seeks to recover unspecified damages, including
punitive damages, consequential or special damages, interest and any other relief to which it may
be entitled.
On August 6, 2010 Activant answered IAPs complaint and filed a motion to dismiss or stay IAPs
lawsuit in favor of arbitration. On August 6, 2010 Activant also filed a demand for arbitration
against IAP with the American Arbitration Association, seeking a declaratory judgment that
Activants contracts with IAP expressly permit Activant to license catalogs and catalog services to
GPI.
16
Table of Contents
We believe we have meritorious defenses to this lawsuit. Although we intend to defend the
lawsuit vigorously, there can be no assurance that we will be successful in our defense, and
damages resulting from an unsuccessful defense could have a material adverse effect on our
business, financial condition, results of operations or cash flows. Even if we are successful, we
may incur substantial legal fees and other costs in defending the lawsuit and the efforts and
attention of our management and technical personnel may be diverted, which could also have a
material adverse effect on our business, financial condition, results of operations or cash flows.
We own approximately 46% of the outstanding common stock of IAP and hold two of five seats on IAPs
board of directors.
17
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NOTE 12 GUARANTOR CONSOLIDATION
The senior secured credit agreement and the senior subordinated notes are guaranteed by our
existing, wholly-owned domestic subsidiaries HM COOP LLC, Activant Wholesale Distribution Solutions
Inc., Atlas Disposition Group Inc. (f/k/a Speedware Group, Inc.) and Atlas America Inc. (f/k/a
Speedware America, Inc.) (collectively, the Guarantors). Since September 30, 2006, (i) the
following subsidiaries have been merged into Activant Solutions Inc.: Triad Systems Financial
Corporation, Triad Data Corporation, CCI/TRIAD Gem, Inc., Enterprise Computer Systems, Inc.,
Speedware Holdings, Inc., CCI/ARD, Inc., Triad Systems Corporation, and Speedware USA, Inc.; and
(ii) the following subsidiaries have been merged into Activant Wholesale Distribution Solutions
Inc. (formerly known as Prophet 21 New Jersey, Inc.): Prophet 21, Inc., Prophet 21 Investment
Corporation, Prophet 21 Canada, Inc., SDI Merger Corporation, Distributor Information Systems
Corporation, Trade Service Systems, Inc., STANPak Systems, Inc., Prelude Systems Inc. and Greenland
Holding Corp. Our other subsidiaries (collectively, the Non-Guarantors) are not guarantors of
the senior secured credit agreement and the senior subordinated notes. The accompanying condensed
consolidating balance sheets as of June 30, 2010 and September 30, 2009 and the accompanying
condensed consolidating statements of operations for the three and nine months ended June 30, 2010
and 2009 and cash flows for the nine months ended June 30, 2010 and 2009 represent the financial
position, results of operations and cash flows of our Guarantors and Non-Guarantors.
Condensed Consolidating Balance Sheet as of June 30, 2010
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
ASSETS: |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 66,211 | $ | 7 | $ | 2,506 | $ | | $ | 68,724 | ||||||||||
Trade accounts receivable, net of allowance for
doubtful accounts |
17,730 | 13,403 | 2,918 | | 34,051 | |||||||||||||||
Inventories |
3,683 | 310 | 223 | | 4,216 | |||||||||||||||
Deferred income taxes |
2,214 | 1,041 | | | 3,255 | |||||||||||||||
Income taxes receivable |
290 | | 1,097 | | 1,387 | |||||||||||||||
Prepaid expenses and other current assets |
5,408 | 211 | 129 | | 5,748 | |||||||||||||||
Total current assets |
95,536 | 14,972 | 6,873 | | 117,381 | |||||||||||||||
Property and equipment, net |
5,920 | 60 | 109 | | 6,089 | |||||||||||||||
Intangible assets, net |
154,078 | 18,051 | 1,271 | | 173,400 | |||||||||||||||
Goodwill |
442,145 | 91,956 | 1,316 | 6,037 | 541,454 | |||||||||||||||
Investments in subsidiaries |
16,769 | | | (16,769 | ) | | ||||||||||||||
Intercompany receivables (payables) |
(127,031 | ) | 122,658 | 4,373 | | | ||||||||||||||
Deferred financing costs |
7,246 | | | | 7,246 | |||||||||||||||
Other assets |
3,352 | 164 | 23 | | 3,539 | |||||||||||||||
Total assets |
$ | 598,015 | $ | 247,861 | $ | 13,965 | $ | (10,732 | ) | $ | 849,109 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | 14,471 | $ | 1,129 | $ | 279 | $ | | $ | 15,879 | ||||||||||
Payroll related accruals |
10,982 | 6,130 | 341 | | 17,453 | |||||||||||||||
Deferred revenue |
13,091 | 20,095 | 1,015 | | 34,201 | |||||||||||||||
Accrued expenses and other current liabilities |
(1,115 | ) | 16,357 | 76 | | 15,318 | ||||||||||||||
Total current liabilities |
37,429 | 43,711 | 1,711 | | 82,851 | |||||||||||||||
Long-term debt |
506,895 | | | | 506,895 | |||||||||||||||
Deferred tax and other liabilities |
69,775 | (2,168 | ) | 742 | | 68,349 | ||||||||||||||
Total liabilities |
614,099 | 41,543 | 2,453 | | 658,095 | |||||||||||||||
Total stockholders equity (deficit) |
(16,084 | ) | 206,318 | 11,512 | (10,732 | ) | 191,014 | |||||||||||||
Total liabilities and stockholders equity
(deficit) |
$ | 598,015 | $ | 247,861 | $ | 13,965 | $ | (10,732 | ) | $ | 849,109 | |||||||||
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Condensed Consolidating Balance Sheet as of September 30, 2009
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
ASSETS: |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 42,001 | $ | 215 | $ | 2,357 | $ | | $ | 44,573 | ||||||||||
Trade accounts receivable, net of allowance
for doubtful accounts |
16,818 | 14,383 | 2,995 | | 34,196 | |||||||||||||||
Inventories |
3,576 | 1,185 | 224 | | 4,985 | |||||||||||||||
Deferred income taxes |
(137 | ) | 1,217 | | | 1,080 | ||||||||||||||
Prepaid expenses and other current assets |
4,886 | 454 | 142 | | 5,482 | |||||||||||||||
Assets of discontinued operations |
6 | | 7,412 | | 7,418 | |||||||||||||||
Total current assets |
67,150 | 17,454 | 13,130 | | 97,734 | |||||||||||||||
Property and equipment, net |
5,337 | 518 | 113 | | 5,968 | |||||||||||||||
Intangible assets, net |
166,128 | 23,134 | 1,585 | | 190,847 | |||||||||||||||
Goodwill |
442,175 | 91,956 | 1,286 | 6,037 | 541,454 | |||||||||||||||
Investments in subsidiaries |
16,769 | | | (16,769 | ) | | ||||||||||||||
Intercompany receivables (payables) |
(83,980 | ) | 99,035 | (15,055 | ) | | | |||||||||||||
Deferred financing costs |
8,903 | | | | 8,903 | |||||||||||||||
Other assets |
3,013 | 181 | (16 | ) | | 3,178 | ||||||||||||||
Total assets |
$ | 625,495 | $ | 232,278 | $ | 1,043 | $ | (10,732 | ) | $ | 848,084 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | 16,456 | $ | 1,635 | $ | (61 | ) | $ | | $ | 18,030 | |||||||||
Payroll related accruals |
(13,178 | ) | 29,850 | 745 | | 17,417 | ||||||||||||||
Deferred revenue |
7,801 | 19,497 | 893 | | 28,191 | |||||||||||||||
Current portion of long-term debt |
5,886 | | | | 5,886 | |||||||||||||||
Accrued expenses and other current liabilities |
16,798 | 1,701 | 1,218 | | 19,717 | |||||||||||||||
Liabilities of discontinued operations |
| | 2,278 | | 2,278 | |||||||||||||||
Total current liabilities |
33,763 | 52,683 | 5,073 | | 91,519 | |||||||||||||||
Long-term debt |
517,009 | | | | 517,009 | |||||||||||||||
Deferred tax and other liabilities |
75,701 | (2,723 | ) | 48 | | 73,026 | ||||||||||||||
Total liabilities |
626,473 | 49,960 | 5,121 | | 681,554 | |||||||||||||||
Total stockholders equity (deficit) |
(978 | ) | 182,318 | (4,078 | ) | (10,732 | ) | 166,530 | ||||||||||||
Total liabilities and stockholders equity
(deficit) |
$ | 625,495 | $ | 232,278 | $ | 1,043 | $ | (10,732 | ) | $ | 848,084 | |||||||||
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Condensed Consolidating Statement of Operations for the Three Months Ended June 30, 2010
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Revenues: |
||||||||||||||||||||
Systems |
$ | 17,368 | $ | 11,874 | $ | 777 | $ | | $ | 30,019 | ||||||||||
Services |
33,585 | 24,156 | 2,731 | | 60,472 | |||||||||||||||
Total revenues |
50,953 | 36,030 | 3,508 | | 90,491 | |||||||||||||||
Cost of revenues: |
||||||||||||||||||||
Systems |
9,186 | 5,626 | 649 | | 15,461 | |||||||||||||||
Services |
12,956 | 5,244 | 1,377 | | 19,577 | |||||||||||||||
Total cost of revenues |
22,142 | 10,870 | 2,026 | | 35,038 | |||||||||||||||
Gross profit |
28,811 | 25,160 | 1,482 | | 55,453 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing |
9,091 | 4,914 | 451 | | 14,456 | |||||||||||||||
Product development |
3,776 | 4,351 | 393 | | 8,520 | |||||||||||||||
General and administrative |
6,272 | 356 | 213 | | 6,841 | |||||||||||||||
Depreciation and amortization |
7,994 | 1,739 | 98 | | 9,831 | |||||||||||||||
Restructuring costs |
(54 | ) | (5 | ) | | | (59 | ) | ||||||||||||
Total operating expenses |
27,079 | 11,355 | 1,155 | | 39,589 | |||||||||||||||
Operating income |
1,732 | 13,805 | 327 | | 15,864 | |||||||||||||||
Interest expense |
(7,589 | ) | | (55 | ) | | (7,644 | ) | ||||||||||||
Other income (expense), net |
(385 | ) | 7 | 109 | | (269 | ) | |||||||||||||
Income (loss) from continuing operations before income
taxes |
(6,242 | ) | 13,812 | 381 | | 7,951 | ||||||||||||||
Income tax (benefit) expense |
(10,675 | ) | 14,589 | (2,013 | ) | | 1,901 | |||||||||||||
Income (loss) from continuing operations |
4,433 | (777 | ) | 2,394 | 6,050 | |||||||||||||||
Income (loss) from discontinued operations, net of income
taxes |
290 | (3 | ) | (602 | ) | | (315 | ) | ||||||||||||
Gain from sale of discontinued operations, net of income
taxes |
(7,134 | ) | | 13,312 | | 6,178 | ||||||||||||||
Net income (loss) |
$ | (2,411 | ) | $ | (780 | ) | $ | 15,104 | $ | | $ | 11,913 | ||||||||
20
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Condensed Consolidating Statement of Operations for the Three Months Ended June 30, 2009
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
(in thousands) | Principal Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Revenues: |
||||||||||||||||||||
Systems |
$ | 13,099 | $ | 13,010 | $ | 735 | $ | | $ | 26,844 | ||||||||||
Services |
35,496 | 24,378 | 2,445 | | 62,319 | |||||||||||||||
Total revenues |
48,595 | 37,388 | 3,180 | | 89,163 | |||||||||||||||
Cost of revenues: |
||||||||||||||||||||
Systems |
9,236 | 5,336 | 519 | | 15,091 | |||||||||||||||
Services |
12,392 | 6,258 | 1,401 | | 20,051 | |||||||||||||||
Total cost of revenues |
21,628 | 11,594 | 1,920 | | 35,142 | |||||||||||||||
Gross profit |
26,967 | 25,794 | 1,260 | | 54,021 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing |
7,206 | 5,661 | 532 | | 13,399 | |||||||||||||||
Product development |
3,677 | 4,762 | 318 | | 8,757 | |||||||||||||||
General and administrative |
5,575 | 377 | 130 | | 6,082 | |||||||||||||||
Depreciation and amortization |
7,306 | 1,798 | 168 | | 9,272 | |||||||||||||||
Restructuring costs |
26 | 84 | (150 | ) | | (40 | ) | |||||||||||||
Total operating expenses |
23,790 | 12,682 | 998 | | 37,470 | |||||||||||||||
Operating income |
3,177 | 13,112 | 262 | | 16,551 | |||||||||||||||
Interest expense |
(9,718 | ) | (4 | ) | | | (9,722 | ) | ||||||||||||
Gain on retirement of debt |
4,631 | | | | 4,631 | |||||||||||||||
Other income (expense), net |
(144 | ) | 50 | 116 | | 22 | ||||||||||||||
Income (loss) from continuing
operations before income taxes |
(2,054 | ) | 13,158 | 378 | | 11,482 | ||||||||||||||
Income tax expense |
5,208 | 10 | | | 5,218 | |||||||||||||||
Income (loss) from continuing operations |
(7,262 | ) | 13,148 | 378 | 6,264 | |||||||||||||||
Income from discontinued operations,
net of income taxes |
368 | | 982 | | 1,350 | |||||||||||||||
Net income (loss) |
$ | (6,894 | ) | $ | 13,148 | $ | 1,360 | $ | | $ | 7,614 | |||||||||
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Condensed Consolidating Statement of Operations for the Nine Months Ended June 30, 2010
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Revenues: |
||||||||||||||||||||
Systems |
$ | 51,494 | $ | 36,114 | $ | 2,681 | $ | | $ | 90,289 | ||||||||||
Services |
101,724 | 73,487 | 8,136 | | 183,347 | |||||||||||||||
Total revenues |
153,218 | 109,601 | 10,817 | | 273,636 | |||||||||||||||
Cost of revenues: |
||||||||||||||||||||
Systems |
29,718 | 17,715 | 1,891 | | 49,324 | |||||||||||||||
Services |
38,480 | 16,471 | 4,242 | | 59,193 | |||||||||||||||
Total cost of revenues |
68,198 | 34,186 | 6,133 | | 108,517 | |||||||||||||||
Gross profit |
85,020 | 75,415 | 4,684 | | 165,119 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing |
25,555 | 15,755 | 1,700 | | 43,010 | |||||||||||||||
Product development |
11,188 | 13,494 | 1,204 | | 25,886 | |||||||||||||||
General and administrative |
17,865 | 1,023 | 482 | | 19,370 | |||||||||||||||
Depreciation and amortization |
23,912 | 5,304 | 397 | | 29,613 | |||||||||||||||
Restructuring costs |
877 | 467 | 571 | | 1,915 | |||||||||||||||
Total operating expenses |
79,397 | 36,043 | 4,354 | | 119,794 | |||||||||||||||
Operating income |
5,623 | 39,372 | 330 | | 45,325 | |||||||||||||||
Interest expense |
(23,234 | ) | (8 | ) | (105 | ) | | (23,347 | ) | |||||||||||
Other income (expense), net |
(6,420 | ) | 253 | 6,329 | | 162 | ||||||||||||||
Income (loss) from continuing operations
before income taxes |
(24,031 | ) | 39,617 | 6,554 | | 22,140 | ||||||||||||||
Income tax (benefit) expense |
(7,810 | ) | 15,615 | (261 | ) | | 7,544 | |||||||||||||
Income (loss) from continuing operations |
(16,221 | ) | 24,002 | 6,815 | 14,596 | |||||||||||||||
Income (loss) from discontinued operations,
net of income taxes |
3,820 | (3 | ) | (4,174 | ) | | (357 | ) | ||||||||||||
Gain from sale of discontinued operations,
net of income taxes |
(7,134 | ) | | 13,312 | | 6,178 | ||||||||||||||
Net income (loss) |
$ | (19,535 | ) | $ | 23,999 | $ | 15,953 | $ | | $ | 20,417 | |||||||||
22
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Condensed Consolidating Statement of Operations for the Nine Months Ended June 30, 2009
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
(in thousands) | Principal Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Revenues: |
||||||||||||||||||||
Systems |
$ | 44,402 | $ | 41,257 | $ | 2,531 | $ | | $ | 88,190 | ||||||||||
Services |
105,667 | 73,785 | 7,692 | | 187,144 | |||||||||||||||
Total revenues |
150,069 | 115,042 | 10,223 | | 275,334 | |||||||||||||||
Cost of revenues: |
||||||||||||||||||||
Systems |
28,116 | 18,826 | 1,548 | | 48,490 | |||||||||||||||
Services |
39,149 | 19,635 | 3,926 | | 62,710 | |||||||||||||||
Total cost of revenues |
67,265 | 38,461 | 5,474 | | 111,200 | |||||||||||||||
Gross profit |
82,804 | 76,581 | 4,749 | | 164,134 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing |
22,885 | 16,521 | 1,648 | | 41,054 | |||||||||||||||
Product development |
11,470 | 14,979 | 963 | | 27,412 | |||||||||||||||
General and administrative |
15,910 | 1,249 | 700 | | 17,859 | |||||||||||||||
Depreciation and amortization |
22,605 | 5,421 | 482 | | 28,508 | |||||||||||||||
Impairment of goodwill |
107,000 | | | | 107,000 | |||||||||||||||
Restructuring costs |
2,910 | 345 | 996 | | 4,251 | |||||||||||||||
Total operating expenses |
182,780 | 38,515 | 4,789 | | 226,084 | |||||||||||||||
Operating income (loss) |
(99,976 | ) | 38,066 | (40 | ) | | (61,950 | ) | ||||||||||||
Interest expense |
(32,385 | ) | (11 | ) | (2 | ) | | (32,398 | ) | |||||||||||
Gain on retirement of debt |
18,958 | | | | 18,958 | |||||||||||||||
Other income (expense), net |
(270 | ) | 31 | (365 | ) | | (604 | ) | ||||||||||||
Income (loss) from continuing
operations before income taxes |
(113,673 | ) | 38,086 | (407 | ) | | (75,994 | ) | ||||||||||||
Income tax expense |
14,347 | 11 | 77 | | 14,435 | |||||||||||||||
Income (loss) from continuing operations |
(128,020 | ) | 38,075 | (484 | ) | (90,429 | ) | |||||||||||||
Income from discontinued operations,
net of income taxes |
2,616 | | 943 | | 3,559 | |||||||||||||||
Net income (loss) |
$ | (125,404 | ) | $ | 38,075 | $ | 459 | $ | | $ | (86,870 | ) | ||||||||
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Condensed Consolidating Statement of Cash Flows for the Nine Months Ended June 30, 2010
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash provided by (used in) operating
activities continuing operations |
$ | 49,364 | $ | (69 | ) | $ | (7,833 | ) | $ | | $ | 41,462 | ||||||||
Net cash
provided by (used in) operating
activities discontinued
operations |
(588 | ) | | 98 | | (490 | ) | |||||||||||||
Net cash provided by (used in)
operating activities |
48,776 | (69 | ) | (7,735 | ) | | 40,972 | |||||||||||||
Investing activities: |
||||||||||||||||||||
Purchase of property and equipment |
(3,911 | ) | (139 | ) | (1 | ) | | (4,051 | ) | |||||||||||
Capitalized computer software costs and
databases |
(8,238 | ) | | | | (8,238 | ) | |||||||||||||
Net cash
used in investing activities continuing operations |
(12,149 | ) | (139 | ) | (1 | ) | | (12,289 | ) | |||||||||||
Net cash provided by investing activities
discontinued operations |
3,583 | | 7,885 | | 11,468 | |||||||||||||||
Net cash provided by (used in) investing
activities |
(8,566 | ) | (139 | ) | 7,884 | | (821 | ) | ||||||||||||
Financing activities: |
||||||||||||||||||||
Payment on long-term debt |
(16,000 | ) | | | | (16,000 | ) | |||||||||||||
Net cash used in financing activities |
(16,000 | ) | | | | (16,000 | ) | |||||||||||||
Net cash from continuing operations |
21,215 | (208 | ) | (7,834 | ) | | 13,173 | |||||||||||||
Net cash from discontinued operations |
2,995 | | 7,983 | | 10,978 | |||||||||||||||
Net change in cash and cash equivalents |
24,210 | (208 | ) | 149 | | 24,151 | ||||||||||||||
Cash and cash equivalents, beginning of period |
42,001 | 215 | 2,357 | 44,573 | ||||||||||||||||
Cash and cash equivalents, end of period |
$ | 66,211 | $ | 7 | $ | 2,506 | $ | | $ | 68,724 | ||||||||||
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Condensed Consolidating Statement of Cash Flows for the Nine Months Ended June 30, 2009
Guarantor | ||||||||||||||||||||
Principal | Non-Guarantor | |||||||||||||||||||
(in thousands) | Operations | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash provided by (used in) operating
activities continuing operations |
$ | 40,082 | $ | (2,644 | ) | $ | (573 | ) | $ | | $ | 36,865 | ||||||||
Net cash provided by (used in) operating
activities discontinued operations |
4,299 | | (235 | ) | | 4,064 | ||||||||||||||
Net cash provided by (used in) operating
activities |
44,381 | (2,644 | ) | (808 | ) | | 40,929 | |||||||||||||
Investing activities: |
||||||||||||||||||||
Purchase of property and equipment |
(1,439 | ) | (5 | ) | (12 | ) | | (1,456 | ) | |||||||||||
Capitalized computer software costs and
databases |
(6,552 | ) | | | | (6,552 | ) | |||||||||||||
Net cash
used in investing activities
continuing operations |
(7,991 | ) | (5 | ) | (12 | ) | | (8,008 | ) | |||||||||||
Net cash used in investing activities
discontinued operations |
(1 | ) | | (1 | ) | | (2 | ) | ||||||||||||
Net cash used in investing activities |
(7,992 | ) | (5 | ) | (13 | ) | | (8,010 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Repurchases of common stock |
(189 | ) | | | | (189 | ) | |||||||||||||
Payments on long-term debt |
(13,512 | ) | | | | (13,512 | ) | |||||||||||||
Repurchases of debt |
(39,840 | ) | | | | (39,840 | ) | |||||||||||||
Net cash used in financing activities |
(53,541 | ) | | | | (53,541 | ) | |||||||||||||
Net cash from continuing operations |
(21,450 | ) | (2,649 | ) | (585 | ) | | (24,684 | ) | |||||||||||
Net cash from discontinued operations |
4,298 | | (236 | ) | | 4,062 | ||||||||||||||
Net change in cash and cash equivalents |
(17,152 | ) | (2,649 | ) | (821 | ) | | (20,622 | ) | |||||||||||
Cash and cash equivalents, beginning of
period |
55,926 | 2,931 | 5,932 | 64,789 | ||||||||||||||||
Cash and cash equivalents, end of period |
$ | 38,774 | $ | 282 | $ | 5,111 | $ | | $ | 44,167 | ||||||||||
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Item 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations
You should read the following discussion and analysis in conjunction with our financial
statements and related notes included above. This discussion contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of a variety of factors,
including those set forth under Part I, Item 1A Risk Factors included in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2009.
Overview
We are a leading provider of business management solutions to wholesale and retail distribution
businesses. We have developed substantial expertise in serving businesses with complex
distribution and retail requirements in two primary vertical markets: retail distribution and
wholesale distribution, which we consider our segments for reporting purposes. These segments are
determined in accordance with how our management views and evaluates our business and based on the
criteria as outlined in authoritative accounting guidance regarding segments. We previously
considered our segments to represent three primary vertical markets: hardlines and lumber,
wholesale distribution and automotive. On October 1, 2009, we combined our Hardlines and Lumber
and Automotive segments to create our Retail Distribution Group segment. We believe these segments
more accurately reflect the manner in which our management views and evaluates the business.
Additionally, as discussed in Note 10 to our accompanying unaudited condensed consolidated
financial statements, in April 2010, we sold our productivity tools business which was previously
presented in Other. These amounts have been separately presented in discontinued operations in the
accompanying financial statements. The prior periods have been reclassified to conform to the
current period presentation.
Because these segments reflect the manner in which our management reviews our business, they
necessarily involve judgments that our management believes are reasonable in light of the
circumstances under which they are made. These judgments may change over time or may be modified to
reflect new facts or circumstances. Segments may also be changed or modified to reflect
technologies and applications that are newly created, or that change over time, or other business
conditions that evolve, each of which may result in reassessing specific segments and the elements
included within each of those segments.
Revenues
Our revenues are primarily derived from customers that operate in two markets retail distribution
and wholesale distribution.
▪ | The retail distribution market consists of a range of specialty retail and distribution
vertical markets, including independent hardware retailers; home improvement centers;
paint, glass and wallpaper stores; farm supply stores; retail nurseries and garden centers;
independent lumber and building material dealers; pharmacies; and other specialty
retailers, primarily in the United States; and customers involved in the manufacture,
distribution, sale and installation of new and remanufactured parts used in the maintenance
and repair of automobiles and light trucks (including manufacturers, warehouse
distributors, parts stores, and professional installers) in North America, the United
Kingdom and Ireland, as well as several retail chains in North America. For the nine months
ended June 30, 2010, we generated approximately 59.1% of our total revenues from the retail
distribution vertical market. |
||
▪ | The wholesale distribution market consists of distributors of a range of products,
including electrical supply; plumbing; medical supply; heating and air conditioning; tile;
industrial machinery and equipment; industrial supplies; fluid power; janitorial and
sanitation products; paper and packaging; and service establishment equipment vendors,
primarily in the United States. For the nine months ended June 30, 2010, we generated
approximately 40.9% of our total revenues from the wholesale distribution vertical market. |
Using a combination of proprietary software and extensive expertise in these markets, we provide
complete business management solutions consisting of tailored systems, product support and content
and supply chain services designed to meet the unique requirements of our customers. Our fully
integrated systems and services include point-of-sale/order entry, inventory management, general
accounting and enhanced data management that enable our customers to manage their day-to-day
operations. Our revenues are derived from the following business management solutions:
• | Systems, which is comprised primarily of proprietary software applications, professional
services, training, and third-party software and may include hardware and peripherals and
forms. |
||
• | Services, which is comprised primarily of product support, content, and supply chain
services. Product support services are comprised of customer support activities, including
software, hardware and network support through our help desk, web help, software updates,
preventive and remedial on-site maintenance and depot repair services. Our content services
are comprised of proprietary database and data management products such as our
comprehensive electronic automotive parts and applications catalog and point-of-sale
business analysis data. Supply chain services are comprised of connectivity services,
e-commerce, |
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networking and security monitoring management solutions. We generally provide
our services on a subscription basis, and accordingly, revenues are generally recurring in
nature. |
Cost of Revenues
Our cost of revenues and gross margins are derived from systems and services as follows:
▪ | Cost of systems revenues and systems gross margins Cost of systems revenues
consists primarily of direct costs of software duplication, our logistics organization,
cost of hardware, salary related costs of professional services and installation personnel,
royalty payments, and allocated overhead expenses. |
||
▪ | Cost of services revenues and services gross margins Cost of services
revenues primarily consist of material and direct labor associated with our help desk,
material and labor and production costs associated with our automotive catalog and other
content offerings as well as overhead expenses. Generally, our services revenues have a
higher gross margin than our systems revenues. |
We allocate overhead expenses including facilities and information technology costs to all
departments based on headcount. As such, general overhead expenses are included in costs of
revenues and each operating expense category.
Operating Expenses
Our operating expenses consist primarily of sales and marketing, product development, and general
and administrative expenses as well as non-cash expenses including depreciation and amortization
and goodwill impairment charges.
▪ | Sales and marketing Sales and marketing expense consists primarily of
salaries and bonuses, commissions for our sales force, travel, stock-based compensation
expense, marketing expenses and allocated overhead expenses. Our marketing approach is to
develop strategic relationships, as well as endorsement and alliance agreements, with many
of the well-known market participants in the vertical markets that we serve. The goal of
these programs is to enhance the productivity of our sales teams and to create leveraged
selling opportunities for system sales and content and supply chain offerings. |
||
▪ | Product development Product development expense consists primarily of
salaries and bonuses, stock-based compensation expense, outside services and allocated
overhead expenses. Our product development strategy includes development of additional
functionality for our existing products as well as developing new products for our existing
customer base and prospective new customers. |
||
▪ | General and administrative General and administrative expense primarily
consists of salaries and bonuses, stock-based compensation expense, outside services,
acquisition related costs and facility and information technology allocations for the
general executive, finance, human resource and legal services functions. General and
administrative expenses are not allocated to our segments. |
||
▪ | Depreciation and amortization Depreciation and amortization expense consists of
depreciation of our fixed assets and amortization of our intangible assets. Depreciation
and amortization are not allocated to our segments. |
||
▪ | Impairment of goodwill We account for goodwill and other intangibles in accordance
with the relevant authoritative principles. Business acquisitions typically result in
goodwill and other intangible assets, and the recorded values of those assets may become
impaired. The determination of the value of these intangible assets requires management to
make estimates and assumptions that affect our consolidated financial statements. Goodwill
and other intangibles are tested for impairment on an annual basis as of July 1, and
between annual tests if indicators of potential impairment exist, using a fair-value-based
approach. |
||
▪ | Restructuring costs Restructuring costs relate to management approved
restructuring actions to eliminate certain employee positions and to consolidate certain
excess facilities with the intent to streamline and focus our operations and more properly
align our cost structure with our projected revenue streams. Restructuring costs are not
allocated to our segments. |
Non-Operating Expenses
Our non-operating expenses consist of the following:
▪ | Interest expense Interest expense represents interest on our outstanding
debt as a result of our 2006 merger with Activant Solutions Holdings Inc. and subsequent
acquisitions. |
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▪ | Gain on retirement of debt Gain on retirement of debt represents the gain in
connection with the debt we have repurchased, net of any related deferred financing fees to
be written off as well as any related transaction fees. Subject to the restrictions and
limitations set forth under the senior secured credit agreement and the indenture governing
the senior subordinated notes, we and our subsidiaries, affiliates or significant
stockholders may from time to time purchase, repay, redeem or retire additional amounts of
our outstanding debt, in privately negotiated or open market transactions, by tender offer
or otherwise. |
||
▪ | Other income (expense), net Other income (expense), net primarily consists of interest
income, other non-income based taxes, foreign currency gains or losses and gains or losses
on marketable securities. |
||
▪ | Income tax expense Income tax expense is based on state, federal and
foreign taxable income determined in accordance with current enacted laws and tax rates. |
General Business Conditions and Trends
The United States economy continued to slowly recover in the first half of 2010. We believe that
the pace of the recovery will likely be slow as the U.S. economy experiences prolonged tight
credit, high unemployment and ongoing foreclosures, as well as deceleration in the rebuilding of
inventories and declining sales of both new and existing homes. The broader macroeconomic
environment has impacted our performance in the vertical markets we serve, and we expect it will
likely affect the industries we serve and our performance in those industries, for fiscal 2010 and
potentially beyond.
We continue to see customer caution in making capital expenditure decisions. While we have seen
year over year total revenue increases for the last few quarters, we also see our potential and
current customer base challenged with, among other things, lack of access to adequate credit and
higher attrition due to bankruptcies and business shutdowns during fiscal 2010.
We saw the macroeconomic weakness first impact our retail distribution vertical, which has shown
continuing signs of improvement over the past two quarters. Our wholesale distribution vertical is
still experiencing the impact of the slowdown in commercial construction and other sectors. At the
same time, we have seen sales to our existing customers improve and experienced larger strategic
transactions across both verticals, as certain larger prospects begin to invest in their businesses
to enhance their efficiencies.
We have proactively addressed our cost model as we faced these marketplace uncertainties. Over
the past two years our management implemented restructuring actions primarily related to
eliminating certain employee positions and consolidating certain excess facilities. We also
benefited from our focus on managing our discretionary expenses and continue to do so wherever
possible.
Demand for our systems and support offerings are correlated with the economic conditions in each
vertical market and the macroeconomic conditions. We continue to focus on executing in the areas
we can control by continuing to provide high value products and services while managing our
expenses. Despite the challenging economic environment, operating cash flow from continuing
operations remained strong for the nine months ended June 30, 2010 at $41.5 million.
If the macroeconomic environment recovery continues to be slow, it could have a negative effect on
our revenue and could have a negative effect on our operating margin growth rate. If this were to
occur, it may impact our ability to meet certain financial tests under our senior secured credit
agreement and the indenture governing our senior subordinated notes. Based on our forecast for
fiscal year 2010, we currently anticipate that we will be able to meet or exceed these financial
tests and covenants during this period.
Results of Operations
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
Total revenues
Our Retail Distribution Group and Wholesale Distribution segments accounted for approximately 59.3%
and 40.7%, respectively, of our revenues during the three months ended June 30, 2010. This
compares to the three months ended June 30, 2009, where our Retail Distribution Group and Wholesale
Distribution segments accounted for approximately 57.2% and 42.7%, respectively, of our revenues.
See Note 9 to our unaudited condensed consolidated financial statements for further information on
our segments, including a summary of our segment revenues and contribution margin.
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The following table sets forth, for the periods indicated, our segment revenues by business
management solution and the variance thereof (in thousands):
Three Months Ended June 30, | ||||||||||||||||
2010 | 2009 | Variance $ | Variance % | |||||||||||||
Retail Distribution Group revenues: |
||||||||||||||||
Systems |
$ | 18,121 | $ | 13,787 | $ | 4,334 | 31.4 | % | ||||||||
Services |
35,500 | 37,202 | (1,702 | ) | (4.6 | )% | ||||||||||
Total Retail Distribution Group revenues |
$ | 53,621 | $ | 50,989 | $ | 2,632 | 5.2 | % | ||||||||
Wholesale Distribution revenues: |
||||||||||||||||
Systems |
$ | 11,898 | $ | 13,010 | $ | (1,112 | ) | (8.5 | )% | |||||||
Services |
24,972 | 25,065 | (93 | ) | (0.4 | )% | ||||||||||
Total Wholesale Distribution revenues |
$ | 36,870 | $ | 38,075 | $ | (1,205 | ) | (3.2 | )% | |||||||
Other revenues: |
||||||||||||||||
Systems |
$ | | $ | 47 | $ | (47 | ) | (100.0 | )% | |||||||
Services |
| 52 | (52 | ) | (100.0 | )% | ||||||||||
Total Other revenues |
$ | | $ | 99 | $ | (99 | ) | (100.0 | )% | |||||||
Total revenues: |
||||||||||||||||
Systems |
$ | 30,019 | $ | 26,844 | $ | 3,175 | 11.8 | % | ||||||||
Services |
60,472 | 62,319 | (1,847 | ) | (3.0 | )% | ||||||||||
Total revenues |
$ | 90,491 | $ | 89,163 | $ | 1,328 | 1.5 | % | ||||||||
Total revenues for the three months ended June 30, 2010 increased by $1.3 million, or 1.5%,
compared to the three months ended June 30, 2009. The increase in revenues over the comparable
period a year ago is primarily a result of an increase in systems revenues in the Retail
Distribution Group, partially offset by a decrease in systems revenues in Wholesale Distribution as
well as an overall decrease in services revenues.
▪ | Retail Distribution Group revenues Retail Distribution Group revenues
increased by $2.6 million, or 5.2%, during the three months ended June 30, 2010 compared to
the same period a year ago. Systems revenues increased primarily as a result of an
increase in the average transaction size of new and customer migration system sales due to
large strategic transitions and sales to multi chain stores
including those in newer markets. In addition,
we continue to have strong sales of additional products and modules to existing customers.
Services revenues experienced a decrease primarily as a result of a contractual price
reduction and attrition on legacy platforms due to the continued slow economy, partially
offset by growth in our content and connectivity offerings. |
||
▪ | Wholesale Distribution revenues Wholesale Distribution revenues decreased
by $1.2 million, or 3.2%, during the three months ended June 30, 2010 compared to the same
period a year ago. The systems revenues decrease was due to a reduction in the unit volume
of new system sales and associated professional services revenues, primarily due
to a lagging economic recovery in commercial construction and other sectors partially
offset by the sale of additional products and modules. Services revenues decreased
primarily as a result of a deferral of support revenue, partially offset by annual support
price increases. |
Total cost of revenues and gross margins as a percentage of revenues
The following table sets forth, for the periods indicated, our gross margin as a percentage of
revenues (in thousands):
Three Months Ended June 30, | ||||||||||||
2010 | 2009 | Variance | ||||||||||
Cost of systems revenues |
$ | 15,461 | $ | 15,091 | $ | 370 | ||||||
Systems gross margins |
48.5 | % | 43.8 | % | ||||||||
Cost of services revenues |
$ | 19,577 | $ | 20,051 | $ | (474 | ) | |||||
Services gross margins |
67.6 | % | 67.8 | % | ||||||||
Total cost of revenues |
$ | 35,038 | $ | 35,142 | $ | (104 | ) | |||||
Total gross margins |
61.3 | % | 60.6 | % |
▪ | Cost of systems revenues and systems gross margins Cost of systems
revenues increased by $0.4 million during the three months ended June 30, 2010 compared to
the same period a year ago, primarily as a result of higher direct costs associated with |
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higher overall systems revenues. Systems gross margins increased by 4.7 percentage points
in the three months ended June 30, 2010 from the comparable period a year ago primarily
attributable to improved professional services utilization in retail distribution as well
as higher hardware equipment margins. |
|||
▪ | Cost of services revenues and services gross margins Cost of services
revenues decreased by $0.5 million primarily as a result of reductions in third party
maintenance and support costs. Services gross margins decreased by 0.2 percentage points
in the three months ended June 30, 2010 from the comparable period a year ago as a result
of a contractual price reduction, customer support revenue deferral and attrition on legacy
platforms, partially offset by customer support price increases and reductions in third
party maintenance and support costs. |
Total operating expenses
The following table sets forth, for the periods indicated, operating expenses and the variance
thereof (in thousands):
Three Months Ended June 30, | ||||||||||||||||
2010 | 2009 | Variance $ | Variance % | |||||||||||||
Sales and marketing |
$ | 14,456 | $ | 13,399 | $ | 1,057 | 7.9 | % | ||||||||
Product development |
8,520 | 8,757 | (237 | ) | (2.7 | )% | ||||||||||
General and administrative |
6,841 | 6,082 | 759 | 12.5 | % | |||||||||||
Depreciation and amortization |
9,831 | 9,272 | 559 | 6.0 | % | |||||||||||
Restructuring costs |
(59 | ) | (40 | ) | (19 | ) | 47.1 | % | ||||||||
Total operating expenses |
$ | 39,589 | $ | 37,470 | $ | 2,119 | 5.7 | % | ||||||||
Total operating expenses increased by $2.1 million, or 5.7%, for the three months ended June
30, 2010, compared to the three months ended June 30, 2009. The increase was driven primarily by
increased compensation and employee related expenses, marketing related expenses and outside
services, partially offset by increased software development capitalization and lower bad debt
expense.
▪ | Sales and marketing Sales and marketing expenses increased by $1.1 million,
or 7.9%, for the three months ended June 30, 2010 compared to the three months ended June
30, 2009. The increase was primarily the result of an addition of $1.3 million in
commissions, $0.3 million in outside services, and $0.3 million in marketing related
expenses, partially offset by a decrease of $0.6 million in bad
debt expense and $0.2
million in travel and recruiting expenses. |
||
▪ | Product development Product development expenses decreased $0.2 million, or
2.7%, for the three months ended June 30, 2010 compared to the three months ended June 30,
2009. The decrease was primarily the result of a $0.1 million reduction in compensation
and employee related costs and lower software development expenses of $0.5 million as a
result of more of these costs being capitalized, partially offset by an increase of $0.4
million in outside services. |
||
▪ | General and administrative General and administrative expenses increased by
$0.8 million, or 12.5%, for the three months ended June 30, 2010 compared to the three
months ended June 30, 2009. The increase is primarily the result
of $0.6 million in
additional compensation and employee related expenses and
$0.2 million in legal fees,
partially offset by $0.1 million in recruiting expenses. |
||
▪ | Depreciation and amortization Depreciation and amortization expense was $9.8
million for the three months ended June 30, 2010 compared to $9.3 million for the three
months ended June 30, 2009. The increase was primarily a result of an increase in capital
expenditures during fiscal year 2010. |
||
▪ | Restructuring costs During fiscal years 2010 and 2009, our management
approved restructuring actions primarily related to eliminating certain employee positions
and consolidating certain excess facilities with the intent to streamline and focus our
operations and more properly align our cost structure with our projected revenue streams.
We recorded a credit to restructuring expense of approximately $0.1 million and less than
$0.1 million for the three months ended June 30, 2010 and 2009, respectively. See Note 8
to our unaudited condensed consolidated financial statements. |
Interest expense
Interest expense for the three months ended June 30, 2010 and 2009 was $7.6 million and $9.7
million, respectively. The decrease in interest expense was primarily a result of the reduction in
our outstanding debt as a result of principal payments and repurchases of our existing debt made in
the past eighteen months totaling approximately $106.7 million.
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Gain on retirement of debt
During the three months ended June 30, 2009, we repurchased approximately $25.0 million in face
value of our senior subordinated notes in open market transactions for an aggregate purchase price
of approximately $19.9 million (including accrued interest of $0.3 million). In connection with
the debt repurchase, we wrote off deferred financing costs and other transaction fees of $0.8
million. As a result of these repurchases we recorded a gain on retirement of debt in the amount
of $4.6 million. We did not repurchase any debt during the three months ended June 30, 2010.
Other income (expense), net
Other income (expense), net for the three months ended June 30, 2010 was an expense of $0.3 million
compared to income of less than $0.1 million in the three months ended June 30, 2009. The decrease
in income was primarily a result of an increase in non-income based taxes of approximately $0.2
million for the three months ended June 30, 2010 compared to the same period in the prior year.
Income tax expense
We recognized income tax expense of $1.9 million, or 23.9% of pre-tax income from continuing
operations, for the three months ended June 30, 2010 compared to income tax expense of $5.2
million, or 45.4% of pre-tax income from continuing operations in the comparable period in 2009.
The decrease in income tax expense during the three months ended June 30, 2010 compared to the
comparable period a year ago is due primarily to lower pre-tax income from continuing operations
and a decrease in the effective tax rate. Our effective tax rate for the three months ended June
30, 2010 differed from the statutory rate primarily due to state taxes, net of U.S. federal income
tax benefit. See Note 6 to our unaudited condensed consolidated financial statements for
additional information about income taxes.
Contribution margin
The results of the reportable segments are derived directly from our management reporting system.
The results are based on our method of internal reporting and are not necessarily in conformity
with accounting principles generally accepted in the United States (GAAP). Our management
measures the performance of each segment based on several metrics, including contribution margin as
defined below, which is not a financial measure calculated in accordance with GAAP. Asset data is
not reviewed by our management at the segment level and therefore is not included.
Segment contribution margin includes all segment revenues less the related cost of sales, direct
marketing, sales expense, and product development expenses. A significant portion of each segments
expenses arises from shared services and centrally managed infrastructure support costs that we
allocate to the segments to determine segment contribution margin. These expenses primarily include
information technology services, facilities, and telecommunications costs.
Certain of our operating expenses are not allocated to segments because they are separately managed
at the corporate level. These unallocated costs include marketing costs other than direct
marketing, general and administrative costs, such as legal and finance, stock-based compensation
expense, acquisition related costs, depreciation and amortization of intangible assets,
restructuring costs, interest expense, and other income.
There are significant judgments that our management makes with respect to the direct and indirect
allocation of costs that may affect the calculation of contribution margins. While our management
believes these and other related judgments are reasonable and appropriate, others could assess such
matters in ways different than our companys management.
The exclusion of costs not considered directly allocable to individual business segments results in
contribution margin not taking into account substantial costs of doing business. We use
contribution margin, in part, to evaluate the performance of, and allocate resources to, each of
the segments. While our management may consider contribution margin to be an important measure of
comparative operating performance, this measure should be considered in addition to, but not as a
substitute for, net income (loss), cash flow and other measures of financial performance prepared
in accordance with GAAP that are otherwise presented in our financial statements. In addition, our
calculation of contribution margin may be different from the calculation used by other companies
and, therefore, comparability may be affected.
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Contribution margin for the three months ended June 30, 2010 and 2009 is as follows (in thousands):
Three Months Ended June 30, | ||||||||||||||||
2010 | 2009 | Variance $ | Variance % | |||||||||||||
Retail Distribution Group |
$ | 16,625 | $ | 16,597 | $ | 28 | 0.2 | % | ||||||||
Wholesale Distribution |
16,370 | 15,946 | 424 | 2.7 | % | |||||||||||
Other |
| 99 | (99 | ) | (100.0 | )% | ||||||||||
Total contribution margin |
$ | 32,995 | $ | 32,642 | $ | 353 | 1.1 | % | ||||||||
▪ | Retail Distribution Group contribution margin The contribution margin
for the Retail Distribution Group remained relatively flat during the three months ended
June 30, 2010 compared to the same period a year ago, primarily as a result of higher
systems revenues and corresponding gross margin, improved professional services utilization
and increased software and database capitalization, partially offset by contractual support
price reductions, legacy platform attrition and higher commissions and bonus related costs. |
||
▪ | Wholesale Distribution contribution margin The contribution margin for Wholesale
Distribution increased $0.4 million during the three months ended June 30, 2010 compared to
the three months ended June 30, 2009, primarily as the result of lower compensation related
costs, lower third party support costs, support price increases and lower bad debt expense
partially offset by lower systems revenue volume and corresponding gross margin and support
revenue deferral. |
The reconciliation of total segment contribution margin to our income from continuing operations
before income taxes is as follows (in thousands):
Three Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Segment contribution margin |
$ | 32,995 | $ | 32,642 | ||||
Corporate and unallocated costs |
(6,438 | ) | (5,925 | ) | ||||
Stock-based compensation expense |
(921 | ) | (934 | ) | ||||
Depreciation and amortization |
(9,831 | ) | (9,272 | ) | ||||
Restructuring costs |
59 | 40 | ||||||
Interest expense |
(7,644 | ) | (9,722 | ) | ||||
Gain on retirement of debt |
| 4,631 | ||||||
Other income (expense), net |
(269 | ) | 22 | |||||
Income from continuing operations before income taxes |
$ | 7,951 | $ | 11,482 | ||||
Nine Months Ended June 30, 2010 Compared to Nine Months Ended June 30, 2009
Total revenues
Our Retail Distribution Group and Wholesale Distribution segments accounted for approximately 59.1%
and 40.9%, respectively, of our revenues during the nine months ended June 30, 2010. This compares
to the nine months ended June 30, 2009, where our Retail Distribution Group and Wholesale
Distribution segments accounted for approximately 57.4% and 42.5%, respectively, of our revenues.
See Note 9 to our unaudited condensed consolidated financial statements for further information on
our segments, including a summary of our segment revenues and contribution margin.
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The following table sets forth, for the periods indicated, our segment revenues by business
management solution and the variance thereof (in thousands):
Nine Months Ended June 30, | ||||||||||||||||
2010 | 2009 | Variance $ | Variance % | |||||||||||||
Retail Distribution Group revenues: |
||||||||||||||||
Systems |
$ | 54,087 | $ | 46,827 | $ | 7,260 | 15.5 | % | ||||||||
Services |
107,548 | 111,241 | (3,693 | ) | (3.3 | )% | ||||||||||
Total Retail Distribution Group revenues |
$ | 161,635 | $ | 158,068 | $ | 3,567 | 2.3 | % | ||||||||
Wholesale Distribution revenues: |
||||||||||||||||
Systems |
$ | 36,202 | $ | 41,275 | $ | (5,073 | ) | (12.3 | )% | |||||||
Services |
75,799 | 75,723 | 76 | 0.1 | % | |||||||||||
Total Wholesale Distribution revenues |
$ | 112,001 | $ | 116,998 | $ | (4,997 | ) | (4.3 | )% | |||||||
Other revenues: |
||||||||||||||||
Systems |
$ | | $ | 88 | $ | (88 | ) | (100.0 | )% | |||||||
Services |
| 180 | (180 | ) | (100.0 | )% | ||||||||||
Total Other revenues |
$ | | $ | 268 | $ | (268 | ) | (100.0 | )% | |||||||
Total revenues: |
||||||||||||||||
Systems |
$ | 90,289 | $ | 88,190 | $ | 2,099 | 2.4 | % | ||||||||
Services |
183,347 | 187,144 | (3,797 | ) | (2.0 | )% | ||||||||||
Total revenues |
$ | 273,636 | $ | 275,334 | $ | (1,698 | ) | (0.6 | )% | |||||||
Total revenues for the nine months ended June 30, 2010 decreased by $1.7 million, or 0.6%,
compared to the nine months ended June 30, 2009. The decrease in revenues over the comparable
period a year ago is primarily a result of a decrease in systems revenues in Wholesale Distribution
and services revenues in the Retail Distribution Group, partially offset by increased systems
revenues in the Retail Distribution Group.
▪ | Retail Distribution Group revenues Retail Distribution Group revenues
increased by $3.6 million, or 2.3%. Systems revenues increased primarily as a result of an
increase in the average transaction size of new and customer migration system sales due to
large strategic transitions and sales to multi chain stores including those in newer markets. In addition,
we continue to have strong sales of additional products and modules to existing customers.
Services revenues experienced a decrease primarily as a result of contractual price
reductions, legacy platform attrition due to the continued slow economy and known attrition
of a major customer. |
||
▪ | Wholesale Distribution revenues Wholesale Distribution revenues decreased
by $5.0 million, or 4.3%. The systems revenues decrease was substantially due to a
reduction in the unit volume of new system sales and associated professional services
revenues, primarily due to a lagging economic recovery in commercial construction
and other sectors, partially offset by the sale of additional products and modules.
Services revenues increased slightly as a result of price increases for support services,
partially offset by deferral of support revenue and attrition on legacy platforms due to
the continued economic downturn in the markets served. |
Total cost of revenues and gross margins as a percentage of revenues
The following table sets forth, for the periods indicated, our gross margin as a percentage of
revenues (in thousands):
Nine Months Ended June 30, | ||||||||||||
2010 | 2009 | Variance | ||||||||||
Cost of systems revenues |
$ | 49,324 | $ | 48,490 | $ | 834 | ||||||
Systems gross margins |
45.4 | % | 45.0 | % | ||||||||
Cost of services revenues |
$ | 59,193 | $ | 62,710 | $ | (3,517 | ) | |||||
Services gross margins |
67.7 | % | 66.5 | % | ||||||||
Total cost of revenues |
$ | 108,517 | $ | 111,200 | $ | (2,683 | ) | |||||
Total gross margins |
60.3 | % | 59.6 | % |
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▪ | Cost of systems revenues and systems gross margins Cost of systems
revenues increased by $0.8 million during the nine months ended June 30, 2010 compared to
the same period a year ago, primarily as a result of a $1.3 million inventory valuation
change in estimate to lower the cost basis of inventory as a result of a review and
analysis of on-hand quantities relative to current and anticipated demand as well as the
higher volume of hardware equipment sales. Systems gross margins increased by 0.4
percentage points in the nine months ended June 30, 2010 from the comparable period a year
ago as a result of higher systems revenue volume and a favorable mix of higher margin
hardware and improved professional services utilization. |
||
▪ | Cost of services revenues and services gross margins Cost of services
revenues decreased by $3.5 million during the nine months ended June 30, 2010 compared to
the same period a year ago, primarily as a result of labor related cost reductions on
legacy platforms, reductions in third party maintenance and support costs and outside
services partially offset by increased bonus expense. Services gross margins increased by
1.2 percentage points in the nine months ended June 30, 2010 from the comparable period a
year ago as a result of service price increases, reductions in labor related costs in
legacy products and lower third party maintenance and support costs, partially offset by
contractual price reductions, attrition on legacy platforms and known attrition of a major
customer. |
Total operating expenses
The following table sets forth, for the periods indicated, operating expenses and the variance
thereof (in thousands):
Nine Months Ended June 30, | ||||||||||||||||
2010 | 2009 | Variance $ | Variance % | |||||||||||||
Sales and marketing |
$ | 43,010 | $ | 41,054 | $ | 1,956 | 4.8 | % | ||||||||
Product development |
25,886 | 27,412 | (1,526 | ) | (5.6 | )% | ||||||||||
General and administrative |
19,370 | 17,859 | 1,511 | 8.5 | % | |||||||||||
Depreciation and amortization |
29,613 | 28,508 | 1,105 | 3.9 | % | |||||||||||
Impairment of goodwill |
| 107,000 | (107,000 | ) | (100.0 | )% | ||||||||||
Restructuring costs |
1,915 | 4,251 | (2,336 | ) | (54.9 | )% | ||||||||||
Total operating expenses |
$ | 119,794 | $ | 226,084 | $ | (106,290 | ) | (47.0 | )% | |||||||
Total operating expenses decreased by $106.3 million, or 47.0%, for the nine months ended
June 30, 2010, compared to the nine months ended June 30, 2009. The decrease was driven primarily
by the impairment of goodwill in the prior year, lower restructuring costs, reduced compensation
related expenses and increased software development capitalization, partially offset by higher
commissions and outside service costs.
▪ | Sales and marketing Sales and marketing expenses increased by $2.0 million,
or 4.8%, for the nine months ended June 30, 2010 compared to the nine months ended June 30,
2009. The increase was primarily the result of additional expenses of $2.5 million in
commissions, $0.8 million in outside services, $0.2 million in marketing related expenses,
and an increase in bad debt
expense of $0.3 million, partially offset by a reduction of
$1.6 million in other compensation and
employee related expenses and associated allocated expenses. |
||
▪ | Product development Product development expenses decreased $1.5 million, or
5.6%, for the nine months ended June 30, 2010 compared to the nine months ended June 30,
2009. The decrease was primarily the result of a $0.7 million reduction in compensation
and employee related costs and lower software development expenses of $1.7 million as a
result of more of these costs being capitalized, partially offset by additional expenses of
$0.9 million in outside services. |
||
▪ | General and administrative General and administrative expenses increased by
$1.5 million, or 8.5%, for the nine months ended June 30, 2010 compared to the nine months
ended June 30, 2009. The increase is primarily the result of an additional $1.4 million in
compensation and employee related expenses, $0.4 million in legal and outside services and
$0.4 million in insurance costs, partially offset by a reduction of $0.3 million of
acquisition related costs. |
||
▪ | Depreciation and amortization Depreciation and amortization expense was
$29.6 million for the nine months ended June 30, 2010 compared to $28.5 million for the
nine months ended June 30, 2009. The increase was primarily a result of an increase in
capital expenditures during fiscal year 2010. |
||
▪ | Impairment of goodwill Due to the continuing global economic uncertainty
and credit crisis and the significant decrease in the level of overall consumer spending,
including spending in the vertical markets that we serve, we determined it necessary to
evaluate goodwill for impairment in the prior year. We recorded a goodwill impairment
charge of $107.0 million in the Retail Distribution Group during the nine months ended June
30, 2009. See Note 3 to our unaudited condensed consolidated financial statements. We had
no similar charges in the nine months ended June 30, 2010. |
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▪ | Restructuring costs During fiscal years 2010 and 2009, our management
approved restructuring actions primarily related to eliminating certain employee positions
and consolidating certain excess facilities with the intent to streamline and focus our
operations and more properly align our cost structure with our projected revenue streams.
During the nine months ended June 30, 2010 and 2009, we recorded restructuring charges of
approximately $1.9 million and $4.3 million, respectively. See Note 8 to our unaudited
condensed consolidated financial statements. |
Interest expense
Interest expense for the nine months ended June 30, 2010 and 2009 was $23.3 million and $32.4
million, respectively. The decrease in interest expense was primarily a result of the reduction in
our outstanding debt as a result of principal payments and repurchases of our existing debt made in
the past eighteen months totaling approximately $106.7 million.
Gain on retirement of debt
During the nine months ended June 30, 2009, we repurchased approximately $60.7 million in face
value of our senior subordinated notes in open market transactions for an aggregate purchase price
of approximately $41.1 million (including accrued interest of $1.3 million). In connection with
the debt repurchase, we wrote off deferred financing costs and other transaction fees of $1.9
million. As a result of these repurchases we recorded a gain on retirement of debt in the amount
of $19.0 million. We did not repurchase any debt during the nine months ended June 30, 2010.
Other income (expense), net
Other income (expense), net for the nine months ended June 30, 2010 was income of $0.2 million
compared to a loss of $0.6 million in the nine months ended June 30, 2009. The increase in income
was primarily a result of foreign currency gains of approximately $0.6 million for the nine months
ended June 30, 2010 compared to $0.4 million of foreign currency losses during the nine months
ended June 30, 2009.
Income tax expense
We recognized income tax expense of $7.5 million, or 34.1% of pre-tax income from continuing
operations, for the nine months ended June 30, 2010 compared to income tax expense of $14.4
million, or 46.6% of pre-tax income from continuing operations, excluding goodwill impairment, in
the comparable period in 2009. During the nine months ended June 30, 2010, the decrease in income
tax expense is primarily due to lower pre-tax income from continuing operations, excluding goodwill
impairment, as well as a decrease in the effective tax rate. Our effective tax rate for the nine
months ended June 30, 2010 differed from the statutory rate primarily due to state taxes, net of
U.S. federal income tax benefit. See Note 6 to our unaudited condensed consolidated financial
statements for additional information about income taxes.
Contribution margin
As previously described, our management measures the performance of each segment based on several
metrics, including contribution margin, which is not a financial measure calculated in accordance
with GAAP. For more information on segment contribution margin and our methodology for calculating
contribution margin, see the discussion herein under Three Months Ended June 30, 2010 Compared to
Three Months Ended June 30, 2009Contribution Margin. While our management may consider
contribution margin to be an important measure of comparative operating performance, this measure
should be considered in addition to, but not as a substitute for, net income, cash flow and other
measures of financial performance prepared in accordance with GAAP that are otherwise presented in
our financial
statements.
Contribution margin for the nine months ended June 30, 2010 and 2009 is as follows (in thousands):
Nine Months Ended June 30, | ||||||||||||||||
2010 | 2009 | Variance $ | Variance % | |||||||||||||
Retail Distribution Group |
$ | 50,760 | $ | 51,112 | $ | (352 | ) | (0.7 | )% | |||||||
Wholesale Distribution |
47,509 | 46,795 | 714 | 1.5 | % | |||||||||||
Other |
| 268 | (268 | ) | (100.0 | )% | ||||||||||
Total contribution margin |
$ | 98,269 | $ | 98,175 | $ | 94 | 0.1 | % | ||||||||
▪ | Retail Distribution Group contribution margin The contribution margin
for the Retail Distribution Group decreased by $0.4 million during the nine months ended
June 30, 2010 compared to the same period in the prior year, primarily as a result of the
previously mentioned change in inventory valuation estimate, lower services revenues due to
contractual price reductions, legacy platform attrition and a higher mix of hardware
systems revenues, partially offset by increased systems revenue
dollars, improved
professional services gross margins and an increase in database and software capitalization
costs. |
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▪ | Wholesale Distribution contribution margin The contribution margin for Wholesale
Distribution increased by $0.7 million during the nine months ended June 30, 2010 compared
to the same period in the prior year, primarily as a result of support price increases and
lower compensation related expenses and third party maintenance costs, partially offset by
lower systems revenue volume, the impact on services revenue from legacy platform
attrition, higher bad debt expense and the previously mentioned change in inventory
valuation estimate. |
The reconciliation of total segment contribution margin to our income (loss) from continuing
operations before income taxes is as follows (in thousands):
Nine Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Segment contribution margin |
$ | 98,269 | $ | 98,175 | ||||
Corporate and unallocated costs |
(18,589 | ) | (17,556 | ) | ||||
Stock-based compensation expense |
(2,827 | ) | (2,810 | ) | ||||
Depreciation and amortization |
(29,613 | ) | (28,508 | ) | ||||
Impairment of goodwill |
| (107,000 | ) | |||||
Restructuring costs |
(1,915 | ) | (4,251 | ) | ||||
Interest expense |
(23,347 | ) | (32,398 | ) | ||||
Gain on retirement of debt |
| 18,958 | ||||||
Other income (expense), net |
162 | (604 | ) | |||||
Income (loss) from continuing operations before income taxes |
$ | 22,140 | $ | (75,994 | ) | |||
Liquidity and Capital Resources
Overview
Our principal liquidity requirements are for debt service, capital expenditures and working
capital. Our ability to service our indebtedness will depend on our ability to generate cash in
the future.
Our cash and cash equivalents balance at June 30, 2010 was $68.7 million. As of June 30, 2010, we
had $506.9 million in outstanding indebtedness comprised primarily of $392.6 million aggregate
principal amount of senior secured term loans (including an incremental term loan) due 2013
pursuant to our senior secured credit agreement and $114.3 million aggregate principal amount of
senior subordinated notes due 2016. As previously discussed and as further discussed below, during
the nine months ended June 30, 2009, we repurchased approximately $60.7 million in face value of
our senior subordinated notes resulting in gain on retirement of debt of $19.0 million. We did not
repurchase any debt during the nine months ended June 30, 2010.
Senior Secured Credit Agreement
We have a senior secured credit agreement that provides for (i) a seven-year term loan in the
amount of $390.0 million payable on May 2, 2013, and (ii) a five-year revolving credit facility
that permits loans in an aggregate amount of up to $40.0 million, which includes a $5.0 million
letter of credit facility and a swing line facility. Principal amounts outstanding under the
revolving credit facility are due and payable in full on May 2, 2011. In addition, subject to
certain terms and conditions, the senior secured credit agreement provides for one or more
uncommitted incremental term loans and/or revolving credit facilities in an aggregate amount not to
exceed $75.0 million.
In August 2007, we borrowed the $75.0 million incremental term loan, which matures on May 2, 2013,
as well as $20.0 million of the revolving credit facility. During the year ended September 30,
2009, we repaid $10.0 million in principal payments towards the revolving credit facility. During
the nine months ended June 30, 2010, we repaid the $10.0 million remaining outstanding principal
balance on the revolving credit facility. Prior to fiscal year 2009, we did not make any principal
repayments towards the revolving credit facility.
We may be required each year, generally concurrent with the filing of our Annual Report on Form
10-K, to make a mandatory principal repayment for the preceding fiscal year towards term loans
equal to a specified percentage of excess cash flow depending on our actually attained ratio of
consolidated total debt to EBITDA (consolidated earnings before interest, taxes, depreciation and
amortization, further adjusted to exclude unusual items and other adjustments permitted in
calculating covenant compliance under the indenture governing the senior subordinated notes and our
senior secured credit facilities), all as defined in the senior secured credit agreement. Any
mandatory repayments due are reduced dollar-for-dollar by any voluntary prepayments made during the
year. Prior to fiscal year 2008, we did not have to make any mandatory repayments. For the period
ended September 30, 2006 and for the years ended September 30, 2007, 2008 and 2009, we repaid $1.9
million, $25.2 million, $15.8 million, and $23.5 million, respectively, in principal towards the
term loans. The fiscal year 2009 payments included approximately $3.3 million of fiscal year 2008
mandatory principal repayments and approximately $20.2
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million of voluntary prepayments. For the
nine months ended June 30, 2010, we repaid $6.0 million in principal towards the term loans as a
voluntary prepayment. As of September 30, 2009, we had classified approximately $5.9 million of
term loans as current maturities resulting from our then current mandatory principal repayment
calculations. Our mandatory repayment calculation as of the repayment date indicated that our
earlier prepayments had fully satisfied all fiscal year 2009 excess cash flow-based payments, and,
consequently, no mandatory repayment was due. As mentioned, we proceeded with a $6.0 million
principal payment, all of which is considered a voluntary prepayment of fiscal year 2010 excess
cash flow-based principal payments. Any future excess cash flow-based payments will be dependent
upon our attained ratio of consolidated total debt to adjusted EBITDA, upon us generating excess
cash flow, and/or upon us making voluntary prepayments, all as defined in the senior secured credit
agreement.
On April 2010, we completed the sale of our productivity tools business for approximately $12.0
million in cash. See Note 10 to our unaudited condensed consolidated financial statements for more
information. The senior secured credit agreement requires us to reinvest such cash proceeds in our
business within 12 months of receipt and to prepay an aggregate principal amount of term loans
equal to the amount of any cash proceeds not reinvested in our business. We expect to reinvest
these cash proceeds in our business within such 12-month period.
The capital and credit markets have been experiencing extreme volatility and disruption during the
past several years. These market conditions have, to a degree, affected our ability to borrow
under our senior secured credit facility. On September 15, 2008, Lehman Brothers Holdings Inc.
(Lehman Brothers) and on November 1, 2009, CIT Group Inc. (CIT), filed petitions under Chapter
11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New
York. On December 10, 2009, CIT confirmed that it had emerged from bankruptcy. A Lehman Brothers
subsidiary, Lehman Commercial Paper Inc. (Lehman CPI) and a CIT subsidiary, The CIT
Group/Equipment Financing, Inc. (CIT Financing), are lenders under our senior secured credit
agreement, having provided commitments of $7.0 million and $7.5 million, respectively, under the
revolving credit facility, of which no amounts were outstanding as of June 30, 2010. Although we
have made no request for funding under the revolving credit facility since the filing of the
bankruptcy petitions by Lehman Brothers or CIT, it is uncertain whether Lehman CPI or CIT Financing
will participate in any future requests for funding or whether another lender might assume their
commitments.
The borrowings under the senior secured credit agreement bear interest at a rate equal to an
applicable margin plus, at our option, either (a) a base rate determined by reference to the higher
of (1) the prime rate of Deutsche Bank Trust Company Americas, and (2) the federal funds rate plus
0.50%; or (b) a reserve adjusted Eurodollar rate on deposits for periods of one-, two-, three-, or
six-months (or, to the extent agreed to by each applicable lender, nine- or twelve-months or less
than one month). The initial applicable margin for the borrowings is:
| under the term loan, 1.00% with respect to base rate borrowings and 2.00% with respect to
Eurodollar rate borrowings; |
|
| under the incremental term loan, 1.50% with respect to base rate borrowings and 2.50% with
respect to Eurodollar rate borrowings; and |
|
| under the revolving credit facility, 1.00% with respect to base rate borrowings and 2.00%
with respect to Eurodollar rate borrowings, which may be reduced subject to our attainment of
certain leverage ratios. |
In addition to paying interest on outstanding principal under the senior secured credit agreement,
we are required to pay a commitment fee to the lenders under the revolving credit facility in
respect of the unutilized commitments thereunder. The initial commitment fee rate is 0.50% per
annum. The commitment fee rate may be reduced subject to our attaining certain leverage ratios.
As of June 30, 2010, our commitment fee was 0.375% per annum. We must also pay customary letter of
credit fees for issued and outstanding letters of credit. As of June 30, 2010, we had $0.3 million
of letters of credit issued and outstanding.
Substantially all of our assets and those of our subsidiaries are pledged as collateral under the
senior secured credit agreement.
The senior secured credit agreement contains a number of covenants that, among other things,
restrict, subject to certain exceptions, our ability to:
| incur additional indebtedness (including contingent liabilities); |
|
| create liens on assets; |
|
| enter into sale-leaseback transactions; |
|
| engage in mergers or acquisitions; |
|
| dispose of assets; |
|
| pay dividends and restricted payments; |
|
| make investments (including joint ventures); |
|
| make capital expenditures; |
|
| prepay other indebtedness (including the notes); |
|
| engage in certain transactions with affiliates; |
|
| amend agreements governing our subordinated indebtedness (including the notes); |
|
| amend organizational documents and other material agreements; and |
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| materially change the nature of our business. |
In addition, the senior secured credit agreement requires us to maintain the following financial
covenants:
| a maximum total leverage ratio; and |
|
| a minimum interest coverage ratio. |
The senior secured credit agreement also contains certain customary affirmative covenants and
events of default. Substantially all of our assets and those of our subsidiaries are pledged as
collateral under the senior secured credit agreement.
Derivative Instruments and Hedging Activities
Our objective in using interest rate swaps is to add stability to interest expense and to manage
and reduce the risk inherent in interest rate fluctuations. To accomplish this objective, we
primarily use interest rate swaps as part of our interest rate risk management strategy. Interest
rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a
counterparty in exchange for our making fixed-rate payments over the life of the agreements without
exchange of the underlying notional amount. At the time we entered into the senior secured credit
agreement, we entered into four interest rate swaps to effectively convert a notional amount of
$245.0 million of floating rate debt to fixed rate debt. In November 2007, 2008 and 2009, interest
rate swaps with a notional amount of $25.0 million, $30.0 million and $50.0 million, respectively,
matured. As of June 30, 2010, we had an outstanding interest rate swap with a notional amount of
$140.0 million. As of and for the six months ended June 30, 2010, there is no cumulative
ineffectiveness related to these interest rate swaps.
Senior Subordinated Notes due 2016
We have also issued $175.0 million aggregate principal amount of 9.5% senior subordinated notes due
May 2, 2016. The notes were issued in a private transaction that was not subject to the
registration requirements of the Securities Act. The notes subsequently were exchanged for
substantially identical notes registered with the SEC, pursuant to a registration rights agreement
entered into in connection with the indenture under which these notes were issued.
During the nine months ended June 30, 2009, we repurchased approximately $60.7 million in face
value of our senior subordinated notes in open market transactions for an aggregate purchase price
of approximately $41.1 million (including accrued interest of $1.3 million). In connection with
the debt repurchase, we wrote off deferred financing costs and other transaction fees of $1.9
million. As a result of these repurchases we recorded a gain on retirement of debt in the amount
of $19.0 million. We did not repurchase any debt during the nine months ended June 30, 2010. As a
result of these repurchases, senior subordinated notes representing $114.3 million in principal
amount were outstanding as of June 30, 2010.
Each of our domestic subsidiaries, as primary obligors and not as sureties, jointly and severally,
irrevocably and unconditionally guarantees, on an unsecured senior subordinated basis, the
performance and full and punctual payment when due, whether at maturity, by acceleration or
otherwise, of all of our obligations under the indenture and the notes. The notes are our
unsecured senior subordinated obligations and are subordinated in right of payment to all of our
existing and future senior indebtedness (including the senior secured credit agreement), are
effectively subordinated to all of our secured indebtedness (including the senior secured credit
agreement) and are senior in right of payment to all of our existing and future subordinated
indebtedness.
The terms of the senior secured credit agreement and the indenture governing the senior
subordinated notes restrict certain activities by us, the most significant of which include
limitations on additional indebtedness, liens, guarantees, payment or declaration of dividends,
sale of assets and transactions with affiliates. In addition, the senior secured credit agreement
requires us to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The
senior secured credit agreement and the indenture also contain certain customary affirmative
covenants and events of default. At June 30, 2010, we were in compliance with all of the senior
secured credit agreements and the indentures covenants.
Compliance with these covenants is dependent on the results of our operations, which are subject to
a number of factors including current economic conditions. Based on our forecast for the remainder
of fiscal year 2010, we currently anticipate that we will be able to meet or exceed these financial
tests and covenants during this period. This expectation is based on our cost and revenue
expectations for fiscal year 2010, which include certain cost cutting initiatives. Should the
current economic conditions cause our business or our vertical markets to deteriorate beyond our
expectations or should our cost cutting initiatives prove insufficient we may not be able to
satisfy these financial tests and covenants.
In order to help ensure compliance with our covenants under our senior secured credit facilities,
we may take additional actions in the future, including implementing additional cost cutting
initiatives, making additional repurchases of some of our debt or making further changes to our
operations. In the event of a default of the financial covenants referred to above, we may (but no
more than two times in four fiscal quarters) cure the default by raising equity capital from our
existing investors in an amount sufficient to pass, but not to exceed, the financial covenant.
While we believe that these additional remedies provide us with some additional flexibility in
maintaining
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compliance with our tests and covenants, they do not assure us that we will not find
ourselves in violation of these tests and covenants. Upon the occurrence of an event of default
under the senior secured credit facilities, the lenders could elect to declare all amounts
outstanding to be immediately due and payable and terminate all commitments to extend further
credit. Any such acceleration would also result in a default under the indenture governing the
senior subordinated notes.
Subject to the restrictions and limitations set forth under the senior secured credit agreement and
the indenture governing the senior subordinated notes, we and our subsidiaries, affiliates or
significant stockholders may from time to time, in our sole discretion, purchase, repay, redeem or
retire additional amounts of our outstanding debt or equity securities (including any publicly
issued debt), in privately negotiated or open market transactions, by tender offer or otherwise.
Nine Months Ended June 30, 2010 Compared to Nine Months Ended June 30, 2009
Our net cash provided by operating activities from continuing operations for the nine months ended
June 30, 2010 increased $4.6 million to $41.5 million from $36.9 million for the nine months ended
June 30, 2009. As compared to the prior year period, the increase was largely attributable to
$18.0 million of higher net income from continuing operations (after giving effect to the goodwill
impairment charge, gain on retirement of debt in the prior year
period and $1.0 million of higher amortization on intangible assets) and additional cash
provided by deferred revenue of $3.4 million and inventory of $1.3 million, partially offset by additional cash used of $9.1 for accounts receivable, $7.2
million for accrued expenses and $2.2 million of deferred taxes.
Our investing activities used net cash from continuing operations of $12.3 million and $8.0 million
during the nine months ended June 30, 2010 and 2009, respectively. The increase in cash used in
investing activities from the prior year was due to an increase in overall capital expenditures.
We purchased property and equipment of $4.1 million and $1.5 million and capitalized computer
software and database development costs of $8.2 million and $6.6 million for the nine months ended
June 30, 2010 and 2009, respectively.
Our financing activities used cash from continuing operations of $16.0 million and $53.5 million
for the nine months ended June 30, 2010 and 2009, respectively. The decrease in cash used in
financing activities was primarily due to payments on our current and long-term debt of $16.0
million during the nine months ended June 30, 2010 compared to $53.4 million, including repurchases
of debt, during the nine months ended June 30, 2009.
We believe that cash flows from operations, together with amounts available under the senior
secured credit agreement, will be sufficient to fund our working capital, capital expenditures and
debt service requirements for at least the next twelve months. Our ability to meet our working
capital and debt service requirements, however, is subject to future economic conditions and to
financial, business and other factors, many of which are beyond our control. If we are not able to
meet such requirements, we may be required to seek additional financing. There can be no assurance
that we will be able to obtain financing from other sources on terms acceptable to us, if at all.
From time to time, we intend to pursue acquisitions, but the timing, size or success of any
acquisition effort and the related potential capital commitments cannot be predicted. We expect to
fund future acquisitions primarily with cash flow from operations and borrowings, including
borrowing from amounts available under our senior secured credit agreement or through new debt
issuances. We may also issue additional equity either directly or in connection with any such
acquisitions. There can be no assurance that acquisition funds will be available on terms
acceptable to us, or at all.
Covenant Compliance
Our senior secured credit agreement requires us to meet certain financial tests, including
covenants that require us to satisfy a maximum total leverage ratio of consolidated total debt to
adjusted EBITDA (consolidated earnings before interest, taxes, depreciation and amortization,
further adjusted to exclude unusual items and other adjustments permitted in calculating covenant
compliance under the indenture governing the senior subordinated notes and our senior secured
credit facilities) and a minimum interest coverage ratio of adjusted EBITDA to consolidated
interest expense, and other financing conditions tests, which become increasingly stringent over
the term of the senior secured credit facility. See Item 2 Managements Discussion and Analysis
of Financial Condition and Results of OperationsLiquidity and Capital ResourcesSenior Secured
Credit Agreement. Based on our forecasts for the remainder of fiscal year 2010, we currently
anticipate that we will be able to meet or exceed these financial tests and covenants during this
period. This expectation is based on our cost and revenue expectations for fiscal year 2010, which
include certain cost cutting initiatives. Should the current economic conditions cause our
business or our vertical markets to deteriorate beyond our expectations or should our cost cutting
initiatives prove insufficient we may not be able to satisfy these financial tests and covenants.
In addition to these factors, our continued ability to meet those financial ratios and tests can be
affected by other events beyond our control or risks in our business (See Part I, Item 1A Risk
Factors of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009).
The failure to comply with any of these covenants or tests would cause a default under our senior
secured credit facilities. A default, if not waived or cured, could result in acceleration of the
outstanding indebtedness under our senior secured credit facilities and our senior subordinated
notes, in which case our debt would become immediately due and payable. In addition, a default or
acceleration of indebtedness under our senior secured credit facilities or our senior subordinated
notes could result in a default or acceleration of other indebtedness we may incur in the future
with cross-default or cross-acceleration provisions. If this occurs, we may not be able to pay our
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debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be
available on terms that are acceptable to us, particularly given the recent crisis in the debt
market in which the general availability of credit is substantially reduced and the cost of
borrowing is generally higher with more restrictive terms. Furthermore, if we are required to
amend our senior secured credit agreement, we may be required to pay significant amounts to obtain
a waiver or the lenders thereunder may require that interest rates applicable to our loans increase
as a condition to agreeing to any such amendment. Either such event could harm our financial
condition.
In order to help ensure compliance with our covenants under our senior secured credit facilities we
may take additional actions in the future to modify our operations or capital structure, including
implementing additional cost cutting initiatives. In addition, in the event a default of the
financial tests required by our senior secured credit facilities occurs, we may (but no more than
two times in four fiscal quarters) cure the default by raising equity capital from our existing
investors in an amount sufficient to pass, but not to exceed, the financial test. While we believe
that these additional remedies provide us with some additional flexibility in maintaining
compliance with our tests and covenants, they do not assure us that we will not find ourselves in
violation of these tests and covenants. If repayment under our senior
secured credit agreement is accelerated, we cannot assure you that we would have sufficient assets
or access to credit to repay our indebtedness.
We use consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as
further adjusted, a non-GAAP financial measure, to determine our compliance with certain covenants
contained in our senior secured credit agreement and in the indenture governing our senior
subordinated notes. For covenant calculation purposes, adjusted EBITDA is defined as
consolidated net income (loss) adjusted to exclude interest, taxes, depreciation and amortization,
and further adjusted to exclude unusual items and other adjustments permitted in calculating
covenant compliance under our senior secured credit facilities and the indenture governing our
senior subordinated notes. The breach of covenants in our senior secured credit agreement that are
tied to ratios based on adjusted EBITDA could result in a default under that agreement and under
our indenture governing the senior subordinated notes. Our ability to engage in activities such as
incurring additional indebtedness, making investments and paying dividends is also tied to ratios
based on adjusted EBITDA.
Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms
are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund
cash needs. While adjusted EBITDA and similar measures are frequently used as measures of
operations and the ability to meet debt service requirements, these terms are not necessarily
comparable to other similarly titled captions of other companies due to the potential
inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of
earnings or charges resulting from matters that we may consider not to be indicative of our ongoing
operations. In particular, the definition of adjusted EBITDA in the indenture allows us to add back
certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating
net income (loss). However, these are expenses that may recur, vary greatly and are difficult to
predict. Further, our debt instruments require that adjusted EBITDA be calculated for the most
recent four fiscal quarters. As a result, the measure can be disproportionately affected by a
particularly strong or weak quarter. Further, it may not be comparable to the measure for any
subsequent four-quarter period or any complete fiscal year.
The following is a reconciliation of net income (loss), which is a GAAP measure of our operating
results, to adjusted EBITDA (as described in our senior secured credit agreement and the indenture
governing our senior subordinated notes, including related calculations) for the twelve months
ended June 30, 2010 and 2009 (in thousands).
Twelve Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Net income (loss) |
$ | 15,252 | $ | (84,614 | ) | |||
Acquisition costs |
804 | 208 | ||||||
Deferred revenue purchase accounting adjustment |
| 907 | ||||||
Adjusted net income (loss) |
16,056 | (83,499 | ) | |||||
Interest expense |
31,926 | 43,922 | ||||||
Income tax expense and other income-based taxes |
16,106 | 17,604 | ||||||
Depreciation and amortization |
39,960 | 38,429 | ||||||
Gain on asset sales, net of tax |
(6,178 | ) | | |||||
Gain on retirement of debt |
| (18,958 | ) | |||||
Non-cash charges (impairment charges and
stock-based compensation expense) |
11,108 | 110,848 | ||||||
Non-recurring cash charges and restructuring charges |
3,145 | 5,345 | ||||||
Deferred compensation payments |
278 | 309 | ||||||
Sponsor payments |
130 | 157 | ||||||
Foreign exchange gain |
(665 | ) | 312 | |||||
Pro-forma adjustment |
| 68 | ||||||
Disposed of EBITDA |
(1,863 | ) | (3,927 | ) | ||||
Adjusted EBITDA |
$ | 110,003 | $ | 110,610 | ||||
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Our financial covenant requirements and ratios for the period ended June 30, 2010 were as
follows:
Covenant | ||||||||
Requirements | Our Ratio | |||||||
Senior Secured Credit Agreement (1) |
||||||||
Maximum consolidated total debt to adjusted EBITDA ratio |
4.50x | 4.05 | ||||||
Minimum adjusted EBITDA to consolidated interest expense |
2.50x | 3.71 | ||||||
Senior Subordinated Notes (2) |
||||||||
Minimum adjusted EBITDA to fixed charges ratio required
to incur additional indebtedness pursuant to ratio
provisions |
2.00x | 3.71 |
(1) | Our senior secured credit agreement requires us to maintain a consolidated total debt to
adjusted EBITDA ratio of a maximum of 3.75x by the end of the quarter ending December 31,
2010. Consolidated total debt is defined in the senior secured credit agreement as total debt
other than certain indebtedness and is reduced by the amount of cash and cash equivalents on
our consolidated balance sheet in excess of $7.5 million. As of June 30, 2010, our
consolidated total debt was $445.7 million, consisting of total debt other than certain
indebtedness totaling $506.9 million, net of cash and cash equivalents in excess of $7.5
million totaling $61.2 million. We are also required to maintain an adjusted EBITDA to
consolidated interest expense ratio of a minimum of 2.75x by the end of the quarter ending
December 31, 2010. Consolidated interest expense is defined in the senior secured credit
agreement as consolidated cash interest expense less cash interest income and is further
adjusted for certain non-cash interest expenses and other items. Failure to satisfy these
ratio requirements would constitute a default under the senior secured credit agreement. If
our lenders failed to waive any such default, our repayment obligations
under the senior secured credit agreement could be accelerated. This would also constitute a
default under the indenture governing the senior subordinated notes. |
|
(2) | Our ability to incur additional indebtedness and make certain restricted payments under the
indenture governing the senior subordinated notes, subject to specified exceptions, is tied
to adjusted EBITDA to fixed charges ratio of at least 2.00x, except that we may incur certain
indebtedness and make certain restricted payments and certain permitted investments without
regard to the ratio. Fixed charges is defined in the indenture governing the senior
subordinated notes as consolidated interest expense less interest income, adjusted for
acquisitions, and further adjusted for non-cash interest expense. |
Recently Issued Accounting Pronouncements and Other Legislation
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education
Reconciliation Act of 2010 (the Act) were enacted. The primary focus of the Act is to
significantly reform health care in the United States. We have determined that this legislation
does not create an immediate financial impact on our condensed consolidated financial statements,
however we will continue to evaluate any prospective effects of the Act.
In January 2010, the FASB issued an ASU further clarifying disclosures regarding measurements of
fair value in financial statements. This guidance clarifies existing fair value guidance as well
as requires new disclosures for significant transfers between Level 1 and Level 2 of the fair value
hierarchy and the reasons for such transfers. Additionally, it requires disclosure of the reasons
for any transfers in or out of Level 3 of the fair value hierarchy. Upon adoption of this guidance
in January 2010, we determined it not to have a material impact on our condensed consolidated
financial statements.
In October 2009, the FASB issued an ASU that amended the accounting rules addressing revenue
recognition for multiple-deliverable revenue arrangements by eliminating the criterion for
objective and reliable evidence of fair value for the undelivered products or services. Instead,
revenue arrangements with multiple deliverables should be divided into separate units of accounting
provided the deliverables meet certain criteria. Additionally, the ASU provides for elimination of
the use of the residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables based on their relative selling
price. A hierarchy for estimating such selling price is included in the update. This ASU will be
effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, however early adoption and retroactive application are
permitted. We plan to adopt this ASU in our fiscal year beginning October 1, 2010. We are
currently evaluating whether this update will have an impact on our consolidated financial
statements.
In October 2009, the FASB also issued an ASU that provides a list of items to consider when
determining whether the software and non-software components function together to deliver a
products essential functionality. This ASU is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, however
early adoption and retroactive application are permitted. We plan to adopt this ASU in our fiscal
year beginning October 1, 2010. We are currently evaluating whether this update will have an impact
on our consolidated financial statements.
In October 2009, we adopted authoritative accounting guidance providing clarification for measuring
liabilities at fair value. The adoption of this guidance did not have a material impact on our
condensed consolidated financial statements. See Note 5 to our unaudited condensed consolidated
financial statements for additional information.
In addition, in October 2009, we adopted revised guidance regarding business combinations. This
guidance, among other things, establishes principles and requirements for how the acquirer in a
business combination (i) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in the acquired
business, (ii) recognizes
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and measures the goodwill acquired in the business combination or a gain
from a bargain purchase, and (iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business combination. The
adoption of this guidance did not have a material impact on our condensed consolidated financial
statements.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Historically, our exposure to market risk for changes in interest rates relates primarily to our
short and long-term debt obligations. At June 30, 2010, we had $392.6 million aggregate principal
amount outstanding of term loans due 2013 pursuant to our senior secured credit agreement and
$114.3 million of our 9.5% senior subordinated notes due 2016. The term loans bear interest at
floating rates. In May 2006, we entered into four interest rate swaps to manage and reduce the risk
inherent in interest rate fluctuations and to effectively convert a notional amount of $245.0
million of floating rate debt to fixed rate debt. In November 2009, 2008 and 2007, interest rate
swaps with a notional amount of $50.0 million, $30.0 million and $25.0 million, respectively,
matured. As of June 30, 2010, we had outstanding interest rate swaps with a notional amount of
$140.0 million. Giving effect to the interest rate swaps, a 0.25% increase in floating rates would
increase our interest expense by $0.4 million annually. See Derivative Instruments and Hedging
Activities under Note 4 to our unaudited condensed consolidated financial statements, which
section is incorporated herein by reference.
Foreign Currency Risk
The majority of our operations are based in the United States and, accordingly, the majority of our
transactions are denominated in U.S. dollars; however, we do have foreign-based operations where
transactions are denominated in foreign currencies and are subject to market risk with respect to
fluctuations in the relative value of currencies. Currently, we have operations in Canada, the
United Kingdom and Ireland and conduct transactions in the local currency of each location.
We monitor our foreign currency exposure and, from time to time, will attempt to reduce our
exposure through hedging. At June 30, 2010, we had no foreign currency contracts outstanding.
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act. This term refers to the controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified by the SEC in its rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the companys management, including its principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Our management evaluated, with the participation of
our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, have concluded
that our disclosure controls and procedures were effective as of June 30, 2010 to provide
reasonable assurance that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the nine months ended June 30, 2010, there have been no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect
that our disclosure controls and procedures or internal control over financial reporting will
prevent all errors and all fraud. A control system, no matter how well conceived and operated, can
only provide reasonable, not absolute, assurances that the objectives of the control system are
met. The design of a control system reflects resource constraints, and the benefits of controls
must be considered relative to their costs. Because there are inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of error or fraud, if any, within our company have been or will be detected.
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PART II OTHER INFORMATION
Item 1 Legal Proceedings
We are a party to various legal proceedings and administrative actions, all of which are of
an ordinary or routine nature incidental to our operations, except as otherwise described below. We
do not believe that such proceedings and actions will, individually or in the aggregate, have a
material adverse effect on our business, financial condition, results of operations or cash flows,
except as otherwise described below.
On July 12, 2010, Internet Autoparts, Inc. (IAP) filed a complaint in the District Court of
Travis County, Texas against Activant Solutions Inc. In the complaint, IAP alleged that we aided
and abetted breach of fiduciary duties by our appointee directors of IAP, and that we tortiously
interfered with a contractual relationship of IAP by licensing catalogs and catalog services to
General Parts, Inc. (GPI), which then allegedly used such catalogs and services to breach a
covenant not to compete in IAPs stockholders agreement. Both Activant Solutions Inc. and GPI are
parties to IAPs stockholders agreement. IAP seeks to recover unspecified damages, including
punitive damages, consequential or special damages, interest and any other relief to which it may
be entitled.
On August 6, 2010 Activant answered IAPs complaint and filed a motion to dismiss or stay IAPs
lawsuit in favor of arbitration. On August 6, 2010 Activant also filed a demand for arbitration
against IAP with the American Arbitration Association, seeking a declaratory judgment that
Activants contracts with IAP expressly permit Activant to license catalogs and catalog services to
GPI.
We believe we have meritorious defenses to this lawsuit. Although we intend to defend the lawsuit
vigorously, there can be no assurance that we will be successful in our defense, and damages
resulting from an unsuccessful defense could have a material adverse effect on our business,
financial condition, results of operations or cash flows. Even if we are successful, we may incur
substantial legal fees and other costs in defending the lawsuit and the efforts and attention of
our management and technical personnel may be diverted, which could also have a material adverse
effect on our business, financial condition, results of operations or cash flows. We own
approximately 46% of the outstanding common stock of IAP and hold two of five seats on IAPs board
of directors.
Item 1A Risk Factors
There have been no material changes from the risk factors associated with our business,
financial condition and results of operations as set forth in Part I, Item 1A of our Annual Report
on Form 10-K for the fiscal year ended September 30, 2009.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 Defaults Upon Senior Securities
None.
Item 4 (Removed and Reserved)
Item 5 Other Information
None.
Item 6 Exhibits
See Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed
as part of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by
reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ACTIVANT SOLUTIONS INC. |
||||
Date: August 9, 2010 | By: | /s/ Kathleen M. Crusco | ||
Kathleen M. Crusco | ||||
Senior Vice President and Chief Financial Officer (Principal Financial and Duly Authorized Officer) |
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EXHIBIT INDEX
Incorporated by Reference | ||||||||||||
Exhibit | File | Date of | Exhibit | Provided | ||||||||
Number | Exhibit Description | Form | Number | First Filing | Number | Herewith | ||||||
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Pervez A. Qureshi | | | | | X | ||||||
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Kathleen M. Crusco | | | | | X | ||||||
32.1*
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Pervez A. Qureshi | | | | | X | ||||||
32.2*
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Kathleen M. Crusco | | | | | X |
* | This certification is not deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liability
of that section. Such certification will not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the
extent that the registrant specifically incorporates it by reference. |
45