-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KQq4nlieQeIrcJ3xFdqviJnOUs3WS3XNRPHQUmSXn2vMelbzErNZ4sAYjTkzRAf/ 9tmzkf5gSBkW7e5q78+krw== 0000313867-96-000010.txt : 19961224 0000313867-96-000010.hdr.sgml : 19961224 ACCESSION NUMBER: 0000313867-96-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRIAD SYSTEMS CORP CENTRAL INDEX KEY: 0000313867 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 942160013 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10504 FILM NUMBER: 96684506 BUSINESS ADDRESS: STREET 1: 3055 TRIAD DR CITY: LIVERMORE STATE: CA ZIP: 94550 BUSINESS PHONE: 5104490606 MAIL ADDRESS: STREET 1: 3055 TRIAD DRIVE CITY: LIVERMORE STATE: CA ZIP: 94550 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark one) [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended September 30, 1996 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 [No Fee Required] For the transition period from ______ to _______ Commission File Number 0-9505 TRIAD SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-2160013 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3055 Triad Drive, Livermore, California 94550 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (510) 449-0606 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED None N/A Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 (Title of Class) Common Stock Purchase Rights (Title of Class) 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 the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements, incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $94,790,000 based on the closing sales price of the Company's common stock, as reported on NASDAQ on November 29, 1996. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant's Common Stock as of November 29, 1996 was 17,835,409. This report, including all exhibits and attachments, contains 65 pages. The Exhibit Index is located on pages 44-46. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference in those Parts of this Annual Report on Form 10-K as are set forth below, but only to the extent specifically stated in such Parts hereof:(1) Information Statement filed by the Company with the Securities and Exchange Commission on November 13, 1996, as amended on November 15, 1996, pursuant to Regulation 14(f) of the Securities Exchange Act of 1934 and Rule 14f-1 thereunder ("Information Statement"). This information statement is referred to herein as the "Information Statement" and is incorporated as provided in Part III. Part I Item 1. BUSINESS Introduction Triad Systems Corporation ("Triad" or the "Company") is a leading provider of business and information management solutions for the Automotive Aftermarket and the Hardlines and Lumber industry. Triad offers new and existing customers a variety of proprietary database products with periodic updates, software and hardware products, financing and ongoing support services. On October 17, 1996, the Company signed a definitive merger agreement with Cooperative Computing, Inc., a Texas corporation ("CCI") under which an acquisition company owned jointly by CCI and the investment firm of Hicks, Muse, Tate & Furst would acquire the Company. See "SUBSEQUENT EVENT - Execution of Merger Agreement." Triad's installed base provides significant recurring revenues, accounting for 74% of its annual revenues in fiscal 1996. Of the recurring revenues, 49% is from service and support agreements, 26% from sales of hardware and software upgrades and add-ons to existing customers and 25% from subscription fees for Triad's proprietary database products. Triad's principal strategy is to expand its presence and generate increasing recurring revenues in its primary markets by marketing a growing family of database, hardware and software products in its two key markets, by penetrating adjacent segments of those markets and by geographic expansion. Markets The Company's markets consist of numerous independent businesses which require management of large quantities of data. These businesses are increasingly needing information management products and services targeted to their specific industries. Triad is providing a growing family of database products and information management services to existing and new customers in response to these market requirements. See "BUSINESS-Information Services." Automotive Aftermarket. The Automotive Aftermarket consists of four principal levels of distribution: manufacturers, warehouse distributors, parts stores ("jobbers and retailers") and auto repair shops ("service dealers"). Manufacturers distribute automotive parts through warehouse distributors, jobbers and retailers, who stock and sell the automobile parts used by service dealers and consumers. Today, these channels of distribution are blurring with many warehouses selling directly to service dealers and retailers and many jobbers also selling at wholesale. The Company had approximately 11,000 Automotive customers spanning small and large businesses as of September 30, 1996. Triad's installed base provides a source of recurring revenue through sales of applications software packages, peripherals, hardware upgrades, information services, business products and customer support services. Due to the high level of automation among traditional jobbers segment and the lower per-unit cost of systems being sold to smaller Automotive Aftermarket customers, the Company does not anticipate significant growth in revenues from system sales to domestic jobbers segment. The Company has developed new products and approaches to expand its customer base in adjacent segments. The Company typically offers its software products and databases in conjunction with system sales, and also markets selected software products and databases separately. Triad has gained access to several leading retail chains, as well as jobbers utilizing non-Triad systems with these products. Further, the Company has reached retail chains, service dealers and small jobbers through products such as the LaserCat and ServiceCat workstations and software and database products. See "BUSINESS- Triad Hardware Systems and Software Products" and "-Information Services." The ServiceCat workstation is directed at the 185,000 automotive repair businesses, while the Triad ServiceWriter system is aimed at the 75,000 targeted segment of the larger, more sophisticated businesses. Triad markets its Automotive products in the United States, United Kingdom, Ireland, Canada, France and Puerto Rico. See "BUSINESS-Marketing and Sales." The Company's strategy is to expand its customer base through the development and marketing of database products for the automotive parts and service aftermarket in the United States, Canada and selected European Community countries. See "BUSINESS-Information Services." Triad markets systems to the warehouse distributor segment. More than 160 mid-range and large warehouse distributors have installed the Paperless Warehouse, the UNIX-based DIS Warehouse System and the Triad Ultimate System. The UNIX-based Warehouse System is targeted at the traditional warehouse distributor who primarily services independent jobbers. The Triad Ultimate System is for larger distributors who wish to operate their warehouses and stores from a single Central Processing Unit (CPU). The Paperless Warehouse utilizes Bar-Code Scanning and Radio Frequency technology to enhance efficiency and productivity in the warehouse operations. Additionally, smaller warehouse distributors and larger jobbers have purchased the Company's jobber system. See "BUSINESS-Triad Hardware Systems and Software Products." Hardlines and Lumber. Triad's Hardlines and Lumber operation offers integrated business systems to a market of approximately 49,000 hardware stores and home centers, lumber/building supplies stores, paint and decorating retailers, and farm supply dealers with annual sales of between $300 thousand and $200 million. At September 30, 1996, the Company had approximately 5,400 customers in these markets. There is a lower level of automation in the Hardlines and Lumber market compared to the Automotive Aftermarket. The Company believes that independent hardlines retailers are increasingly recognizing the advantages of automation as they face increased competition. Hardlines and Lumber trade journals have encouraged automation, and some major hardlines wholesalers and cooperatives strongly endorse automation to their member dealers. Approximately half of the top 60 hardware distributors endorse Triad products and services, along with five of the seven leading lumber and building materials groups. In addition, Triad has developed and currently maintains strong relationships with the four major hardlines cooperatives. See "BUSINESS-Marketing and Sales." Technological advancements in Triad's interactive UNIX-based Eagle, Eagle LS and IMS systems allow for product offerings suitable for hardlines and building materials chains with up to 99 stores and $200 million in annual sales. See "BUSINESS-Triad Hardware Systems and Software Products." Information Services Triad licenses its proprietary databases in return for a license fee and monthly subscription fees entitling customers to periodic updates. These database products generate recurring revenues through monthly subscription fees and add value to the Company's products, thus contributing to new system sales. The Company offers special databases to its Automotive customers and has a database catalog product for hardware stores affiliated with Cotter & Company (True Value). Electronic Catalog. Triad's Electronic Catalog product provides more than 20 million automobile parts applications. This database minimizes the time-consuming and cumbersome use of printed catalogs and is designed to increase productivity and accuracy in parts selection and handling. Proprietary software on Triad's jobber systems integrates information from the Electronic Catalog and the Telepricing databases so that for a given automotive repair, parts required are identified, along with updated prices and inventory levels. Additional prompts enable the jobber to recommend related parts that the customer may need in addition to the parts requested. Triad charges a monthly subscription fee for the Electronic Catalog database and provides the customer with periodic updates. At September 30, 1996, approximately 5,800 customers had licensed the Electronic Catalog database. Telepricing. The Telepricing service provides price updates for automotive parts following a manufacturer's price change, minimizing a customer's need to input this data manually. Telepricing service customers pay an initial license fee and a monthly subscription fee for this updating service. This database had 3,000 subscribers at September 30, 1996. LaborGuide Database. The LaborGuide database provides estimations of labor hours for car repairs and is based on labor estimating data from Mitchell International, Inc. There were approximately 6,700 units generating monthly fees for this database at September 30, 1996. This database is targeted to approximately 185,000 service dealers in the United States and permits users to comply more easily with regulations in many states that require written estimates of repair costs. During fiscal 1996, Triad added a new dimension to this database with its introduction of Major Service Intervals for domestic automobiles. The data includes detailed labor time and parts recommendations as defined by the automobile manufacturer, enabling subscribers to schedule regular maintenance appointments for their customers. LaserGuide. The LaserGuide database is a reconfiguration of Electronic Catalog and allows a jobber to determine which automobiles (by make and year) the identified automotive parts will fit. The database also assists the jobber in making decisions on inventory levels. There were approximately 300 customers using this database at September 30, 1996. Workstation Products. Triad offers several products which are designed to make its proprietary databases available to businesses with or without Triad systems. These products, including the LaserCat and ServiceCat, make Triad's proprietary database products available through CD-ROM technology and are designed to operate as stand-alone terminals or integrated as terminals in Triad systems or many competitors' systems. See "BUSINESS-Triad Hardware Systems and Software Products." The Company's Information Services Division also markets the software and database products to new customers separately from Triad's hardware systems. Databases for Retailers. Triad markets its database products to large automotive retail chains (i.e., Goodyear, Western Auto, Penske and Sears) with multiple national or regional sites. These chains use a variety of hardware platforms and applications software on their systems. Triad's proprietary databases are integrated into these systems. Triad's applications software may, but need not, be included in these packages. Databases for Manufacturers. Triad markets database services utilizing Triad's database products to auto parts manufacturers. In addition to the full Telepricing database, manufacturers may select only certain categories of parts, or may choose the Competitive Analysis service, which compares price levels and number of applications to a competitor's product line. Triad's new transaction analysis service, MarketPACE for the Automotive Aftermarket, reports product movement information based on point of sale (POS) data collected at the independent retail levels in the respective markets. MarketPACE services supply comprehensive POS information and inventory analysis providing the decision support tools required to increase sales, boost productivity, improve distribution and enhance customer service for warehouses and auto parts stores. Databases for International Markets. In 1992, Triad established a wholly-owned subsidiary in Longford, Ireland, to create, maintain and distribute database products for automotive business management systems marketed by Triad and third parties in the United Kingdom and Ireland. This project is supported, in part, by grants from the Industrial Development Authority of Ireland ("IDA"), subject to maintaining minimum capitalization and employment levels for the subsidiary. The facility began distributing database products in 1993 and its Electronic Catalog product is marketed in the United Kingdom and Ireland. Triad also markets automotive database products in Canada and Puerto Rico and developed a product for the French market which was introduced in late 1995. Hardlines and Lumber. In addition to its Automotive Aftermarket databases, the Company also markets databases to the Hardlines and Lumber industry. Cotter & Company Database. Triad introduced the Cotter & Company database product in 1991 as a catalog of products available from the Cotter & Company (True Value) cooperative warehouses. The database is marketed to Cotter affiliated members. See "BUSINESS-Triad Hardware Systems and Software Products." Databases for Manufacturers. VISTA is the new transaction analysis service for the Hardlines and Lumber industry. VISTA provides product manufacturers with ongoing measurement of brand and item movement with major product classifications using POS business analysis data from independent hardware stores, home centers and lumber and building materials outlets. Information from VISTA services provide manufacturers with insight into how a given product or brand performs against its competitors and the market in general. Triad Hardware Systems and Software Products Triad's applications software and business computer systems, together with its database products, provide comprehensive business solutions targeted to its two key segments. The Company provides a different set of standard applications programs for each segment that include user options allowing the selective structuring of applications files and reports to meet customers' specific requirements. These software products also allow Triad customers to access the Company's proprietary databases. See "BUSINESS- Information Services." Systems developed for each specific market are generally field-upgradable to meet customers' future growth needs. Hardware components include central processing units (CPUs), disk drives, video display terminals, CD-ROM storage devices, point of sale terminals, communication devices, printers and other peripherals. Triad's systems also have communication capabilities allowing users to exchange purchase orders and pricing and inventory information with suppliers and, in some cases, customers. Automotive Aftermarket. Triad's Warehouse Systems have the potential for a larger number of application enhancements and offer increased processor speed to serve businesses with high transaction volumes. The enhanced database management features allow the user flexibility in information retrieval. The Paperless Warehouse from Triad eliminates manual entry of parts-related information and enables warehouse operators to update inventory records, dramatically changing the way warehouses manage the flow of parts. This product enables employees to utilize hand-held computers equipped with bar-code scanners and radio transmitters to perform every warehouse task from receiving to stocking and from order picking to shipping, transmitting the data to the host Triad computer. Triad's UNIX- based Warehouse System merges the latest UNIX/RISC technology to provide users with total warehouse management capabilities and gives users a powerful relational database to access any information they require. Triad Prism is a UNIX-based system featuring a fully-integrated relational database on Intel Pentium Pro and other Intel processors. In 1996, the Company focused its marketing efforts of the Triad Prism products on the medium to large sophisticated automotive parts distributors. At about the same time, the marketing effort for the Triad Eclipse system, developed by the Company's loadSTAR subsidiary, was expanded to cover the general market of the automotive parts distributors. Triad's Series 11, Triad Eclipse, and Triad Prism track inventory, perform accounting functions, and execute such point of sale operations as invoicing and billing and catalog. Smaller warehouse distributors also use these systems with applications software designed to serve their particular information management requirements. Triad's Series 11 systems use a microcomputer manufactured by Triad with a proprietary operating system. All these Triad systems enable customers to use the Electronic Catalog database and Triad's other automotive database products. See "BUSINESS-Information Services." The Company also markets the TelePart terminal to its jobber customers, who generally place the terminal on-site with their service dealer customers. The TelePart terminal allows service dealers to electronically order parts by communicating directly with that jobber's Triad system equipped with the Electronic Catalog product. At September 30, 1996, Triad had installed more than 1,800 TelePart terminals. Triad ServiceWriter is the latest addition to its growing family of information management solutions. A version of the service dealer system which operates under Microsoft WindowsTM was introduced in the fourth quarter of this year. Triad ServiceWriter blends Triad's unique databases of 20 million parts applications, detailed labor estimates and recommended vehicle service intervals with the latest in workstation technology. Triad ServiceWriter also creates printed work estimates, automated work orders and maintains individual customer records and vehicle maintenance histories, enabling users to notify customers of required preventive maintenance and create other special promotions. Utilizing Triad's unique TelePart feature, Triad ServiceWriter electronically orders required parts. ServiceWriter can also be expanded to include inventory management, point of sale and general accounting applications. The ServiceCat workstation is marketed to the service dealer segment of the automotive parts aftermarket. The ServiceCat product includes the Electronic Catalog and LaborGuide databases and TelePart software. It permits service dealers to estimate the cost of an entire repair job, including parts and labor, for customers, a service which is mandatory in several states. See "BUSINESS Information Services." Triad's Information Services Division also markets the Catalog databases separately from the workstation. In 1996, the Company, acquired certain assets of Pace Automotive Systems Ltd. of Canada, including the Pace Business Manager, a business management software system directed at service dealers. The Company also markets various terminals and workstations which provide access to Triad's proprietary databases. Triad's LaserCat product is marketed to customers requiring the complete Electronic Catalog database product, regardless of whether they own a Triad jobber system, a competitor's system or are not automated. The LaserCat product is an independent PC-based workstation using CD-ROM technology to provide access to Triad's Electronic Catalog database product, resulting in recurring revenues from monthly subscription fees. See "BUSINESS-Information Services." LaserCat workstations function as stand-alone units and also can be integrated as a terminal with any Triad Jobber System or with numerous competitors' jobber systems. Triad's Information Services Division also markets the LaserCat software and databases separately from the workstation. See "BUSINESS-Information Services." Hardlines and Lumber Industry. Triad Hardlines and Lumber systems automate inventory control, point of sale functions, invoicing, billing, payroll, accounting and electronic communications to affiliated cooperatives, distributors and manufacturers. The UNIX-based Intel Pentium and Pentium Pro driven Eagle series of systems is designed for small and mid- to large sized Hardlines dealers. These systems have greater power and functionality and therefore have expanded access to larger Hardlines dealers. Existing Triad customers are able to upgrade to an Eagle system and utilize the newly incorporated technological advancements. The Company's Eagle LS blends the power and flexibility of Triad's UNIX- based business and information management system with applications and features created to meet the unique needs of lumber and building materials operations. The Eagle LS system manages the flow of a typical transaction, including estimating, ordering and inventory management, shipping, invoicing and tracking accounts receivable. More than 3,750 Eagle and Eagle LS systems, including upgrades and new systems, have been sold since 1991. In 1996, the Company purchased Computer System Dynamics (CSD) and its assets. CSD was founded in 1975 and is headquartered in Denver, Colorado. It is recognized as one of the leaders in providing specialized computer solutions to the building materials industry which is comprised of 600 firms in 1,100 locations nationwide. CSD's product, IMS, is a UNIX-based system designed for large sized lumber and building material dealers. The product is being driven by Intel Pentium and IBM RS/6000 hardware and has functionality to handle very large lumber dealers. The True Start(TM) product, an entry level catalog and ordering system, includes the Cotter and Company database product. It is designed as a stand alone system and is marketed and sold by Cotter and Company to its members. Business Products. Triad markets a wide line of business products to the Automotive Aftermarket and Hardlines and Lumber industry through catalogs and telemarketing services. Customer Support and Services The Company's Customer Support Services organization, representing approximately 32% of the Company's full-time employees at September 30, 1996, provides service, training and support to Triad's domestic and international customers. System support agreements are a significant source of recurring revenue for Triad. Triad system owners are principally small business proprietors without the internal staffing or expertise to train users or to maintain computer systems on a consistent basis. These customers require a high level of service, training and support. Management believes its service organization represents a major competitive advantage. Hardware Maintenance and Software Support. Triad typically provides a limited warranty on its systems. Triad also sells a variety of post-sale support programs through its system support agreements, including preventive and remedial maintenance, hardware engineering modifications and daily system operating support by phone. Triad's customers can call the Company's Advice Line service giving them access to trained personnel able to perform on-line diagnostics or to dispatch field engineers if on-site service is necessary. Virtually all new system customers enter into system support agreements at the time of purchase and most retain such service agreements as long as they own the system. Monthly domestic fees vary with system size. At September 30, 1996, the Company had 181 field engineers and managers, and 73 customer education representatives (CERs) and managers in 115 domestic and 17 foreign field service offices. Customer Training. Customer training is offered in Triad facilities, including 42 education centers nationwide. The Company also provides on-site training for new and existing customers. In addition to training in system operations and software enhancements, Triad offers seminars and workshops to assist customers in understanding the capabilities of their systems. Pre-Delivery Services and Installation. Triad's sales representatives provide a number of pre-delivery services to Triad's customers, including a cost-justification analysis, visits to current Triad users, site planning and preparation, training for management and employees and installation planning. Triad's Zapstart product pre-loads an individual automotive customer's inventory, pricing and parts applications data into its Triad system upon installation, saving customers significant data-entry time. The Company also offers hardware retailers a similar capability to pre-load inventory files provided by certain cooperatives or distributors. Marketing and Sales The Company markets its automotive and hardlines products and services through a 225-person direct sales organization as of September 30, 1996. The Company's products and services are marketed through direct sales calls, telephone sales and by system demonstrations in customer facilities or in Company sales offices. Sales prospects are generated by telemarketing, customer referrals, trade publication advertising and trade show demonstrations. Triad's national accounts sales force solicits endorsements and other marketing arrangements with regional and national associations, distributors and cooperatives. In addition, the Company markets its database products directly by telemarketing and direct sales, or indirectly through value-added resellers, to jobbers, service dealers and hardlines distribution chains. Triad reaches potential customers who do not own Triad computer systems by marketing its database information products through value-added resellers who offer other systems or products in Triad's markets. The Company began marketing certain products and services in the Automotive Aftermarket in the United Kingdom and Canada in the early 1980s. Marketing efforts were expanded to Ireland through the United Kingdom subsidiary in 1989 and France in 1996. In 1995 the Company began selling the Hardlines and Lumber product in Canada. Sales in foreign countries are generally priced in local currencies and are therefore subject to currency exchange fluctuations. For the years ended September 30, 1994, 1995 and 1996, no customer other than Triad Systems Financial Corporation ("Triad Financial"), accounted for 10% or more of Triad's revenues, and no end user accounted for more than 10% of Triad's revenues. Historically, the Company's business has been seasonal, with the Company generally experiencing a decline in revenues in the first quarter of each year from the final quarter of the preceding year, with revenues usually building as the year progresses. Triad Systems Financial Corporation Triad formed Triad Systems Financial Corporation in August 1978 to provide lease financing to the Company's customers. Leases are full-payout, noncancellable leases with terms from one to six years. Triad Financial provided lease financing for approximately 65% of domestic business systems sales in the year ended September 30, 1996. The Company believes that its ability to offer lease financing to its customers through Triad Financial shortens the sales cycle and provides a competitive advantage in marketing Triad products. From its inception through September 30, 1996, Triad Financial purchased and leased $564 million of Triad equipment, including $39 million during fiscal 1996. Triad Financial also provides lease financing to independent third parties in the markets that Triad serves, and since 1984 has financed $70 million under these programs, including $18 million in 1996. It is actively pursuing additional third party opportunities. Triad Financial discounts most of its lease receivables on either a full or limited recourse basis to banks and lending institutions under discounting agreements. Under the agreements, Triad Financial is contingently liable for losses in the event of lessee nonpayment for discounted leases. The contingent liability for losses was $25.9 million at September 30, 1996. The discounting agreements provide for limited recourse of up to 15% or full recourse at 100% of discounted proceeds, depending on the credit risk associated with specific leases. At September 30, 1996, the Company had $16 million invested in its lease portfolio and, if needed, maintains discounting lines to sufficiently liquidate the principal of this investment into cash. The discounting agreements contain restrictive covenants that must be maintained in order to discount. In the event of non-compliance, the banks and lending institutions could assume administrative control of the lease portfolio and could prohibit further discounting under the available credit facilities. The most restrictive covenant requires that both Triad and Triad Financial be profitable every quarter. The Company failed to meet this covenant at June 30, 1996, and received a waiver. At September 30, 1996, the Company is in compliance with the restrictive covenants. Under the terms of an operating and support agreement with Triad Financial, the Company is obligated, if required, to make equity contributions or subordinated loans to enable Triad Financial to fulfill its obligations under the equipment financing agreements. Product Development Triad's newest products are based on open systems design architecture. This allows the use of latest technology hardware and industry standard software for rapid development of products and services. Triad typically integrates its application software with industry standard operating systems and hardware platforms. Triad uses its system integration expertise to deliver reliable systems with the appropriate performance and scalability for future enhancements. The open design environment allows the Company to focus its development efforts on applications that provide business solutions for each market segment and custom design when current technology does not offer a solution. During 1994, 1995 and 1996, Triad's respective product development expenditures including capitalized costs were $11.2 million, $11.1 million and $11.9 million. The Company capitalized $3.1 million, $2.9 million and $3.5 million of software development costs in 1994, 1995 and 1996, respectively. Amortization of capitalized software costs begins when the products are available for general release to customers. Costs are amortized over the expected product lives and are calculated using the greater of the straight- line method, generally over a three, five or seven year period, or a cost per unit sold basis. During 1996, the Company repositioned certain products within the Automotive Aftermarket and wrote off $7,500,000 in capitalized costs for Triad Prism. At September 30, 1996, the Company employed 128 persons in product development. Separate teams of Company analysts and programmers are dedicated to each of the Company's markets. Common hardware and operating system expertise provides support to each market-oriented development team. In addition, Triad uses industry-specific advisory councils, representing a cross-section of its customers, to review its development plans and give advice on software applications features and priorities as they relate to their automation needs. Manufacturing Triad's Manufacturing operation consists primarily of systems integration, including third party hardware and software with the Company's application software. Triad assembles and tests systems or peripherals from standard components and third party subassemblies at the Livermore facility. In addition, Triad provides manufacturing and test services for third party companies to optimize capacity and material planning operations. Purchased parts and standard assemblies normally account for approximately 96% of hardware overhead cost, with subassembly, assembly and test costs representing the balance. The Company had 45 manufacturing employees at September 30, 1996. Standard systems are typically shipped in the same quarter the orders are received. The backlog of orders is not a significant factor in understanding the Company's business. Most of the components and peripherals used in the Company's systems are available from a number of different suppliers, although the Company generally purchases such major items as peripherals from a single source of supply. The Company believes that alternative sources could be developed, if required, without significant disruption or delay of shipments. Product Protection Triad regards its software and databases as proprietary and attempts to protect them with copyrights, trade secret law and internal nondisclosure safeguards, as well as restrictions on disclosure and transferability that are incorporated into its license agreements. Despite these restrictions, it may be possible for competitors or users to copy aspects of the Company's products or to obtain information which the Company considers to be a trade secret. Triad has obtained licenses from various sources covering operating systems, utilities and applications programs and databases used in its current and future products. The Company is not aware that the manufacture and sale of its current hardware, software and database products requires any licenses from others not already secured. Triad has three patents pending and may seek additional patent protection related to new hardware or software products as appropriate. Competition Triad experiences competition for its applications software and database products from a variety of firms, ranging from small, independent applications software producers to partnerships of the largest software producers, information services and computer systems suppliers. Some of Triad's competitors customize general-purpose business management software and market it for use on industry-standard hardware. The Company also faces competition in both the Automotive Aftermarket and Hardlines and Lumber segments from large distributors and large cooperatives that market computer systems to their members. Competition for the Company's higher-priced warehouse systems and database products comes from both customers developing their own systems in-house, and from large, well-established businesses that offer general-purpose business computers and custom programming. Entry into the markets for the Company's products is not unusually difficult, and new competition is expected from traditional suppliers of systems to retailers, from parts manufacturers and from others. The Company believes that the key competitive factors in each of the Company's markets are information management capability, product features and functions, quality and quantity of data, price, ease of use, reliability, technical support, customer service and financing. The Company believes that it operates in a highly competitive environment, marked by a significant consolidation among its traditional customer base. Triad is developing new products and improvements to meet these competitive challenges. Litigation The Company is involved in litigation arising in the ordinary course of business and in litigation to protect its proprietary rights. Triad is party to various legal proceedings, primarily in connection with deficiencies from customer-financed leases for products and services and related contract defenses such as breach of warranty. Alleged damages vary widely and some actions involve claims against the Company for damages, including punitive damages. In the opinion of management, after consultation with legal counsel, these matters will be resolved without material adverse effect on the Company's results of operations or financial position. Triad, in compliance with the Hart-Scott-Rodino antitrust Improvements Act, notified the Federal Trade Commission (FTC) and Department of Justice of the pending tender offer for shares by Hicks, Muse, Tate & Furst Incorporated. See "SUBSEQUENT EVENT - Execution of Merger Agreement." The FTC has since initiated a review of the transaction. The parties do not believe the transaction raises any competitive concerns and are cooperating fully in this review. Employees At September 30, 1996, Triad had 1,503 full-time employees. Persons with programming skills and experience are in great demand in the information management industry. The loss of a substantial number of these personnel, or an inability in the future to obtain sufficient additional qualified personnel, would have an adverse effect on the Company's business. The Company considers its employee relations good and is not party to any collective bargaining agreements. Subsequent Event - Execution of Merger Agreement On October 17, 1996, the Company signed a definitive merger agreement with Cooperative Computing, Inc., a Texas corporation ("CCI"), under which CCI Acquisition Corp. ("CAC"), a Delaware corporation jointly owned by CCI and Hicks, Muse, Tate & Furst Incorporated, a private investment firm located in Dallas, Texas, would acquire the Company. Pursuant to the terms of the merger agreement, CAC commenced a cash tender offer for all outstanding shares of the Company at a price of $9.25 per share on October 23, 1996. The tender offer, which was to have expired at 12:00 Midnight, New York City time, November 20, 1996, has been extended until 12:00 midnight, New York City time, on Friday, January 3, 1997. When the tender offer is completed, it will be followed by a merger transaction, in which any shares of the Company's common stock that remain outstanding after the tender offer will be exchanged for cash at the same price as the tender offer price. The tender offer is not expected to be completed until the Federal Trade Commission completes its currently pending review of the transaction and certain other conditions to closing are satisfied. In addition to the cash consideration to be received by the Company's shareholders pursuant to the tender offer or the merger transaction, the merger agreement provides that the Company's shareholders of record immediately prior to the consummation of the tender offer will receive a dividend consisting of their pro rata share of the equity of a newly formed company whose assets will consist of all the Company's owned real property located in Livermore, California, including its corporate headquarters buildings and land held for sale in the Triad Park development in Livermore. The spun-off real estate entity, which the Company expects to be a public company, will assume all the indebtedness currently secured by the spun-off real estate and will lease the corporate headquarters buildings to the Company's post merger successor. Over time, the real estate entity is expected to liquidate its real estate portfolio, with proceeds used to pay expenses (including taxes), repay secured debt and distribute any remaining proceeds to its equity holders. The Company's ability to market this property is dependent upon interest rates, general economic and market conditions, the prospective purchaser's ability to develop the property and the purchaser's ability to obtain a variety of governmental approvals, none of which is assured and all of which are subject to objections from the public. Item 2. Properties The Company owns substantially all of its real property and the equipment used in its business. Corporate headquarters is located on a portion of its Livermore, California properties. Operations are consolidated in three buildings aggregating 220,000 square feet. Title to the headquarters buildings and the land on which they sit is held by a wholly owned subsidiary of the Company, which leases the premises to the Company for approximately $209,000 per month. The property and the lease are pledged as security on a 15-year term loan made by an insurance company to the subsidiary in the principal amount of $15.5 million with an initial interest rate of 97/8% that may be adjusted at the option of the lender in 1998. At September 30, 1996, the Company was leasing sales and service space in 116 cities in the United States and 16 foreign sites. In 1984, the Company purchased Triad Park, an aggregate of 398 contiguous acres in the City of Livermore, for a total purchase price of $15.8 million. The Company subsequently reconveyed approximately 10 acres of Triad Park to the sellers under the terms of the original purchase agreement. Since 1984, the Company has also conveyed approximately 12.8 acres to Livermore for roadways which Triad developed in Triad Park. A portion of Triad Park consisting of 110 acres is zoned "open space" and currently may only be used for agricultural purposes. The Company sold an aggregate of 59.1 acres of Triad Park from fiscal years 1987 through 1996 for $11.3 million and as of September 30, 1996, intended to market 161.1 acres of Triad Park for resale during the next several years. During first quarter 1997, the Company decided to sell an additional 36 acres previously classified in Property, Plant and Equipment. Approximately 14.6 acres of property have been rezoned for retail use, 28.1 acres for residential, 25.4 acres for retail or industrial use and the balance of the property is zoned for research and development purposes. As part of this rezoning process, the Company entered into an agreement with the City of Livermore canceling the former development agreement for the Triad Park and eliminating any further obligations by the Triad Park owners, including Triad, to construct or participate in any assessment district to fund construction of two freeway interchanges and a water storage facility. However, all future construction in the Triad Park will require payment to the City of its current traffic impact fees required in connection with issuance of building permits. Improvements are financed through municipal bonds. Two series of municipal bonds were sold by an assessment district from November 1985 through September 1988 to finance $11.5 million in improvements. A community facilities district was formed in 1990 that replaced the function of the assessment district under which $2.4 million in improvements were financed in September 1990. The community facilities district is authorized to finance a total of $17 million in bonds to provide funds to pay costs of the acquisition and construction of certain public facilities and services related to Triad Park. In 1993, the assessment district debt was refinanced to take advantage of lower interest rates. The liens of the assessment district and community facilities district securing those bonds is segregated on a pro rata basis among all developable parcels of Triad Park and thus, except with respect to parcels retained by Triad for its own use, will be assumed by buyers of individual parcels. Principal and interest payments are required to be made by Triad (or by subsequent purchasers of parcels of Triad Park) as additional bonds up to the $17 million authorized are sold. With respect to $9.6 million in assessments outstanding, the Company made $864,000 in interest payments on the bonds in fiscal 1994, $832,000 in fiscal 1995 and $816,000 in fiscal 1996. The Company intends to sell those portions of the Livermore acreage which are in excess of the Company's long-term facilities requirements. Item 3. Legal Proceedings See "Item 1-Litigation." Item 4. Submission of Matters to a Vote of Security Holders The Company did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 1996. Item E.O. EXECUTIVE OFFICERS OF THE REGISTRANT The Company's Executive Officers and Operating Management as of December 15, 1996 are as follows: Name Age Position - ---- --- -------- James R. Porter 61 President, Chief Executive Officer, and Director Shane Gorman 53 Executive Vice President, Automotive Operations Chad A. Schneller 55 Vice President, Hardlines and Lumber Operations Stanley F. Marquis 53 Vice President, Finance, Chief Financial Officer, Corporate Secretary and Treasurer; President, Triad Systems Financial Corporation Dan F. Dent 49 Vice President and General Manager, Customer Support Services Division Thomas A. King 52 Vice President, Product Development and Manufacturing M. Edward Molkenbuhr 49 Vice President and General Manager, Service Dealer Division Thomas J. O'Malley 61 Vice President, Administration Bruce M. Blanco 47 Corporate Controller and General Manager, Triad Systems Financial Corporation Patrick J. Bormann 40 General Manager, Automotive Distributor Systems Mr. James R. Porter joined the Company as President and Chief Executive Officer and was elected a director of the Company in September 1985. Mr. Shane Gorman joined the Company as a sales representative in 1972 and has held several progressive management positions, including General Manager, Automotive Division, General Manager, Dental Division and Vice President and General Manager, Automotive Division. He became Executive Vice President in September 1992. Mr. Chad A. Schneller joined the Company as Vice President and General Manager, Hardlines and Lumber Division in July 1994. Prior to joining Triad, he served as President and Chief Executive Officer of Harvest Software from January 1991 to December 1993. Mr. Stanley F. Marquis joined the Company in January 1980 as Director of Triad Systems Financial Corporation. In August 1983, he was elected President, Triad Systems Financial Corporation and in September 1987, he was elected Treasurer of Triad. In December 1994, he was promoted to Vice President, Finance, Chief Financial Officer and became Corporate Secretary. Mr. Dan F. Dent joined the Company in January 1993 as Director of Field Operations and became General Manager, Customer Support Services Division in October 1994. He was promoted as Vice President and General Manager, Customer Support Services Division in October 1995. Prior to joining Triad, he was Vice President, Customer Support Services at Ultimate from July 1991 to December 1992. Mr. Thomas A. King joined the Company in April 1989 as Vice President, Product Development and became Vice President, Product Development and Manufacturing in October 1993. Mr. M. Edward Molkenbuhr joined the Company in September 1993 as Vice President and General Manager of the Company's new Service Dealer Division. Prior to joining Triad, he served as President and Chief Executive Officer of Amicus Information Services from November 1992 to May 1993. From January 1983 to November 1992, he served in a number of key senior positions with ADP, Inc. where his most recent position was Senior Vice President of Data Services. Mr. Thomas J. O'Malley joined the Company in January 1981 as Director of Administration and was elected Vice President, Administration in August 1983. Mr. Bruce M. Blanco joined the Company in April 1984 as Financial Manager of Triad Systems Financial Corporation. In January 1985, he was promoted to Revenue Systems Manager. He has been the Controller since May 1988. In October 1996, he assumed the responsibilities of General Manager of Triad Systems Financial Corporation. Mr. Patrick J. Bormann joined the Company in September 1978 as a Marketing Applications Representative and has progressed through a series of sales, support, marketing and customer service assignments. In February 1991, he assumed complete responsibility for Warehouse Systems operations and was promoted to General Manager in October 1995. In October 1996, he was promoted to General Manager, Automotive Distributor Systems. Officers serve at the discretion of the Board of Directors. There is no understanding between any of the Company's officers and any other person pursuant to which such officer is or was to be selected. Part II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters Triad common stock is traded on the over-the-counter market under the NASDAQ National Market System symbol TRSC. As of September 30, 1996, there were 1,245 record holders of the Company's common stock. Below are the quoted prices for the stock's high and low sales prices: FY 1996 High Low - ----------------------------------------------------------------- First Quarter $ 6 3/8 $ 5 1/4 Second Quarter 6 3/4 5 1/2 Third Quarter 6 7/8 5 1/4 Fourth Quarter 6 5/8 4 3/4 FY 1995 High Low - ----------------------------------------------------------------- First Quarter $ 5 3/8 $ 4 5/8 Second Quarter 6 5 Third Quarter 7 5/8 5 5/8 Fourth Quarter 7 5/8 5 1/8 The Company has declared no dividends on its common stock since incorporation and anticipates it will continue to retain its earnings for use in its business. Item 6. Selected Financial Data For the Years Ended September 30 - ----------------------------------------------------------------------------- (Amounts in thousands except per share and employee data) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------- Statements of Income Data Revenues Systems $ 70,090 73,312 72,910 64,069 63,820 Customer support services 64,148 62,429 59,733 59,509 61,063 Information services 31,792 28,092 24,436 20,586 18,127 Finance 9,646 11,244 10,199 8,654 9,562 - ----------------------------------------------------------------------------- Total revenues $175,676 $175,077 $167,278 $152,818 $152,572 Market revenues Automotive $101,182 $112,223 $112,750 $102,484 $104,957 Hardlines and lumber 69,757 56,255 50,229 47,506 43,553 Other 4,737 6,599 4,299 2,828 4,062 - ----------------------------------------------------------------------------- Total revenues $175,676 $175,077 $167,278 $152,818 $152,572 Gross margins Automotive 46.4% 51.4% 50.4% 49.8% 50.7% Hardlines and lumber 49.4% 50.9% 49.7% 50.2% 45.4% Total gross margins 46.6% 49.4% 49.3% 49.4% 48.7% Operating income $ 5,533 $ 20,532 $ 19,361 $ 15,822 $ 18,013 Gain from sale of land 1,194 - - 652 - Income before extraordinary charge 1,559 8,426 7,379 5,065 3,520 Net income 1,182 8,030 7,236 5,065 2,097 Primary earnings per share Income before extraordinary charge $ .09 $ .48 $ .43 $ .31 $ .27 Net income .07 .46 .42 .31 .17 Fully diluted earnings per share Income before extraordinary charge .09 .48 .43 .30 .27 Net income .07 .45 .42 .30 .17 Balance Sheet Data Total assets $139,753 $132,709 $136,363 $131,379 $124,175 Total debt 55,913 55,609 63,406 72,352 71,896 Stockholders' equity (deficit) 16,787 14,221 12,141 3,114 (2,649) Other Data Net income as a percent of revenue 0.7% 4.6% 4.3% 3.3% 1.4% Return on assets 1.1% 6.3% 5.5% 4.0% 2.8% Product development costs Capitalized software $ 3,465 $ 2,930 $ 3,142 $ 2,840 $ 3,347 Product development expense 8,414 8,136 8,022 8,118 7,483 - ----------------------------------------------------------------------------- Total product development costs $ 11,879 $ 11,066 $ 11,164 $ 10,958 $ 10,830 Capital expenditures $ 2,931 $ 2,819 $ 3,416 $ 3,029 $ 3,116 Depreciation and amortization 8,704 8,793 8,087 8,423 9,912 Number of employees 1,503 1,453 1,449 1,391 1,409 Common shares outstanding 17,749 17,370 13,626 12,484 11,710 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Revenues for fiscal 1996 of $175.7 million increased slightly over 1995 revenues of $175.1, which were 5% above the $167.3 million of 1994. Gross profit of $81.9 million declined 5% or $4.7 million from 1995, while increasing 5% or $4.1 million over 1994. A restructuring charge of $9.0 million, related to an Automotive product issue and realignment of Automotive Aftermarket operations, was included in the 1996 operating profit of $5.5 million compared to operating income of $20.5 million in 1995 and $19.4 million in 1994. Net income was $1.2 million in 1996 compared with $8.0 million in 1995 and $7.2 million in 1994. Net income in 1996 reflected the $9.0 million restructuring charge, proceeds from the sale of the Company's investment in the Alldata Corporation of $1.8 million, the sale of four parcels in Triad Park for $1.1 million and a net charge of $.4 million after taxes related to the refinancing of debt. Net income in 1995 and 1994 also reflected a net charge of $.4 million and $.1 million after taxes, respectively, also related to the early retirement of debt. Fully diluted earnings per share were 7 cents in 1996, 45 cents in 1995 and 42 cents in 1994. Automotive Aftermarket Revenues The Automotive Aftermarket consists of manufacturers, warehouse distributors, parts stores and independent and chain repair outlets. Revenues are primarily derived from the sale and financing of systems and information and support services related to those systems. Automotive Aftermarket revenues of $101.2 million were 10% below 1995 revenues of $112.2 million. Revenues in 1995 remained relatively consistent with 1994. Systems sales in 1996 decreased 22% to $31.6 million from $40.7 million in 1995, a decline of 9% from $44.7 million in 1994. In 1995, the Company's jobber system sales were affected by the implementation of a controlled rollout of the second phase of the Triad Prism(R) product due to certain software-related problems. In the third quarter of 1996, recognizing slower than anticipated aftermarket acceptance of the Triad Prism system and its product performance issues, management: - Reduced and repositioned the automotive product line to more closely match the configuration of the aftermarket while decreasing the complexity and costs associated with a broader product line. The Triad Prism system remains a contributing member of the automotive product line, marketed to a specific segment of the aftermarket. - Resized the automotive sales force and management structure to reflect aftermarket changes and current sales. - Initiated a review of the research and development spending process to ensure that ongoing spending is a profitable investment for Triad stockholders. As a result, a restructuring charge of $9.0 million was recorded for the third quarter of 1996. As part of the restructuring, there was an increased focus on the large account segment that resulted in record systems revenue of $9.5 million, an increase of 34% from $7.1 in 1995. Customer support revenues were down $2.5 million to $34.2 million in 1996 from $36.7 million in 1995. Revenues decreased by $.5 million in 1995 from 1994 revenues of $37.2 million The 1995 decline was attributed to a reduction in the customer base as well as shifting customers to lower priced service options and more reliable product technology The 1996 decline was related to lower-than-planned new automotive systems sales and a reduction of the customer base due to continuing consolidation within the aftermarket. Information services revenues grew 10% to $29.5 million in 1996 which was 13% greater than 1994. Customers utilizing Triad's information products increased in 1996, 1995 and 1994. In addition, national automotive chain customers began subscribing during 1994. MarketPACE point of sale (POS) operation continues to develop. These emerging businesses inter-relate with the Company's products and other services from manufacturers to end-users. Triad Systems Financial Corporation ("Triad Financial", a wholly-owned subsidiary) revenues were $5.9 million in 1996, down 27% or $2.1 million from 1995. Finance revenues for 1995 were $8.0 million, up 14% or $1.0 million over 1994. The decline in 1996 was due mainly to a lower-earning portfolio and lower discounting yields related to rising interest rates. Hardlines & Lumber Market Revenues The Hardlines & Lumber Market consists of manufacturers, hardware stores, home centers, lumber and building supply outlets and paint and decorating centers. Revenues increased by 24% or $13.5 million to $69.8 million from 1995 to 1996 and increased 12% or $6.0 million to $56.3 million from 1994 to 1995. Contributing to the overall increase in revenues was the Company's acquisition of Computer System Dynamics (CSD) in June 1996. (See the Liquidity and Capital Resources section.) Systems revenues increased $7.2 million to $36.4 million for 1996 and $3.0 million to $29.2 million for 1995. Triad continues to become more closely affiliated with major co-ops and wholesale distributors and this activity is reflected in the revenue growth from 1994 to 1996. Customer support revenues increased 21% to $27.3 million in 1996 and 11% to $22.6 million in 1995. This growth is a direct result of increases in the customer base. Information services revenues increased to $2.3 million in 1996 compared to $1.3 million in 1995 and $.6 million in 1994. Triad's Vista point of sale (POS) services continue to contribute to this growth as its customer base expands. Triad Systems Financial Corporation revenues were fairly consistent from 1994 to 1996. Gross Margin Gross margins for the Automotive Aftermarket of 46% declined 5% from 1995 and increased slightly from 1994 to 1995. The 1996 decline was due primarily to higher Triad Prism system returns and the cost of shifting customers to lower margin products. Also contributing was a change in the product mix, along with a higher percentage of fixed costs. Gross margins for the Hardlines and Lumber Market have remained relatively consistent at 49% in 1996, 51% in 1995 and 50% in 1994. Consolidated Expenses and Other Income Marketing expense of $48.7 million increased slightly as a percentage of revenue over the prior year due to an increase in lease loss reserves in the automotive aftermarket. In 1995, marketing expense of $46.9 million also increased slightly as a percentage of revenues over 1994 due to an increase in the sales force and continued investment in the Automotive and Hardlines and Lumber markets. Product development expenses, after capitalization of software development, were $8.4 million in 1996, $8.1 million in 1995 and $8.0 million in 1994. As a percentage of revenue, product development expense remained consistent at 5% over the three years. General, administrative and other operating expenses decreased 6.7% to $10.2 million and decreased in 1995 compared to 1994 by 1.1% from $11.0 million. The 1996 cost reflects reduced litigation expenses, initiated by the Company to protect its intellectual property rights, along with containment of operating costs. The restructuring charge of $9.0 million included a $7.5 million write-off relating to the Triad Prism system software the Company had previously capitalized, along with $1.0 million in reserves for related product issues. Also included was $.5 million in costs associated with the realignment of aftermarket sales and support personnel to address increasing aftermarket consolidation. Interest and other expense decreased by $1.0 million to $5.9 million in 1996 and by $.5 million to $6.9 million in 1995 compared to 1994. In the fourth quarter of 1995, the Company retired $3.8 million and refinanced $11.8 million in floating rate notes at a lower interest cost, which is reflected in the interest decrease in 1996. The Company's retirement of debt also contributed to the decline in interest expense in 1995 and 1994. Other income of $2.9 million in 1996 consisted of the sale of marketable securities and land held for resale. The Company realized $1.8 million in income related to the sale of its investment in AllData Corporation, an automotive database marketer that was purchased by Autozone in March 1996. In September 1996, the Company recognized a gain of $1.1 million in the sale of 25 acres of land held for resale. The Company sold an 11-acre parcel to Lincoln Properties Company, which plans to erect an office and research and development building, a 9.2-acre parcel to HHH Investment and Supply Company, which plans to house dental laboratories, a 1.8-acre parcel to D'Ambrosio Brothers Investment Company, which plans to build a restaurant and a 3.4-acre parcel to Tri-Valley Office Limited Partnership, which plans to erect an office building. In July of 1996, $10.1 million of senior fixed-rate notes were retired early. This generated an extraordinary charge of $377,000 ($.02 per share) that included a premium of $379,000, unamortized debt costs of $229,000, less taxes of $231,000. Subsequent Event On October 17, 1996, the Company signed a definitive merger agreement with Cooperative Computing, Inc. ("CCI"), a Texas corporation, under which CCI Acquisition Corp. ("CAC"), a Delaware corporation jointly owned by CCI and Hicks, Muse, Tate & Furst Incorporated, a private investment firm located in Dallas, Texas, would acquire the Company. Pursuant to the terms of the merger agreement, CAC commenced a cash tender offer for all outstanding shares of the Company at a price of $9.25 per share on October 23, 1996. The tender offer, which was to have expired at 12:00 Midnight, New York City time, November 20, 1996, has been extended until 12:00 midnight, New York City time, on Friday, January 3, 1997. When the tender offer is completed, it will be followed by a merger transaction, in which any shares of the Company's common stock that remain outstanding after the tender offer will be exchanged for cash at the same price as the tender offer price. The tender offer is not expected to be completed until the Federal Trade Commission completes its currently pending review of the transaction and certain other conditions to closing are satisfied. In addition to the cash consideration to be received by the Company's shareholders pursuant to the tender offer or the merger transaction, the merger agreement provides that the Company's shareholders of record immediately prior to the consummation of the tender offer will receive a dividend consisting of their pro rata share of the equity of a newly formed company whose assets will consist of all the Company's owned real property located in Livermore, California, including its corporate headquarters buildings and land held for sale in the Triad Park development in Livermore. The spun-off real estate entity, which the Company expects to be a public company, will assume all the indebtedness currently secured by the spun-off real estate and will lease the corporate headquarters buildings to the Company's post merger successor. Over time, the real estate entity is expected to liquidate its real estate portfolio, with proceeds used to pay expenses (including taxes), repay secured debt and distribute any remaining proceeds to its equity holders. The Company's ability to market this property is dependent upon interest rates, general economic and market conditions, the prospective purchaser's ability to develop the property and the purchaser's ability to obtain a variety of governmental approvals, none of which is assured and all of which are subject to objections from the public. Future Operating Results Future operating results will depend upon conditions in its markets that may affect demand for its products, and upon the Company's ability to introduce products and enhancements on a timely basis. Results will also be affected by seasonal changes in product demand, market acceptance of new products and enhancements, the size and experience of the sales force and the mix of products sold. All could cause operating results to fluctuate, especially on a quarterly basis. Liquidity and Capital Resources Management believes available cash resources, primarily generated from operations, marketable securities, lease discounting and credit lines, will provide adequate funds to finance foreseeable operating needs. The Company maintains $26.9 million in a bank line of credit and there were outstanding borrowings of $15.8 million at September 30, 1996. Triad Financial financed $42.2 million in Triad equipment during 1996 in addition to $17.7 million in non-Triad equipment through client lease programs. Triad Financial received $73.6 million of proceeds from discounting leases during 1996. Limited and full-recourse discounting agreements are maintained with banks and lending institutions. Discounting agreements contain certain restrictive covenants that allow Triad Financial to discount only while in compliance with such covenants. In the event of non-compliance, the banks and lending institutions could assume administrative control of the Company's lease portfolio and prohibit further discounting under the available credit facilities. The Company failed to meet the quarterly profitability covenant in the third quarter and received a waiver of this requirement. Under the discounting agreements, Triad Financial is contingently liable for losses in the event of lessee nonpayment. The agreements provide for limited recourse of up to 15% or full recourse at 100% of discounting proceeds, depending on the credit risk associated with specific leases. Capital equipment expenditures, excluding capitalized leases, were $2.9 million during 1996. On June 27, 1996, the Company acquired Computer System Dynamics, Inc. (CSD), a Colorado supplier of systems and software products to the high-end user in the Hardlines and Lumber market. The acquisition expanded Triad's Hardlines and Lumber customer base to more than 5,400 customers with approximately 6,100 locations. The acquisition was accounted for using the purchase method. The purchase includes contingent deferred payment obligations based on attainment of future performance objectives. On September 30, 1996, the Company acquired certain assets of Pace Automotive Systems, Ltd., the leading provider of automated information management systems in the Canadian service dealer market. The acquisition expanded the Service Dealers customer base by 1,200 customers. During fiscal 1994, the Company established a Stock Ownership By Management policy to further align the executive officers' interests with those of the Corporation's shareholders. The stock ownership equivalent is based upon 1993 compensation, ranging from 100% of base compensation to 200% of total compensation, depending upon the position held within the Company. Each officer must meet his respective stock ownership level within a three-to five-year period. All of the current executive officers required to meet the stock ownership target by October 1, 1996 had done so as of September 30, 1996. During March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," (SFAS No. 121), which requires the review for impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. The Company does not believe that adoption of SFAS No. 121, which will become effective for the Company's fiscal year 1997, will have a material impact on its financial condition or operating results. During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This statement, which establishes a fair value-based method for stock-based compensation plans, also permits an election to continue following the requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees," with disclosures on a pro forma net income and earnings per share under the new method. The Company is required to adopt SFAS No. 123 by fiscal year 1997, and upon adoption, will elect to continue to measure compensation cost for its employee stock compensation plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25. Pro forma disclosure of net income and earnings per share will reflect the difference between compensation cost included in net income and the related cost measured by the fair value-based method defined in SFAS No. 123, including tax effects, that would have been recognized in the consolidated statement of operations if the fair value-based method had been used. During June 1996, the Financial Accounting Standards Board issued Statement No. 125 (SFAS No. 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This standard establishes consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company is reviewing the requirements of this pronouncement and its effect on lease discounting including any administrative organizational changes to insure continued sales accounting treatment for these transactions. SFAS No. 125 will become effective for transactions that the Company enters into after December 31, 1996. Item 8. Financial Statements and Supplementary Data Consolidated Statements of Income For the Years Ended September 30 (Amounts in thousands except per share data) 1996 1995 1994 - --------------------------------------------------------------------- Revenues Systems $ 70,090 $ 73,312 $ 72,910 Customer support services 64,148 62,429 59,733 Information services 31,792 28,092 24,436 Finance 9,646 11,244 10,199 - --------------------------------------------------------------------- Total revenues 175,676 175,077 167,278 Cost of sales Systems 37,544 35,606 34,407 Services and finance 56,264 52,903 50,359 - --------------------------------------------------------------------- Total cost of sales 93,808 88,509 84,766 Gross margin 81,868 86,568 82,512 Marketing 48,688 46,929 44,030 Product development 8,414 8,136 8,022 General and administrative 10,233 10,971 11,099 Restructuring charge 9,000 - - - --------------------------------------------------------------------- Operating expenses 76,335 66,036 63,151 - --------------------------------------------------------------------- Operating income 5,533 20,532 19,361 Interest and other expense 5,944 6,941 7,459 Other income 2,926 - - - --------------------------------------------------------------------- Income before income taxes and extraordinary charge 2,515 13,591 11,902 Provision for income taxes 956 5,165 4,523 - --------------------------------------------------------------------- Income before extraordinary charge 1,559 8,426 7,379 Extraordinary charge on repurchase of debt, net of taxes 377 396 143 - --------------------------------------------------------------------- Net income $ 1,182 $ 8,030 $ 7,236 ===================================================================== Earnings per share Primary Income before extraordinary charge $ .09 $ .48 $ .43 Net income .07 .46 .42 Weighted average shares 17,570 17,774 17,418 Fully diluted Income before extraordinary charge $ .09 $ .48 $ .43 Net income .07 .45 .42 Weighted average shares 17,570 17,973 17,421 ===================================================================== The accompanying notes are an integral part of these financial statements. Consolidated Balance Sheets September 30 (Amounts in thousands except share data) 1996 1995 - --------------------------------------------------------------------- Assets Current assets Cash and equivalents $ 7,652 $ 7,263 Trade accounts receivable 17,746 13,175 Investment in leases 1,635 2,001 Inventories 5,799 5,636 Prepaid expenses and other current assets 8,551 6,702 - --------------------------------------------------------------------- Current assets 41,383 34,777 Service parts 3,273 3,316 Property, plant and equipment 26,887 27,017 Long-term investment in leases 14,380 16,540 Land for resale 22,850 25,250 Capitalized software and intangible assets 21,312 16,222 Other assets 9,668 9,587 - --------------------------------------------------------------------- Assets $139,753 $132,709 ===================================================================== Liabilities Current liabilities Notes payable and current portion of long-term debt $ 25,990 $ 3,032 Accounts payable 10,590 9,373 Accrued employee compensation 8,275 7,908 Deferred income taxes 2,701 3,338 Other current liabilities and accrued expenses 10,968 9,695 - --------------------------------------------------------------------- Current liabilities 58,524 33,346 Long-term debt 29,923 52,577 Deferred income taxes 27,656 26,176 Other liabilities 6,863 6,389 - --------------------------------------------------------------------- Liabilities 122,966 118,488 - --------------------------------------------------------------------- Commitments and contingencies Stockholders' equity Common stock $.001 par value; authorized 50,000,000 shares; issued 18,394,000 shares at September 30, 1996 and 17,969,000 shares at September 30, 1995 18 18 Treasury stock 645,000 shares at September 30, 1996 and 599,000 shares at September 30, 1995 (3,478) (3,204) Capital in excess of par value 29,954 28,201 Accumulated deficit (9,707) (10,794) - --------------------------------------------------------------------- Stockholders' equity 16,787 14,221 - --------------------------------------------------------------------- Liabilities and stockholders' equity $139,753 $132,709 ===================================================================== The accompanying notes are an integral part of these financial statements. Consolidated Statements of Cash Flows For the Years Ended September 30 (Amounts in thousands) 1996 1995 1994 - --------------------------------------------------------------------- Cash flows from operating activities Income before extraordinary charge $ 1,559 $ 8,426 $ 7,379 Adjustments to reconcile income before extraordinary charge to net cash provided by operating activities Extraordinary charge on repurchase of debt, net of taxes (377) (396) (143) Depreciation and amortization 8,704 8,793 8,087 Receivable and inventory loss provisions 10,956 8,271 8,264 Restructuring charge 9,000 - - Gains from lease discounting (6,981) (7,585) (5,923) Gain on sale of marketable security (1,779) - - Gain from sale of land (1,194) - - Other (3,395) 876 1,710 Changes in assets and liabilities Trade accounts receivable (6,525) (2,138) (6,548) Investment in leases 6,637 13,607 6,233 Inventories (49) (207) (991) Deferred income taxes 559 1,349 3,401 Prepaid expenses and other current assets (1,277) (634) (1,512) Accounts payable 448 433 (764) Accrued employee compensation 127 (182) 742 Other current liabilities and accrued expenses (969) (494) 513 - --------------------------------------------------------------------- Net cash provided from operating activities 15,444 30,119 20,448 - --------------------------------------------------------------------- Cash flows from investing activities Investment in property, plant and equipment (2,931) (2,819) (3,416) Capitalized software and databases (8,452) (7,043) (5,282) Investment in service parts (1,041) (1,887) (1,195) Proceeds from the sale of land 3,523 - - Acquisition of businesses (4,054) - - Sale of marketable securities 2,321 - - Other (1,065) (1,116) (2,166) - --------------------------------------------------------------------- Net cash used in investing activities (11,699) (12,865) (12,059) - --------------------------------------------------------------------- Cash flows from financing activities Issuance of debt 53,924 53,391 40,560 Repayment of debt (58,668) (62,718) (50,536) Redemption of preferred stock - (10,000) - Proceeds from sale of common stock 1,662 3,998 2,834 Dividends paid - (400) (800) Purchase of treasury stock (274) (1,878) (734) Other - (347) - - --------------------------------------------------------------------- Net cash used in financing activities (3,356) (17,954) (8,676) - --------------------------------------------------------------------- Net increase (decrease) in cash and equivalents 389 (700) (287) Beginning cash and equivalents 7,263 7,963 8,250 - --------------------------------------------------------------------- Ending cash and equivalents $ 7,652 $ 7,263 $ 7,963 Supplemental disclosures of cash flow information Cash paid during the year for Interest $ 6,058 $ 6,644 $ 7,172 Income taxes 1,279 557 881 Noncash investing and financing activities Conversion of preferred stock - 11,195 - Leases capitalized - 913 518 Assessment district refinancing 5,300 - - ===================================================================== The accompanying notes are an integral part of these financial statements. Consolidated Statements of Stockholders' Equity For the Years Ended September 30 --Number of Shares-- (Amounts in thousands) 1996 1995 1994 1996 1995 1994 - ------------------------------------------------------------------------------ Cumulative convertible preferred stock Beginning balance $ 0 $ 10 $ 10 0 1,000 1,000 Repurchase and conversion - (10) - - (1,000) - - ------------------------------------------------------------------------------ Ending balance 0 0 10 0 0 1,000 - ------------------------------------------------------------------------------ Common stock Beginning balance 18 14 13 17,969 13,896 12,611 Common stock issuance - 4 1 425 4,073 1,285 - ------------------------------------------------------------------------------ Ending balance 18 18 14 18,394 17,969 13,896 - ------------------------------------------------------------------------------ Treasury stock Beginning balance (3,204) (1,326) (592) 599 270 127 Treasury stock purchase (274) (1,878) (734) 46 329 143 - ------------------------------------------------------------------------------ Ending balance (3,478) (3,204) (1,326) 645 599 270 - ------------------------------------------------------------------------------ Capital in excess of par Beginning balance 28,201 31,680 27,626 Preferred stock repurchase/conversion - (10,079) - Preferred stock conversion dividend - (151) - Common stock issuance 1,662 4,083 2,833 Market rate adjustment on dividend - 435 870 Tax benefit of options exercised 91 2,233 351 - ------------------------------------------------------------------------------ Ending balance 29,954 28,201 31,680 - ------------------------------------------------------------------------------ Accumulated deficit Beginning balance (10,794) (18,237) (23,943) Net income 1,182 8,030 7,236 Translation gains (losses) (95) 97 140 Preferred stock conversion dividend - 151 - Dividends declared on cumulative convertible preferred stock - (400) (800) Market rate adjustment on dividends - (435) (870) - ------------------------------------------------------------------------------ Ending balance (9,707) (10,794) (18,237) - ------------------------------------------------------------------------------ Stockholders' equity $16,787 $14,221 $12,141 ============================================================================== The accompanying notes are an integral part of these financial statements. Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies. Description of Business. Triad Systems Corporation ("Triad") is a leading provider of business and information management services to the Automotive Aftermarket and the Hardlines and Lumber industry. The Company produces and markets proprietary databases and software products, and designs, develops, assembles, markets, services and leases computer systems. Development and assembly facilities are located in Livermore, California, Denver, Colorado and New Jersey. Principal markets are located in the United States, United Kingdom, Ireland and Canada. Financial Statement Presentation. The Consolidated Financial Statements include the accounts of Triad and its wholly-owned subsidiaries, including Triad Systems Financial Corporation ("Triad Financial"), after elimination of intercompany accounts and transactions. Cash and Equivalents. Cash equivalents are short-term interest bearing instruments with maturity dates of ninety days or less at the time of purchase. Inventories. Inventories are stated at the lower of cost (first-in, first-out method) or market and include amounts which ultimately may be capitalized as equipment or service parts. Service Parts. Service parts used for servicing installed equipment are stated at cost and are depreciated over a period not exceeding five years using the straight-line method. Property, Plant and Equipment. Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the lease term, whichever is less. As property, plant and equipment are disposed of, the asset cost and related accumulated depreciation or amortization are removed from the accounts, and the resulting gains or losses are reflected in operations. Investment in Leases. At the inception of a lease, the gross lease receivable, the reserve for potential losses, the estimated residual value of the leased equipment and the unearned lease income are recorded. The unearned lease income represents the excess of the gross lease receivable plus the estimated residual value over the cost of the equipment leased. Certain initial direct costs incurred in consummating the leases, included in the investment in leases, are amortized over the life of the lease. Leases discounted under the agreements are removed from the balance sheet and the gains are reflected in operations. Capitalized Software. Costs relating to the conceptual formulation and design of software products are expensed as product development, and costs incurred subsequent to establishing the technological feasibility of software products are capitalized. Amortization of capitalized software costs begins when the products are available for general release to customers. Costs are amortized over the expected product lives and are calculated using the greater of the straight line method, generally over a three, five or seven year period, or a cost per unit sold basis. Treasury Stock. Purchases of the Company's common stock are valued at cost. Debt Costs. The unamortized costs associated with the issuance of debt instruments are recorded with the associated liability. Amortization is computed according to the interest and is included in interest expense. Upon retirement of remaining principal balances, the associated unamortized costs are reflected in operations. Income Taxes. Deferred income taxes reflect differences in reporting certain items for financial statement and income tax purposes. Income taxes are provided on the undistributed earnings of foreign subsidiaries that are not considered to be permanently reinvested. Earnings Per Share. Primary and fully diluted earnings per share are based on the average common shares outstanding, the dilutive effect of the stock options, and the assumed conversion of the preferred stock and exercise of warrants during the periods they were outstanding. Revenue Recognition. Services revenue is recognized over the period that the services are performed. Systems revenue is recognized upon product shipment provided there are no remaining significant obligations and collection is probable. Finance revenue is recognized ratably over the lease term, except discounting gains, which are recognized at the time of discounting. Fair Value of Financial Instruments. Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, accounts receivable, accounts payable, and other accrued liabilities approximate fair value because of their short maturities. Lease receivables are stated at the present value using the internal rate of return which approximates fair value. All significant debt obligations either carry variable interest rates and their carrying value is considered to approximate fair value or for the senior fixed rate notes and the mortgage loan payable, the settlement rates which when factored into these instruments approximate fair value. Use Of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affects the reported amounts of assets and liabilities. It also affects the disclosure of contingent assets and liabilities at the dates of the financial statements along with the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain Risks and Concentrations. Cash and cash equivalents are, for the most part, maintained with several major financial institutions in the United States. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and therefore, bear minimal risk. The Company performs ongoing credit evaluations of its customers and generally does not require collateral from its customers. Most of the Company's customers are in the Automotive Aftermarket or the Hardlines and Lumber industry. Off Balance Sheet Risk. The Company conducts business on a global basis in several international currencies. As such, it is exposed to adverse movements in foreign currency exchange rates. The Company enters into foreign exchange forward contracts to reduce currency exposures. These contracts principally hedge exposures associated with intercompany product sales denominated in United Kingdom currencies. The Company does not enter into foreign exchange contracts for trading purposes. Limited and full recourse agreements are maintained with banks and lending institutions under which lease receivables are discounted and removed from the balance sheet. Triad Financial is contingently liable in the event of lessee nonpayment. See Note 3 "Discounting of Lease Receivables." Foreign Currency Translation. Assets and liabilities of subsidiary operations denominated in foreign currencies are translated at the year-end rates of exchange and the income statements have been translated at the average rates of exchange for the year. Local currencies are considered to be the functional currencies. Note 2. Finance Subsidiary. Triad Financial is a wholly-owned subsidiary that purchases Triad systems and other products and leases those products to third parties under full-payout and direct financing leases. Triad Financial's purchases from Triad were $ 38,731,000 in 1996, $36,984,000 in 1995 and $39,624,000 in 1994. Summarized financial information of the Company's combined leasing operations, included in the Consolidated Financial Statements, is as follows: Condensed Combined Balance Sheets September 30 (Amounts in thousands) 1996 1995 - ------------------------------------------------------------------ Assets Cash $ 10 $ 5 Net investment in leases 16,015 18,541 Residual value retained on leases discounted, less unearned income of $7,735 in 1996 and $7,476 in 1995 7,012 6,452 Receivable from parent company 55,243 50,262 Other assets 3,880 3,652 - ------------------------------------------------------------------ Assets $82,160 $78,912 ================================================================== Liabilities and Stockholder's Equity Other liabilities and accrued expenses $ 8,687 $ 8,367 Deferred income 2,570 2,337 Debt 10,059 13,033 Stockholder's equity 60,844 55,175 - ------------------------------------------------------------------ Liabilities and stockholder's equity $82,160 $78,912 ================================================================== Condensed Combined Statements of Income For the Years Ended September 30 (Amounts in thousands) 1996 1995 1994 - --------------------------------------------------------------------- Revenues $ 9,646 $11,244 $10,199 Costs and expenses Selling and administrative 1,544 1,750 1,949 Provision for doubtful accounts and revaluation charges 5,897 3,232 2,317 - --------------------------------------------------------------------- Operating income 2,205 6,262 5,933 Interest expense 925 132 199 Intercompany income 7,766 5,678 3,148 - --------------------------------------------------------------------- Income before taxes 9,046 11,808 8,882 Provision for income taxes 3,413 4,413 3,430 - --------------------------------------------------------------------- Net income $ 5,633 $ 7,395 $ 5,452 ===================================================================== Note 3. Discounting of Lease Receivables. Limited and full recourse agreements are maintained with banks and lending institutions under which available lines were $ 45,885,000 at September 30, 1996. As leases are discounted, a sale is recorded and gains, the difference between proceeds received and the book value of the lease receivables, are reflected in finance revenue. Proceeds from discounting of lease receivables were $73,624,000 in 1996, $73,216,000 in 1995 and $64,044,000 in 1994. A portion of discounting gains is deferred to offset future administration costs for discounted leases and is amortized over the remaining lease term. Under the discounting agreements, Triad Financial is contingently liable for losses in the event of lessee nonpayment. The agreements provide for limited recourse of up to 15% or full recourse at 100% of discounting proceeds, depending on the credit risk associated with specific leases. At September 30, 1996, the contingent liability for discounted leases was $25,855,000. Title to equipment discounted under the agreements is generally pledged as collateral. The discounting agreements contain restrictive covenants which allow Triad Financial to discount only while in compliance with such covenants. In the event of non-compliance, the banks and lending institutions could assume administrative control of the lease portfolio and could prohibit further discounting under the available credit facilities. The Company is in compliance with the restrictive covenants, and management believes that it will maintain compliance with such covenants in the foreseeable future. The most restrictive covenant requires that both Triad and Triad Financial be profitable each quarter. In third quarter, 1996, the Company failed to meet this covenant and received the appropriate waiver. Under the terms of an operating and support agreement with the finance subsidiary, Triad is obligated, if necessary, to make equity contributions or subordinated loans to enable Triad Financial to fulfill its obligations under the agreements. Note 4. Trade Accounts Receivable. Trade accounts receivable at September 30, 1996 and 1995 include allowances for doubtful accounts of $1,980,000 and $1,420,000, respectively. Note 5. Business Combination. On June 27, 1996, the Company acquired Computer System Dynamics, Inc. (CSD), a supplier of systems and software products to the lumber and building materials segment of the Hardlines and Lumber market. The acquisition was accounted for as a purchase. The purchase price was $8,500,000 with additional future obligations contingent upon CSD's attainment of certain performance objectives. The fair market values of the acquired assets and assumed liabilities were included in the Company's financial statements. The purchase price was allocated to the acquired assets and assumed liabilities based on the fair market values. Of the $6,000,000 recorded as intangibles, $3,700,000 was goodwill and $2,300,000 million was purchased technology and the customer base. The intangibles will be amortized on a straight-line basis over seven years. The results of operations of the acquired business were included from the acquisition date through September 30, 1996. Note 6. Inventories. (Amounts in thousands) 1996 1995 - ------------------------------------------------------------------ Purchased parts $ 2,233 $ 2,189 Work in process 12 391 Finished goods 3,554 3,056 - ------------------------------------------------------------------ Total inventories $ 5,799 $ 5,636 ================================================================== Note 7. Service Parts. (Amounts in thousands) 1996 1995 - ------------------------------------------------------------------ Service parts $10,154 $10,980 Less accumulated depreciation 6,881 7,664 - ------------------------------------------------------------------ Total service parts $ 3,273 $ 3,316 ================================================================== Note 8. Property, Plant and Equipment. (Amounts in thousands) 1996 1995 - ------------------------------------------------------------------ Furniture and equipment $24,928 $21,269 Field service and demonstration equipment 12,949 12,519 Buildings and leasehold improvements 17,421 17,210 - ------------------------------------------------------------------ 55,298 50,998 Less accumulated depreciation and amortization 35,198 30,768 - ------------------------------------------------------------------ 20,100 20,230 Land 6,787 6,787 - ------------------------------------------------------------------ Total property, plant and equipment $26,887 $27,017 ================================================================== Note 9. Investment in Leases. (Amounts in thousands) 1996 1995 - ------------------------------------------------------------------ Total minimum lease payments receivable $12,469 $17,226 Allowance for doubtful accounts (222) (233) Initial direct costs 216 287 Estimated unguaranteed residual value 882 1,211 - ------------------------------------------------------------------ Gross investment in leases 13,345 18,491 Unearned income (3,561) (5,456) Leases pending acceptance 6,231 5,506 - ------------------------------------------------------------------ Total investment in leases 16,015 18,541 - ------------------------------------------------------------------ Short-term investment in leases 1,635 2,001 Long-term investment in leases $14,380 $16,540 ================================================================== Historically, a substantial portion of the lease receivables are discounted prior to maturity. Accordingly, a schedule of maturities for the next five years is not indicative of future cash collections. Most of Triad Financial's customers are in the Automotive Aftermarket and the Hardlines and Lumber industry. Note 10. Capitalized Software. (Amounts in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------- Beginning balance $ 9,127 $ 8,114 $ 7,263 Restructuring charge (7,500) - - Acquisition of Assets 677 - - Capitalized software costs 3,465 2,930 3,142 Amortization of software costs (1,370) (1,917) (2,291) - ----------------------------------------------------------------------------- Ending balance $ 4,399 $ 9,127 $ 8,114 ============================================================================= Note 11. Land for Resale. Triad currently holds 161.1 acres in Livermore, California that it intends to sell over a period of years. During first quarter of 1997 an additional 36 acres was reclassified from Property, Plant and Equipment to Land for Resale. Gains from the sale of land amounting to $1,194,000 in 1996 are included as other income. Note 12. Savings and Investment Plan. The Company has a savings and investment plan known as the Triad Systems Corporation Savings and Investment Plan (the "Plan") as allowed under Sections 401(k) and 401(a) of the Internal Revenue Code. The Plan provides employees with tax deferred salary deductions and alternative investment options. Employees are eligible to participate the first day of the calendar quarter following date of hire and are able to apply for and secure loans from their account in the Plan. The Plan provides for contributions by the Company as determined annually by the Board of Directors. The Company matches 50% of the first 4% of compensation contributed by each employee and the deferred amount cannot exceed 15% of the annual aggregate salaries of those employees eligible for participation. Contributions to the Plan are allocated among eligible participants in the proportion of their salaries to the total salaries of all participants and amounted to $1,005,000 in 1996, $985,000 in 1995 and $933,000 in 1994. Note 13. Debt. (Amounts in thousands) 1996 1995 - ------------------------------------------------------------------ 12.25% senior fixed rate notes, due in 1999 $ 9,200 $19,300 Line of credit 15,800 - Warehousing credit agreement 10,000 11,916 Mortgage loan payable, bearing interest at 9.9%, and maturing through 2003 10,001 10,946 Assessment district improvement bonds, bearing interest at rates ranging from 4.75% to 7.25%, and maturing through 2014 Land for operations 1,453 2,432 Land for resale 8,153 8,500 Other, bearing interest at rates ranging from 7% to 12%, and maturing through 1998 1,612 3,290 Unamortized debt issuance costs (306) (775) - ------------------------------------------------------------------ Total debt 55,913 55,609 - ------------------------------------------------------------------ Short-term debt 25,990 3,032 Long-term debt $29,923 $52,577 ================================================================== The Company retired $10,100,000 of the 12.25% senior fixed rate notes ("fixed rate notes") at 103.75% of principal plus accrued interest in July 1996. The remaining $9,200,000 12.25% fixed rate notes mature in 1999, however, $8,334,000 of principal plus accrued interest is subject to mandatory redemption in August 1997. The balance can be redeemed at the option of the Company beginning in August 1997 at 101% of principal plus accrued interest and at 100% of principal plus accrued interest after August 1998. Interest is payable semiannually. The Company retired $1.9 million on the Warehouse Credit Agreement during 1996. The term of the original 1995 Warehousing Credit Agreement was a one year revolver with a three year term out option. During October 1996, the revolver was renegotiated and now requires monthly payments of $333,333 starting in April 1997 with the remaining balance due December 1997. Interest on this revolver is the LIBOR rate plus 1.85% (7.35% at September 30, 1996). The collateral for this facility is the non-discounted leases receivables. The interest rate on the mortgage financing for the Livermore headquarters facility may be adjusted at the option of the lender in 1998 and could impact the interest rate from 1999 to its maturity in 2003. Borrowings are collateralized by the land and buildings, and are payable in monthly installments. A portion of the Company's land for resale and the parcels retained for its facilities are part of assessment districts and are subject to bonded indebtedness incurred in connection with the development of improvements and community services. Semiannual principal and interest payments on the bonds are required to be made by Triad as long as the parcels are owned by the Company. As the Company sells land, the corresponding obligation will be assumed by the new owners. The Company's $26,875,000 revolving line of credit with a bank bears interest at prime rate plus 0.75% (9% at September 30, 1996), and is collateralized by receivables and inventories. The line of credit commitment decreases by $1,125,000 each quarter through maturity in 1997. Commitment fees are 0.5% on the average unused commitment. The fixed rate notes and the line of credit agreements contain restrictive covenants regarding payment of dividends, incurrence of additional debt and maintenance of consolidated tangible net worth and certain financial ratios. In the event the Company is unable to meet these covenants, accelerated repayments could be required. At June 30, the Company failed to meet certain credit line covenants which were waived. At September 30, the Company received a waiver on the credit line covenants because of its failure to meet the equity requirements and the current and quick ratios. Annual maturities of long-term debt for each year from 1997 through 2001 are $26,241,000, $12,946,000, $2,017,000, $2,007,000 and $2,134,000, respectively. Accruals for interest expense at the end of 1996 and 1995 were $218,000 and $533,000, respectively. Note 14. Equity. Cumulative Convertible Preferred Stock. On March 31, 1995, the Company financed the exchange of 1,000,000 preferred stock and the associated warrants to purchase 3,500,000 shares of common stock. The financial consideration given was $10,000,000 cash and 2,222,222 shares of Triad common stock. Common Stock. Triad has declared no dividends on its common stock since its incorporation and anticipates it will continue to retain its earnings for use in its business. The Company's loan agreements contain restrictions on the payment of dividends on its common stock. The most restrictive covenant regarding the payment of common stock cash dividends requires the ability to cover interest expense three times from operating income. Note 15. Restructuring Charge. In the third quarter of 1996, the Company recorded a $9,000,000 restructuring charge related to an Automotive product issue and realignment of the Automotive Aftermarket operations. This charge includes a $7,500,000 write off of previously capitalized costs for the Triad Prism system software, along with $1,000,000 in reserves for related product issues. Also included is $500,000 in costs associated with the realignment of aftermarket sales and support personnel to address increasing consolidation of the Automotive Aftermarket. The Company believes that this event will not adversely affect its future liquidity or working capital. Note 16. Other Income. Other income is comprised of a sale of marketable securities, $1,779,000, net land sales totaling $1,194,000, and other expenses of $47,000. Note 17. Extraordinary Charges. Extraordinary charges resulted from the retirement of debt in 1996, 1995 and 1994. The early retirement of the senior fixed rate notes in 1996, 1995 and 1994 generated extraordinary charges of $377,000 ($.02 per share), $153,000 ($.01 per share) and $143,000 ($.01 per share) that included premiums of $379,000, $198,000 and $196,000, unamortized debt costs of $229,000, $49,000 and $35,000 less taxes of $231,000, $94,000 and $88,000, respectively. In addition, in 1995, the refinancing of floating rate notes resulted in an extraordinary charge of $243,000 ($.02 per share), that included unamortized debt costs of $392,000 less taxes of $149,000. Note 18. Employee Stock Plans. Stock Options. The Company has reserved shares of common stock for issuance under its employee and outside director stock option plans for nonqualified or incentive stock options. The option price may not be less than the fair market value at the date of grant. Options typically vest ratably over five years and expire ten years from the date of grant. Stock Option Activity (Amount in thousands Option except per Price Exercisable Available share data) Shares Per Share Amount Options for Grant - ------------------------------------------------------------------------------ Options outstanding at September 30, 1993 4,470 $1.47 to $6.25 $11,065 4,138 501 Granted 337 4.62 to 5.50 1,757 Exercised (1,136) 1.47 to 4.12 (2,200) Cancelled (15) 3.12 to 4.12 (61) - ------------------------------------------------------------------------------ Options outstanding at September 30, 1994 3,656 1.50 to 6.25 10,561 3,210 194 Granted 177 5.00 to 6.63 934 Exercised (1,702) 1.50 to 5.50 (3,534) - ------------------------------------------------------------------------------ Options outstanding at September 30, 1995 2,131 1.78 to 6.63 7,961 1,645 17 Granted 31 5.00 to 6.38 189 Exercised (277) 1.90 to 5.50 (886) Cancelled (47) 3.81 to 5.50 (238) - ------------------------------------------------------------------------------ Options outstanding at September 30, 1996 1,838 $1.78 to $6.63 $7,026 1,491 383 - ------------------------------------------------------------------------------ Stock Purchase Plan. The Company has an Employee Stock Purchase Plan under which shares of common stock have been reserved for issuance to all permanent employees who have met minimum employment criteria. Employees who do not own 5% or more of the outstanding shares of the Company are eligible to participate through payroll deductions in amounts relating to their basic compensation. At the end of an offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period, to a maximum of 500 shares per participant. The Company has reserved 1,150,000 shares of common stock and at September 30, 1996, 860,000 shares have been issued and 290,000 shares are available for issuance. Note 19. Commitments and Contingencies. The Company rents office facilities and certain office equipment under noncancellable operating lease agreements for periods of up to five years. Certain lease agreements contain renewal options and provisions for maintenance, taxes or insurance. Minimum future lease payments for each year 1997 through 2001 are $1,922,000, $1,499,000, $594,000 $232,000 and $169,000 respectively. Rental expense under operating lease was $2,773,000 in 1996, $3,445,000 in 1995 and $3,007,000 in 1994. The Company is involved in litigation arising in the ordinary course of business and has been named as defendants in legal proceeding wherein substantial damages are claimed. Such proceedings are not uncommon in the Company's business and historically, the Company has been successful in defending such actions or have settled them within insured limits. In the opinion of management, after consultation with legal counsel, these matters will be resolved without material adverse effect on the Company's result of operations or financial position. The Board of Directors determined that in the event of a change of control of the Company, employees, including executive officers, would be entitled to certain severance benefits in the event their employment is terminated. The maximum benefits provide for a year's salary plus bonus. In the event of a sale or exchange of more than fifty percent of the stock of the Company to an outside entity, all options shall become fully exercisable and fully vested. Note 20. Income Taxes. Provision for Income Taxes. (Amounts in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------- Current Federal $ 37 $ 1,433 $ 545 State 387 523 503 Foreign 136 367 30 - ----------------------------------------------------------------------------- Current provision 560 2,323 1,078 Deferred Federal 104 3,628 2,481 State 49 (904) 983 Foreign 12 (125) (107) - ----------------------------------------------------------------------------- Deferred provision 165 2,599 3,357 - ----------------------------------------------------------------------------- Provision for income taxes $ 725 $ 4,922 $ 4,435 ============================================================================= In 1996, 1995 and 1994, taxes of $ 956,000, $5,165,000 and $4,523,000, respectively, were provided on income from continuing operations. Respective tax benefits of $ 231,000, $243,000 and $88,000, related to extraordinary charges on the repurchases of debt are included in the 1996, 1995 and 1994 total provision for income taxes. The Company's effective tax rate from continuing operations differs from the U.S. statutory income tax rate as set forth below: 1996 1995 1994 - ----------------------------------------------------------------------------- U.S. statutory income tax rate 35.0% 35.0% 35.0% State taxes, net of Federal income tax benefit 14.9 (1.8) 8.1 Foreign income taxes 5.6 3.8 - Favorable tax settlements on prior years (30.2) - - Permanent differences, primarily goodwill 12.7 - - Income tax credits - (1.0) (1.3) Other - 2.0 (3.8) - ----------------------------------------------------------------------------- Effective tax rate 38.0% 38.0% 38.0% ============================================================================= Deferred Tax Assets and Liabilities. (Amounts in thousands) 1996 1995 - --------------------------------------------------------------------- Deferred Tax Assets Current gross deferred tax assets Inventory and sales return reserves $ 3,246 $ 2,771 Accrued compensation 777 700 Other 1,374 1,036 - --------------------------------------------------------------------- Current gross deferred tax assets 5,397 4,507 - --------------------------------------------------------------------- Noncurrent gross deferred tax assets Federal Tax credit 5,108 5,368 Depreciation 1,123 1,612 Other 1,134 1,424 - --------------------------------------------------------------------- Noncurrent gross deferred tax assets 7,365 8,404 - --------------------------------------------------------------------- Gross deferred tax assets 12,762 12,911 Less valuation allowance - - - --------------------------------------------------------------------- Deferred tax assets 12,762 12,911 - --------------------------------------------------------------------- Deferred Tax Liabilities Current gross deferred tax liabilities Direct financing leases 7,694 7,595 Other 390 250 - --------------------------------------------------------------------- Current gross deferred tax liabilities 8,084 7,845 - --------------------------------------------------------------------- Noncurrent gross deferred tax liabilities Direct financing leases 34,011 34,029 Other 1,024 551 - --------------------------------------------------------------------- Noncurrent gross deferred tax liabilities 35,035 34,580 - --------------------------------------------------------------------- Gross deferred tax liabilities 43,119 42,425 - --------------------------------------------------------------------- Net deferred tax liabilities $30,357 $29,514 ===================================================================== At September 30, 1996, the Company had business tax credit carryforwards of $1,180,000, which may be used to reduce future Federal income taxes, if any. The business tax credit carryforwards expire from 1999 through 2010. Also available to the Company to reduce future regular federal income taxes are alternative minimum tax credits of approximately $3,927,000 with no statutory expiration period. Substantially all of the Company's operating income was generated from domestic operations during 1996, 1995 and 1994. The Company has not provided for United States income taxes on the earnings of certain foreign subsidiaries that are considered invested indefinitely outside the United States. The cumulative earnings of the foreign subsidiaries that are considered permanently invested outside the United States amounted to $2,396,000 at September 30, 1996. Note 21. Segment Information. The Company operates in one industry segment; it produces and markets proprietary databases and software products, and designs, develops, assembles, markets, services and leases computer systems. The Company markets its products in the United States, Puerto Rico, the United Kingdom, France, Canada and Ireland and has no customer which accounts for 10% or more of its revenue. Revenue, operating income and assets outside the United States were not material to the consolidated financial statements of the Company. Note 22. Selected Quarterly Financial Data (Unaudited). (Amounts in thousands 1996 Fiscal Quarter Ended except per share data) Dec. 31 March 31 June 30 Sept. 30 - ---------------------------------------------------------------------------- Revenues $40,850 $42,434 $42,318 $50,074 Gross margin 19,417 19,655 19,717 23,079 Operating income 3,982 3,365 (5,805) 3,991 Income before extraordinary charge 1,486 2,190 (4,411) 2,294 Extraordinary charge, net of taxes - - - 377 Net income 1,486 2,190 (4,411) 1,917 Earnings per share Primary Income before extraordinary charge $ .09 $ .13 $ (.25) $ .13 Net income .09 .13 (.25) .11 Fully diluted Income before extraordinary charge $ .09 $ .13 $ (.25) $ .13 Net income .09 .13 (.25) .11 - ---------------------------------------------------------------------------- 1995 Fiscal Quarter Ended Dec. 31 March 31 June 30 Sept. 30 - ---------------------------------------------------------------------------- Revenues $41,969 $44,118 $41,183 $47,807 Gross margin 20,643 22,013 20,135 23,777 Operating income 4,287 5,379 4,409 6,457 Net income 1,430 2,291 1,594 2,715 Earnings per common and common equivalent share $ .08 $ .13 $ .09 $ .15 - ---------------------------------------------------------------------------- Note 23. Recent Accounting Pronouncements. During March 1995, the Financial Accounting Standards Board issued Statement No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires the review for impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. The Company does not believe the adoption of SFAS No. 121, which is required in fiscal 1997, will have a material impact on the Company's financial condition or operating results. During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This statement, which establishes a fair value-based method for stock-based compensation plans, also permits an election to continue following the requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees," with disclosures on a pro forma net income and earnings per share under the new method. The Company is required to adopt SFAS No. 123 by fiscal year 1997, and upon adoption, will elect to continue to measure compensation cost for its employee stock compensation plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25. Pro forma disclosure of net income and earnings per share will reflect the difference between compensation cost included in net income and the related cost measured by the fair value-based method defined in SFAS No. 123, including tax effects, that would have been recognized in the consolidated statement of operations if the fair value-based method had been used. During June 1996, the Financial Accounting Standards Board issued Statement No. 125 (SFAS No. 125) "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This standard, which establishes consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company is reviewing the requirements of this pronouncement and its effect on lease discounting including any administrative organizational changes to insure continued sales accounting treatment for these transactions. SFAS No. 125 will become effective for transactions that the Company enters into after December 31, 1996. Note 24. Subsequent Event. On October 17, 1996, the Company signed a definitive merger agreement with Cooperative Computing, Inc. ("CCI"), a Texas corporation, under which CCI Acquisition Corp. ("CAC"), a Delaware corporation jointly owned by CCI and Hicks, Muse, Tate & Furst Incorporated, a private investment firm located in Dallas, Texas, would acquire the Company. Pursuant to the terms of the merger agreement, CAC commenced a cash tender offer for all outstanding shares of the Company at a price of $9.25 per share on October 23, 1996. The tender offer, which was to have expired at 12:00 Midnight, New York City time, November 20, 1996, has been extended until 12:00 midnight, New York City time, on Friday, January 3, 1997. When the tender offer is completed, it will be followed by a merger transaction, in which any shares of the Company's common stock that remain outstanding after the tender offer will be exchanged for cash at the same price as the tender offer price. The tender offer is not expected to be completed until the Federal Trade Commission completes its currently pending review of the transaction and certain other conditions to closing are satisfied. In addition to the cash consideration to be received by the Company's shareholders pursuant to the tender offer or the merger transaction, the merger agreement provides that the Company's shareholders of record immediately prior to the consummation of the tender offer will receive a dividend consisting of their pro rata share of the equity of a newly formed company whose assets will consist of all the Company's owned real property located in Livermore, California, including its corporate headquarters buildings and land held for sale in the Triad Park development in Livermore. The spun-off real estate entity, which the Company expects to be a public company, will assume all the indebtedness currently secured by the spun-off real estate and will lease the corporate headquarters buildings to the Company's post merger successor. Over time, the real estate entity is expected to liquidate its real estate portfolio, with proceeds used to pay expenses (including taxes), repay secured debt and distribute any remaining proceeds to its equity holders. The Company's ability to market this property is dependent upon interest rates, general economic and market conditions, the prospective purchaser's ability to develop the property and the purchaser's ability to obtain a variety of governmental approvals, none of which is assured and all of which are subject to objections from the public. Corporate Responsibility Statement The Company's management is responsible for the preparation and accuracy of the financial statements and other information included in this report. The financial statements have been prepared in conformity with generally accepted accounting principles using, where appropriate, management's best estimates and judgments. In meeting its responsibility for the integrity of financial information, management has developed and relies upon the Company's system of internal accounting control. The system is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed as authorized and are properly recorded. The system is augmented by written policies and procedures. The Board of Directors reviews the financial statements and reporting practices of the Company through its Audit Committee. The committee meets regularly with the independent accountants and management to discuss audit scope and results and to consider internal controls and financial reporting matters. The independent accountants have unrestricted access to the Audit Committee. James R. Porter President and Chief Executive Officer Stanley F. Marquis Vice President Finance Chief Financial Officer Corporate Secretary and Treasurer President, Triad Systems Financial Corporation October 23, 1996 Livermore, California Report of Independent Accountants To The Board of Directors and Stockholders Triad Systems Corporation Livermore, California We have audited the consolidated financial statements and the financial statement schedule of Triad Systems Corporation and Subsidiaries listed in Item 14A of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Triad Systems Corporation and Subsidiaries as of September 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. San Jose, California Coopers & Lybrand L.L.P. October 23, 1996 Item 9. Disagreements on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant There is incorporated herein by reference the information under the caption "Right to Designate Directors: Parent's Designees," "Directors of the Company" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Information Statement filed with the Securities and Exchange Commission on November 8, 1996 pursuant to Regulation 14(f) of the Securities Exchange Act of 1934 and Rule 14f-1 thereunder ("Information Statement"). Information with respect to executive officers may be found on pages 12 to 13, under the caption "Executive Officers of the Registrant" in this Form 10-K. Item 11. Executive Compensation There is incorporated by reference the information under the captions "Executive Compensation and Other Matters," "Compensation Committee Report on Executive Compensation," "Comparison of Stockholder Return," "Compensation of Directors," "Termination and Change-of-Control Arrangements" and "Compensation Committee Interlocks and Insider Participation" set forth in the Information Statement referred to above. Item 12. Security Ownership of Certain Beneficial Owners and Management There is incorporated by reference the information under the caption of "Stock Ownership Of Certain Beneficial Owners And Management" set forth in the Information Statement referred to above. Item 13. Certain Relationships and Related Transactions There is incorporated by reference the information under the caption "Executive Compensation And Other Matters" set forth in the Information Statement referred to above. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, as amended, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into the Registrant's Registration Statements on Form S-8, Nos. 333-06247 (filed June 18, 1996), 33-52101 (filed January 31, 1994), 33-60320 (filed March 30, 1993), 33-40945 (filed May 30, 1991), 33-40875 (filed May 29, 1991), 33-38540 (filed January 7, 1991), 2-88436 (filed December 15, 1983), 33-2427 (filed November 24, 1985), 33-15219 (filed June 19, 1987), 33-20239 (filed February 22, 1988), 33-33553 (filed February 21, 1990) and 33-33554 (filed February 21, 1990). Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements, Schedules and Exhibits (1) Consolidated Financial Statements The following consolidated financial statements of Triad Systems Corporation and subsidiaries (including Triad Financial), and related notes, together with the report thereon of Coopers & Lybrand L.L.P., independent accountants, are included in Item 8 and are incorporated herein by reference: Financial Statements and Supplementary Data Consolidated Balance Sheet Consolidated Statements of Cash Flows Consolidated Statements of Stockholders' Equity Notes to Consolidated Financial Statements Corporate Responsibility Statement Report of Independent Accountants Page Number ----------- (2) Consolidated Financial Statement Schedule in Form 10K Report II Valuation and Qualifying Accounts 43 In accordance with the rules of Regulation S-X, the other required schedules are not submitted because (a) they are not applicable or required, or (b) the information required to be set forth therein is included in the financial statements, or notes thereto. Separate financial statements of the Registrant are omitted because the Registrant is primarily an operating company and all consolidated subsidiaries are totally held and are not indebted to any person, other than the Registrant, in an amount that is in excess of 5% of total consolidated assets. (3) Exhibits See Index to Exhibits, pages 44 to 46. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the last quarter of the fiscal year ended September 30, 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. TRIAD SYSTEMS CORPORATION December 19, 1996 By: /s/ JAMES R. PORTER - ----------------- -------------------- Date James R. Porter President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ------ ---- /s/ JAMES R. PORTER President December 19, 1996 (James R. Porter) (Principal Executive Officer) /s/ STANLEY F. MARQUIS Vice President December 19, 1996 (Stanley F. Marquis) (Principal Financial Officer) /s/ BRUCE M. BLANCO Corporate Controller December 19, 1996 (Bruce M. Blanco) (Principal Accounting Officer) /s/ WILLIAM W. STEVENS Chairman of the Board December 19, 1996 (William W. Stevens) /s/ HENRY M. GAY Director December 19, 1996 (Henry M. Gay) /s/ GEORGE O. HARMON Director December 19, 1996 (George O. Harmon) /s/ RICHARD C. BLUM Director December 19, 1996 (Richard C. Blum) TRIAD SYSTEMS CORPORATION AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) =========================================================================== COL A COL B COL C COL D COL E - --------------------------------------------------------------------------- Additions Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions Period - --------------------------------------------------------------------------- Year ended September 30, 1994: Allowance for doubtful accounts and system returns $1,777 $6,819 $6,445 (A) $2,151 ====== ====== ====== ====== Product warranty costs (B) $562 $1,079 $1,380 $261 ==== ====== ====== ==== Inventory valuation $938 $595 $875 $658 ==== ==== ==== ==== Year ended September 30, 1995: Allowance for doubtful accounts and system returns $2,151 $7,590 $7,492 (A) $2,249 ====== ====== ====== ====== Product warranty costs (B) $261 $773 $835 $199 ==== ==== ==== ==== Inventory valuation $658 $685 $784 $559 ==== ==== ==== ==== Year ended September 30, 1996: Allowance for doubtful accounts and system returns $2,249 $10,456 (C) $10,503 (A) $2,202 ====== ======= ======= ====== Product warranty costs (B) $199 $710 $714 $195 ==== ==== ==== ==== Inventory valuation $559 $236 $4 $791 ==== ==== == ==== - ---------------------- (A) Balances written off during the year and transfer of reserves to other liabilities to provide for recourse on discounted leases. (B) The estimated cost of warranty repairs is added to the reserve at the time the products are sold and actual costs deducted as incurred. (C) Includes $70,000 balance transferred from the acquisition of Computer Systems Dynamics, Inc. and $146,839 receivables allowance transferred due to the acquisition of certain assets of Pace Automotive Systems, Ltd. EXHIBIT INDEX FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 Sequentially Exhibit Numbered Number Page - ------- ------------ 3.1 Restated Certificate of Incorporation. 3.2 Triad Systems Corporation, a Delaware corporation, Amended and Restated Bylaws incorporated by reference from Exhibit 3.4 to the Company's Registration Statement on Form S-4 (33-53038) (the "Form S-4"). 4.1 Senior Floating Rate Note Indenture dated as of August 1, 1992, between the Company and Security Pacific National Trust Company (New York), as Trustee, including form of Fixed Rate Notes, incorporated by reference from Exhibit 4.1 to the Company's Current Report on Form 8-K filed August 17, 1992. 4.2 Amended and Restated Rights Agreement dated as of December 6, 1993, between the Company and Chemical Bank of California, as Rights Agent (including as exhibits the form of Rights Certificate and the form of Summary of Rights to Purchase Common Stock). 4.3 Purchase Agreement dated July 2, 1992, between the Company and purchasers of 12.25% Senior Notes due 1999, as amended by the Amendment and Consent to Documents dated as of August 3, 1992, incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed August 17, 1992. 4.4 Purchase Agreement dated July 2, 1992, between the Company and purchasers of Floating Rate Senior Notes due 1997, incorporated by reference from Exhibit 10.2 to the Company's Current Report on Form 8-K filed August 17, 1992. 4.5 Consent Agreement between Triad Systems Corporation and certain holders of the Fixed Rate Notes dated March 31, 1995, incorporated by reference from Exhibit 2 to the Company's Current Report on Form 8-K filed May 11, 1995. 4.6 Consent Agreement between Triad Systems Corporation and the holder of the Floating Rate Notes dated March 31, 1995, incorporated by reference from Exhibit 3 to the Company's Current Report on Form 8-K filed May 11, 1995. 4.7 First Supplemental Indenture between Triad Systems Corporation and BankAmerica National Trust Company dated March 31,1995, incorporated by reference from Exhibit 4 to the Company's Current Report on Form 8-K filed May 11, 1995. 4.8 First Supplemental Indenture between Triad Systems Corporation and Chase Manhattan Bank N.A. dated March 31,1995, incorporated by reference from Exhibit 5 to the Company's Current Report on Form 8-K filed May 11, 1995. 4.9 Triad Systems Corporation Amended Senior Floating Rate Note Due 1997 dated March 31,1995, incorporated by reference from Exhibit 7 to the Company's Current Report on Form 8-K filed May 11,1995. * 10.1 Triad Systems Corporation Amended and Restated 1982 Stock Option Plan as amended on October 22, 1993, incorporated by reference from Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 10.2 Form of Indemnification Agreement, incorporated by reference from Exhibit 10.4 to the Company's Registration Statement on Form S-2 (File No. 33-2966) filed July 3, 1989 (the "1989 Form-2 Registration Statement"). * 10.3 Nonqualified Stock Option Agreement between the Company and James R. Porter dated January 13, 1987, incorporated by reference from Exhibit 10.5 to the 1987 Form S-2 Registration Statement, (File No. 33-13599) (the "1987 Company's Form S-2 Registration Statement"). 10.4 Mortgage between Variable Annuity Life Insurance Company and 3055 Triad Drive dated August 23, 1988, incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1988 (the "1988 Form 10-K"). * 10.5 Nonqualified Stock Option Agreement between the Company and James R. Porter dated as of February 17, 1987, incorporated by reference from Exhibit 10.7 of the 1988 Form 10-K. * 10.6 Nonqualified Stock Option Agreement between the Company and James R. Porter dated November 12, 1988, incorporated by reference from Exhibit 10.8 of the 1988 Form 10-K. * 10.7 Triad Systems Corporation 1990 Stock Option Plan as amended on October 22, 1993, incorporated by reference from Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. * 10.8 Triad Systems Corporation Amended and Restated Outside Directors Stock Option Plan, incorporated by reference from Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1991. 10.9 Revolving Credit Loan Agreement dated as of June 30, 1992, as amended, between the Company and Plaza Bank of Commerce, incorporated by reference from Exhibit 10.3 to the Company's Current Report on Form 8-K filed August 17, 1992. 10.10 Unit Purchase Agreement dated as of July 2, 1992, between the Company, Richard C. Blum & Associates, Inc. and certain purchasers, together with the First Amendment to Unit Purchase Agreement dated as of August 3, 1992, and the form of irrevocable Proxy, incorporated by reference from Exhibit 10.4 to the Company's Current Report on Form 8-K filed August 17, 1992. 10.11 Registration Rights Agreement between the Company and certain purchasers under the Unit Purchase Agreement dated as of August 3, 1992, incorporated by reference from Exhibit 10.5 to the Company's Current Report on Form 8-K filed August 17, 1992. 10.12 Grant Agreement between the Industrial Development Authority and Triad Systems Ireland Limited, Triad Systems Corporation and Tridex Systems Limited and related agreements, incorporated by reference from Exhibit 10.15 to the 1992 Form S-4 Registration Statement. 10.13 Cancellation of Development Agreement between the Company and the City of Livermore dated July 15, 1993, incorporated by reference from Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 10.14 Amended and Restated Subdivision Improvement Agreement between the Company and the City of Livermore dated May 12, 1993, incorporated by reference from Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. * 10.15 Supplemental Deferred Compensation Plan between the Company and a select group of Triad Key Employees and their beneficiaries dated April 1, 1994, incorporated by reference from Exhibit 10.18 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1994. * 10.16 Amendment to the Amended and Restated 1982 Stock Option Plan dated April 25, 1994, incorporated by reference from Exhibit 10.19 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1994. 10.17 Amendment No. Three to Revolving Credit Loan Agreement and Consent (to Exchange Agreement) between Triad Systems Corporation, Triad Systems Financial Corporation and Comerica Bank-California dated March 31, 1995, incorporated by reference from Exhibit 6 to the May 11, 1995 Form 8-K. 10.18 Exchange Agreement and Second Amendment to Unit Purchase Agreement by and among Triad Systems Corporation, Richard C. Blum & Associates, L.P. and certain holders dated March 31, 1995, incorporated by reference from Exhibit 1 to the Company's Current Report on Form 8-K filed May 11, 1995. 10.19 Warehousing Credit Agreement between Triad Systems Financial Corporation and the First National Bank of Boston dated August 29, 1995, incorporated by reference from Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. 10.20 Amendment No. Four to Revolving Credit Loan Agreement and Consent (to Exchange Agreement) between Triad Systems Corporation, Triad Systems Financial Corporation and Comerica Bank-California dated May 23, 1996, incorporated by reference from Exhibit 10.20 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1996. 10.21 Amendment No. Five to Revolving Credit Loan Agreement and Consent (to Exchange Agreement) between Triad Systems Corporation, Triad Systems Financial Corporation and Comerica Bank-California dated June 28, 1996, incorporated by reference from Exhibit 10.21 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1996. * 10.22 Triad Systems Corporation Amendment to the Amended and Restated 1982 Stock Option Plan dated February 8, 1996, incorporated by reference from Exhibit 10.22 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1996. * 10.23 Triad Systems Corporation Amended and Restated Outside Directors Stock Option Plan dated April 30, 1996, incorporated by reference from Exhibit 10.23 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1996. 10.24 Agreement and Plan of Merger among Cooperative Computing Incorporated, CCI Acquisition Corporation and Triad Systems Corporation dated October 17, 1996, incorporated by reference from Exhibit 5 to the Company's Schedule 14D-9 filed October 23, 1996. 11.1 Computation of Earnings per share. 12.1 Statement regarding computation of ratio of earnings to fixed charges, incorporated by reference from Exhibit 12.1 to the 1992 Form S-4 Registration Statement. 20.1 Information Statement Pursuant to Section 14(f) of the Securities Exchange Act of 1934 and Rule 14f-1 dated November 13, 1996. 20.2 Amendment to the Information Statement dated November 15, 1996. 21.1 Subsidiaries. 23.1 Consent of Independent Accountants. 27 Financial Data Schedule, filed by electronic submission only. - ------------------------ * Compensatory or employment agreement. Exhibit 11.1 TRIAD SYSTEMS CORPORATION COMPUTATION OF EARNINGS PER SHARE For The Three Years Ended September 30, 1994 1995 1996 ------ ------ ------ (Amounts in thousands except per share data) Calculation of number of shares entering into computations Weighted average shares outstanding 12,995 17,159 17,570 Assumed conversion of preferred stock and exercise of warrants 3,137 - - ------ ------ ------ 16,132 17,159 17,570 Net effect of dilutive stock options and warrants based on the average stock price 1,286 615 - ------ ------ ------ Average primary shares outstanding 17,418 17,774 17,570 Net effect of dilutive stock options and warrants based on the ending stock price 3 199 - ------ ------ ------ Average fully diluted shares outstanding 17,421 17,973 17,570 ====== ====== ====== Income before extraordinary charge $7,379 $8,426 $1,559 Net interest costs associated with assumed retirement of debt 63 - - Preferred stock conversion dividend - 151 - ------ ------ ------ Adjusted income before extraordinary charge 7,442 8,577 1,559 Extraordinary charge 143 396 377 ------ ------ ------ Adjusted net income $7,299 $8,181 $1,182 ====== ====== ====== Earnings per share Primary Income before extraordinary charge $ .43 $ .48 .09 Net income .42 .46 .07 Fully diluted Income before extraordinary charge $ .43 $ .48 .09 Net income .42 .45 .07 Exhibit 21.1 TRIAD SYSTEMS CORPORATION SUBSIDIARIES State or Other Jurisdiction of Incorporation or Name Organization - ---- ---------------- Triad Systems Financial Corporation California Tridex Systems Limited United Kingdom Tridex Leasing Limited United Kingdom Triad Systems Ireland Limited Ireland Triad Systems Canada Limited Canada Triad Systems France, S.A.R.L. France 3055 Triad Drive Corporation California Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Triad Systems Corporation and subsidiaries on Form S-8 (File Nos. 333-06247, 33-52101, 33-60320, 33-40945, 33-40875, 33-38540, 33-33554, 33-33553, 33-20239, 33-15219, 33-2427 and 2-88436) of our report dated October 23, 1996, on our audits of the consolidated financial statements and financial statement schedule of Triad Systems Corporation and subsidiaries as of September 30, 1995 and 1996, and for the years ended September 30, 1996, 1995 and 1994, which report is included in the Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. San Jose, California December 19, 1996 Triad and the stylized logo, LaserCat(R), ServiceCat(R), LaserGuide(R), MarketPACE(R), TelePart(R), Telepricing(R), Triad Prism(R) and Triad ServiceWriter(R) are registered trademarks of Triad Systems Corporation. LaserStation(TM), Electronic Catalog(TM), LaborGuide(TM), Competitive Analysis(TM), AdviceLine(TM), Vista(TM), Eagle(TM), Eagle LS(TM), Pace Business Manager(TM), Triad Ultimate(TM), Triad Eclipse(TM) and Quick Assist(SM) are trademarks or service marks of Triad Systems Corporation. Interactive(TM) is a trademark of Sun Microsystems, Inc. Pentium(TM) and Pentium Pro(TM) are trademarks of Intel Corporation. The Paperless Warehouse(R) is a registered trademark of Management Technology International, Inc. True Value(R) is a registered trademark of Cotter & Company. EX-27 2
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets at September 30, 1996 and Consolidated Statement of Income and Statement of Cash Flow for the year ended September 30, 1996 and is qualified in its entirity by reference to such financial statements. YEAR SEP-30-1996 SEP-30-1996 7652 0 19726 1980 5799 41383 62085 35198 139753 58524 29923 18 0 0 16769 139753 70090 175676 37544 93808 76335 10956 5944 2515 956 1559 0 377 0 1182 0.07 0.07
EX-99 3 [Triad Logo] TRIAD SYSTEMS CORPORATION 3055 TRIAD DRIVE LIVERMORE, CALIFORNIA 94550 INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER NO VOTE OR OTHER ACTION OF THE COMPANY'S STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS INFORMATION STATEMENT. NO PROXIES ARE BEING SOLICITED AND YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY. This Information Statement is being mailed on or about November 12, 1996, to holders of record of the Common Stock, par value $.001 per share ("Share", collectively the "Shares" or the "Common Stock") of Triad Systems Corporation, a Delaware corporation (the "Company"), at the close of business on or about November 7, 1996. The term "Share" includes the related common stock purchase rights (the "Rights") issued pursuant to the Amended and Restated Rights Agreement, dated as of December 6, 1993 (the "Rights Agreement"), between the Company and Chemical Trust Company of California, as Rights Agent. You are receiving this Information Statement in connection with the possible election to the Company's Board of Directors (the "Board" or the "Board of Directors") of that number of persons designated by Cooperative Computing, Inc., a Texas corporation ("Parent"), as will give Parent that number of directors, rounded up to the next whole number (but in no event more than one less than the total number of directors on the Board of Directors of the Company), on the Company's Board of Directors equal to the product of the total number of directors on the Board of Directors of the Company multiplied by the percentage that the number of Shares purchased by Parent or any of its subsidiaries pursuant to the Offer (as defined below) bears to the aggregate number of Shares outstanding. Parent and its affiliate, CCI Acquisition Corp., a Delaware corporation ("Purchaser"), have commenced a tender offer to purchase all outstanding Shares on the terms and subject to the conditions set forth in the Offer to Purchase, dated October 23, 1996 (the "Offer to Purchase"), and in the related Letter of Transmittal (which, together with the Offer to Purchase and any amendments or supplements thereto, collectively constitute the "Offer"). The Offer was disclosed in a Tender Offer Statement on Schedule 14D-1 and Schedule 13D, dated October 23, 1996 (the "Schedule 14D-1"), which was filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules promulgated by the Commission thereunder. The Offer is being made by Purchaser pursuant to the Agreement and Plan of Merger, dated as of October 17, 1996 (the "Merger Agreement"), among Parent, Purchaser and the Company. The Company filed a Solicitation/Recommendation Statement on Schedule 14D-9 with the Commission on October 23, 1996 pursuant to Section 14(d)(4) of the Exchange Act and the rules promulgated thereunder. The Merger Agreement requires the Company, at the request of Parent, to take all action necessary to cause Parent's designees to be elected to the Board under the circumstances described therein. This Information Statement is required by Section 14(f) of the Exchange Act and Rule 14f-1 thereunder. You are urged to read this Information Statement carefully. You are not, however, required to take any action. Pursuant to the Merger Agreement, Purchaser and Parent commenced the Offer on October 23, 1996. The Offer is scheduled to expire at 12:00 midnight, New York City time, on Wednesday, November 20, 1996, unless extended in accordance with its terms. 2 The information contained in this Information Statement concerning Purchaser and Parent and their respective board designees has been furnished to the Company by Parent and Purchaser, and the Company assumes no responsibility for the accuracy or completeness of such information. BOARD OF DIRECTORS AND EXECUTIVE OFFICERS GENERAL The Shares are the only class of voting securities of the Company outstanding. Each Share has one vote. As of September 30, 1996, there were 17,749,158 Shares issued and outstanding. The Board presently consists of five members, and there are currently no vacancies on the Board. Each director holds office until such director's successor is elected and qualified or until such director's earlier resignation, death or removal. RIGHT TO DESIGNATE DIRECTORS; PARENT'S DESIGNEES The Merger Agreement provides that promptly upon the purchase by Parent or any of its subsidiaries of such number of Shares which represents at least 51% of the outstanding Shares on a fully-diluted basis (as defined in the Merger Agreement), and from time to time thereafter, Parent shall be entitled to designate such number of directors, rounded up to the next whole number (but in no event more than one less than the total number of directors on the Board) as will give Parent, subject to compliance with Section 14(f) of the Exchange Act, representation on the Board equal to the product of (a) the number of directors on the Board (giving effect to any increase in the number of directors pursuant to the Merger Agreement) and (b) the percentage that such number of Shares so purchased bears to the aggregate number of Shares outstanding (such number being the "Board Percentage"). The Company has agreed, upon request of Parent, to promptly satisfy the Board Percentage by increasing the size of the Board or using its best efforts to secure the resignations of such number of directors as is necessary to enable Parent's designees to be elected to the Board and to cause Parent's designees promptly to be so elected, provided that no such action shall be taken which would result in there being, prior to the consummation of the Merger, less than two directors of the Company that are not affiliated with Parent. Following the election or appointment of Parent's designees pursuant to the Merger Agreement and prior to the Effective Time (as defined in the Merger Agreement) of the Merger, any amendment or termination of the Merger Agreement, extension for the performance or waiver of the obligations or other acts of Parent or Purchaser or waiver of the Company's rights thereunder shall require the concurrence of a majority of the directors of the Company then in office who are Continuing Directors. The term "Continuing Directors" means (i) each member of the Board on the date of the Merger Agreement who voted to approve the Merger Agreement and (ii) any successor to any Continuing Director who was recommended to succeed such Continuing Director by a majority of the Continuing Directors then on the Board. It is expected that Parent's designees may assume office at any time following the purchase of Shares by Purchaser pursuant to the Offer, which purchase may not be consummated prior to midnight on Wednesday, November 20, 1996 and that, upon assuming office, Parent's designees will thereafter constitute at least a majority of the Board of Directors. To the extent the Board of Directors will consist of persons who are not Parent's designees, the Company expects such persons shall be Continuing Directors. Parent's designees will be selected by Parent from among the individuals listed below. The Company has been informed that each of the following individuals has consented to serve as a director of the Company if appointed or elected. None of the following individuals owns any Shares. In addition, none of the following individuals is a director of, or holds any position with, the Company. The name, age, present principal occupation or employment and five-year employment history of each of the following individuals are set forth below. Each person is a citizen of the United States, and, except as indicated otherwise, the business address of each person is 200 Crescent Court, Suite 1600, Dallas, Texas 75201. 2 3
PRESENT PRINCIPAL OCCUPATION NAME, AGE AND OR EMPLOYMENT AND FIVE-YEAR BUSINESS ADDRESS EMPLOYMENT HISTORY ---------------- ---------------------------- Glenn E. Staats* (52).............. Chairman of the Board, Cooperative Computing, Inc. 6207 Bee Cave Road (1985-present); Director, President and Chief Austin, Texas 78146 Executive Officer, Cooperative Computing, Inc. (1976-present) Preston W. Staats, Jr.* (54)....... Director, Secretary and Executive Vice President, 6207 Bee Cave Road Cooperative Computing, Inc. (1978-present) Austin, Texas 78146 Thomas O. Hicks (50)............... Chairman of the Board and Chief Executive Officer, Hicks, Muse, Tate & Furst Incorporated (1989-present) Lawrence D. Stuart, Jr. (52)....... Managing Director and Principal, Hicks, Muse, Tate & Furst Incorporated (October 1995-present); Managing Partner -- Dallas Office, Weil, Gotshal & Manges LLP (1988-September 1995) John R. Muse (45).................. Managing Director and Principal, Hicks, Muse, Tate & Furst Incorporated (1989-present) Charles W. Tate (52)............... Managing Director and Principal, Hicks, Muse, Tate & Furst Incorporated (1991-present) Jack D. Furst (37)................. Managing Director and Principal, Hicks, Muse, Tate & Furst Incorporated (1989-present) Alan B. Menkes (37)................ Managing Director and Principal, Hicks, Muse, Tate & Furst Incorporated (April 1996-present); Vice President, Hicks, Muse, Tate & Furst Incorporated (1992-1996); The Carlyle Group (1988-1992) Michael J. Levitt (38)............. Managing Director and Principal, Hicks, Muse, Tate & Furst Incorporated (April 1996-present); Managing Director and Deputy Head of Investment Banking, Smith Barney Inc. (1993-1996); Morgan Stanley & Co. (1986-1993)
- --------------- * Glenn E. Staats and Preston W. Staats, Jr. are brothers. DIRECTORS OF THE COMPANY The Company's Certificate of Incorporation provides that there shall be three classes of directors of as nearly equal size as reasonably possible, each class being elected for a three-year term and only one class being elected each year. The total number of directors is fixed by the Board of Directors pursuant to authority granted it under the Company's By-Laws. The Board of Directors is presently comprised of five directors, one of whom is a salaried employee of the Company. The current terms of the Class I, Class II and Class III directors expire at the 1997, 1998 and 1999 Annual Meetings, respectively. Set forth below is certain information concerning the Company's directors, including their classes and terms, ages, present principal occupations and business experience during the past five years and the period during which they have served as directors. The business address of each director is 3055 Triad Drive, Livermore, California 94550.
PRINCIPAL OCCUPATION DIRECTOR NAME DURING LAST FIVE YEARS AGE SINCE ---- ---------------------- --- -------- CLASS I DIRECTOR WHOSE TERM EXPIRES AT THE 1997 ANNUAL MEETING OF STOCKHOLDERS: William W. Stevens... Chairman of the Board of the Company since 1972. Founder 65 1972 of the Company and President and Chief Executive Officer from inception until September 1985.
3 4
PRINCIPAL OCCUPATION DIRECTOR NAME DURING LAST FIVE YEARS AGE SINCE ---- ---------------------- --- -------- CLASS II DIRECTORS WHOSE TERMS EXPIRE AT THE 1998 ANNUAL MEETING OF STOCKHOLDERS: Henry M. Gay......... Director of the Company. Founder of the Company and Vice 72 1972 President, Marketing until 1980. Secretary from 1972 to September 1987. Also a director of Silicon Valley Bank. Richard C. Blum...... Director of the Company. President and Chairman of 61 1992 Richard C. Blum & Associates, L.P. Also a director of Northwest Airlines Corporation, URS Corporation and National Education Corporation. CLASS III DIRECTORS WHOSE TERMS EXPIRE AT THE 1999 ANNUAL MEETING OF STOCKHOLDERS: James R. Porter...... President and Chief Executive Officer of the Company 60 1985 since 1985. Also a director of Brock Control Systems and Silicon Valley Bank. George O. Harmon..... Director of the Company. President and Chief Executive 73 1986 Officer of Harmon Associates International, Inc. Also a director of Interscience Inc. and various privately held companies.
CERTAIN INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS During the fiscal year ended September 30, 1996, the Board of Directors held 5 meetings. During the 1996 fiscal year, each director attended at least 75% of the aggregate of the total number of meetings of the Board of Directors and the total number of meetings of committees of the Board of Directors on which he served which were held during the periods in which such director served. The Board of Directors has an Audit Committee and a Compensation Committee. Messrs. Gay, Harmon and Porter are the members of the Audit Committee, which held one meeting during the fiscal year ended September 30, 1996. The functions of the Audit Committee include recommending to the Board of Directors, subject to stockholder approval, the independent accountants, reviewing and approving the planned scope of the annual audit, proposed fee arrangements and the results of the annual audit, reviewing the adequacy of accounting and financial controls, reviewing the independence of the independent accountants, approving all assignments to be performed by the independent accountants and instructing the independent accountants, as deemed appropriate, to undertake special assignments. Messrs. Stevens, Gay and Harmon are the members of the Compensation Committee, which held one meeting during the fiscal year ended September 30, 1996. The Compensation Committee reviews and recommends salaries for corporate officers and key employees. In addition, the Compensation Committee administers the Company's Amended and Restated 1982 Stock Option Plan, although the Board retains the authority to grant stock options pursuant thereto, and administers the 1990 Employee Stock Purchase Plan and the Amended and Restated Outside Directors' Stock Option Plan. For additional information concerning the Compensation Committee, see "COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION." COMPENSATION OF DIRECTORS Directors who are not employees of the Company receive reimbursement of expenses and an annual retainer fee of $10,000, plus $1,000 for each meeting of the Board of Directors and $500 for each separate meeting of committees of the Board of Directors which they attend, in compensation for their services as members of the Board of Directors of the Company. The Triad Systems Corporation Amended and Restated Outside Directors' Stock Option Plan (the "Directors Plan") provides for the granting of nonqualified stock options (that is, options which are not intended to satisfy the requirements of Section 422 of the Internal Revenue Code) to directors of the Company who are not employees of the Company. A total of 100,000 Shares were reserved for issuance under 4 5 the Directors Plan, of which none currently remain available for grant. Unless the Directors Plan is amended to increase the number of Shares reserved for issuance and to extend the period during which options can be granted under the Directors Plan, no additional options can be granted under the Directors Plan. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information concerning the executive officers of the Company:
NAME AGE POSITION ---- --- -------- James R. Porter.................... 60 President, Chief Executive Officer, and Director Shane Gorman....................... 53 Executive Vice President, Automotive Operations Dan F. Dent........................ 49 Vice President and General Manager, Customer Support Services Division Thomas A. King..................... 52 Vice President, Product Development and Manufacturing Stanley F. Marquis................. 53 Vice President, Finance, Chief Financial Officer, Corporate Secretary and Treasurer; President, Triad Systems Financial Corporation. M. Edward Molkenbuhr............... 49 Vice President and General Manager, Service Dealer Division Thomas J. O'Malley................. 61 Vice President, Administration Chad A. Schneller.................. 55 Vice President, Hardlines and Lumber Operations Bruce M. Blanco.................... 47 Corporate Controller and General Manager, Triad Systems Financial Corporation Patrick J. Bormann................. 40 General Manager, Automotive Distributor Systems
Mr. Porter joined the Company as President and Chief Executive Officer and was elected as a director of the Company in September 1985. Mr. Gorman joined the Company as a sales representative in 1972 and has held several progressive management positions, including General Manger, Automotive Division, General Manager, Dental Division and Vice President and General Manager, Automotive Division. He became Executive Vice President in September 1992. Mr. Dent joined the Company in January 1993 as Director of Field Operations and became General Manager, Customer Support Services Division in October 1994. He was promoted as Vice President and General Manager, Customer Support Services Division in October of 1995. Prior to joining Triad, he was Vice President, Customer Support Services at The Ultimate Corporation from July 1991 to December 1992. Mr. King joined the Company in April 1989 as Vice President, Product Development and became Vice President, Product Development and Manufacturing in October 1993. Mr. Marquis joined the Company in January 1980 as Director of Triad Systems Financial Corporation. In August 1983 he was elected President, Triad Systems Financial Corporation and in September 1987 he was elected Treasurer of the Company. In December 1994 he was promoted to Vice President, Finance, Chief Financial Officer and became Corporate Secretary. Mr. Molkenbuhr joined the Company in September 1993 as Vice President and General Manger of the Company's new Service Dealer Division. Prior to joining the Company, he served as President and Chief Executive Officer of Amicus Information Services from November 1992 to May 1993. From January 1983 to November 1992, he served in a number of key senior positions with ADP, Inc. where his most recent position was Senior Vice President of Data Services. Mr. O'Malley joined the Company in January 1981 as Director of Administration and was elected Vice President, Administration in August 1983. 5 6 Mr. Schneller joined the Company as Vice President and General Manager, Hardlines and Lumber Division in July 1994. Prior to joining the Company, he served as President and Chief Executive Officer of Harvest Software from January 1991 to December 1993. Mr. Blanco joined the Company in April 1984 as Financial Manager of Triad Systems Financial Corporation. In January 1985 he was promoted to Revenue Systems Manager. He has been the Controller since May 1988. In October 1996 he assumed the responsibilities of General Manager of Triad Systems Financial Corporation. Mr. Bormann joined the Company in September 1978 as a Marketing Applications Representative and has progressed through a series of sales, support, marketing and customer service assignments. In February 1991, he assumed complete responsibility for Warehouse Systems operations and was promoted to General Manager, Warehouse Systems in October 1995. In October 1996 he was promoted to General Manager, Automotive Distributor Systems. Officers serve at the discretion of the Board of Directors. There is no understanding between any of the Company's officers and any other person pursuant to which such officer is or was to be selected. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of October 31, 1996, with respect to the beneficial ownership of Shares by (i) all persons known by the Company to be the beneficial owners of more than 5% of the outstanding Shares, (ii) each director of the Company, (iii) the Chief Executive Officer and the four other most highly compensated executive officers of the Company as of September 30, 1996 whose total annual compensation for the year ended September 30, 1996 exceeded $100,000, and (iv) all executive officers and directors of the Company as a group.
AMOUNT AND NATURE OF NAME AND ADDRESS OF BENEFICIAL OWNERSHIP BENEFICIAL OWNER OF COMMON STOCK PERCENT OF CLASS(1) ------------------- -------------------- ------------------- Richard C. Blum....................................... 2,008,159(3) 10.9% 909 Montgomery Street, Suite 400 San Francisco, California 94133 Gabelli Funds, Inc. .................................. 1,850,800(4) 10.0% One Corporate Center Rye, New York 10580-1434 Pioneering Management Corporation..................... 1,237,950(5) 6.72% 60 State Street Boston, MA 02109 James R. Porter....................................... 958,200(6) 5.1% 3055 Triad Drive Livermore, CA 94550 William W. Stevens.................................... 430,340(7) 2.3% Henry M. Gay.......................................... 90,397(8) (2) George O. Harmon...................................... 40,001(9) (2) Shane Gorman.......................................... 235,288(10) 1.3% Chad A. Schneller..................................... 40,500(11) (2) Thomas A. King........................................ 246,000(12) 1.3% Stanley F. Marquis.................................... 151,294(13) (2) All Executive Officers and Directors as a Group....... 4,443,060(14) 22.9%
6 7 - --------------- (1) Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all Shares shown as beneficially owned by them, subject to community property laws, where applicable. (2) Less than 1%. (3) Includes 10,001 Shares subject to options vested and exercisable within 60 days of October 31, 1996. Of these shares, (a) The Common Fund for Nonprofit Organizations, 450 Post Road East, Westport, Connecticut 06881-0909, beneficially owns 1,111,111 Shares, representing 6% of the Common Stock; (b) BK Capital Partners IV, L.P. beneficially owns 275,936 Shares, representing 1.5% of the Common Stock; (c) BK Capital Partners III, Limited Partnership beneficially owns 500,000 Shares, representing 2.7% of the Common Stock; and (d) BK Capital Partners II, a California limited partnership ("BK II") beneficially owns 111,111 Shares, representing 0.6% of the Common Stock. By reason of advisory and other relationships with the foregoing persons, Richard C. Blum and Richard C. Blum & Associates, L.P. ("RCBA") may be deemed to be indirect beneficial owners of all such Shares and Richard C. Blum and RCBA each have sole power to dispose of all of such Shares. The address of RCBA is 909 Montgomery Street, San Francisco, California 94133, and the address of BK Capital Partners IV, L.P., BK Capital Partners III, Limited Partnership and BK II is c/o Richard C. Blum & Associates, L.P., 909 Montgomery Street, San Francisco, California 94133. Mr. Blum and each of the entities referenced in clauses (a) through (d) of the preceding sentence entered into a Stockholders Agreement, dated October 17, 1996, among Parent, Purchaser and certain selling stockholders (the "Stockholders Agreement"), pursuant to which such persons agreed, among other things, to tender all Shares beneficially owned by them in accordance with the terms of the Offer. (4) Includes 204,900 Shares, representing 1% of the Common Stock, held by Gabelli Performance Partnership, 117,000 Shares, representing 0.6% of the Common Stock, held by Gabelli Funds, Inc., 13,000 Shares, representing .07% of the Common Stock, held by Gabelli International Limited II, 656,300 Shares, representing 3.6% of the Common Stock, held by Gabelli Associates Fund, 20,000 Shares, representing 0.1% of the Common Stock, held by Gabelli Associates Limited and 839,600 Shares, representing 5% of the Common Stock, held by GAMCO Investors Inc., 79,000 Shares of which GAMCO Investors, Inc. has no power to vote. (5) Includes 390,000 Shares, representing 2% of the Common Stock, held by Pioneer Small Company Fund, and 847,950 Shares, representing 5% of the Common Stock, held by Pioneer Capital Growth Fund. The investment adviser of both funds is Pioneering Management Corporation. (6) Includes 349,736 Shares subject to options vested and exercisable within 60 days of October 31, 1996. Mr. Porter entered into the Stockholders Agreement, pursuant to which he agreed, among other things, to tender all Shares beneficially owned by him in accordance with the terms of the Offer. (7) Includes 423,690 Shares held as tenant-in-common with Virda J. Stevens, of which 6,650 Shares are held as custodian for Jean Stevens. Mr. Stevens entered into the Stockholders Agreement, pursuant to which he agreed, among other things, to tender all Shares beneficially owned by him in accordance with the terms of the Offer. (8) Includes 50,396 Shares held by Henry M. Gay and his wife, as trustees of a family trust, and 40,001 Shares subject to options vested and exercisable within 60 days of October 31, 1996. Mr. Gay entered into the Stockholders Agreement, pursuant to which he agreed, among other things, to tender all Shares beneficially owned by him in accordance with the terms of the Offer. (9) Includes 40,001 Shares subject to options vested and exercisable within 60 days of October 31, 1996. Mr. Harmon entered into the Stockholders Agreement, pursuant to which he agreed, among other things, to tender all Shares beneficially owned by him in accordance with the terms of the Offer. (10) Includes 78,500 Shares subject to options vested and exercisable within 60 days of October 31, 1996. (11) Includes 40,000 Shares subject to options vested and exercisable within 60 days of October 31, 1996. (12) Includes 200,000 Shares subject to options vested and exercisable within 60 days of October 31, 1996. (13) Includes 99,869 Shares subject to options vested and exercisable within 60 days of October 31, 1996. 7 8 (14) Includes 1,012,608 Shares subject to options vested and exercisable within 60 days of October 31, 1996. Voting Agreement Between the Company and the RCBA Group. At the record date for any meeting of the Company's stockholders, if RCBA, its affiliates and accounts that it manages or advises (the "RCBA Group"), beneficially own voting stock of the Company in excess of certain specified limits, then the voting stock in excess of those limits is to be voted with respect to nominees to the Board of Directors and all other matters in accordance with the recommendations of the Board of Directors, except that the RCBA Group retains all voting authority with respect to certain business combinations resulting in a change of control, any recapitalization or similar transaction, and the sale of all or substantially all of the Company's assets. At the present time, the RCBA Group does not own voting stock in excess of the limits specified in such voting agreement. The voting agreement terminates upon the later of August 3, 1997 or such time as the RCBA Group no longer beneficially owns voting stock or equity securities in an amount that exceeds certain thresholds specified in the voting agreement. EXECUTIVE COMPENSATION AND OTHER MATTERS The following table sets forth information concerning the compensation of the Chief Executive Officer of the Company and the four other most highly compensated executive officers of the Company, as of September 30, 1996, whose total annual compensation for the fiscal year ended September 30, 1996 exceeded $100,000, for services in all capacities to the Company and its subsidiaries during each of the fiscal years ended September 30, 1994, 1995 and 1996: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ---------------------------------------------- BONUS ------------------------ ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY PERFORMANCE OTHER(1) COMPENSATION(2) - ---------------------------------- ---- -------- ----------- -------- --------------- James R. Porter 1996 $298,864 $ 70,969 -- $ 2,850 President and Chief Executive 1995 300,000 155,216 $100,074 2,984 Officer 1994 300,000 150,734 97,295 4,636 Chad A. Schneller 1996 180,000 173,690 -- 3,000 Vice President 1995 180,000 89,982 -- 3,750 Hardlines and Lumber 1994 32,500 48,750 -- 450 Operations Thomas A. King 1996 185,004 34,188 -- 3,000 Vice President, 1995 185,004 57,371 -- 3,584 Product Development 1994 185,004 60,644 -- 4,808 and Manufacturing Shane Gorman 1996 195,000 19,078 -- 1,995 Executive Vice President 1995 195,000 76,985 43,290 2,979 Automotive Operations 1994 195,000 97,978 23,498 5,128 Stanley F. Marquis 1996 170,004 34,357 -- 3,000 Vice President, Finance 1995 166,879 66,556 18,281 3,848 Chief Financial Officer 1994 155,004 65,666 2,925 4,065 Corporate Secretary and Treasurer; President, Triad Systems Financial Corporation
- --------------- (1) Represents bonus paid with the exercise of stock options granted before 1987. The bonuses paid were in an amount equal to 30% of the excess of $2.50 per share over the option exercise price. (2) Represents matching contributions by the Company to the named officers' 401(k) savings and incentive plans. 8 9 During the fiscal year ended September 30, 1996, there were no option grants to the Chief Executive Officer of the Company or to any of the four other most highly compensated executive officers. The following table provides information concerning exercises of options to purchase Shares in the fiscal year ended September 30, 1996, and unexercised options held as of September 30, 1996, by the persons named in the Summary Compensation Table: AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT 9/30/96 AT 9/30/96(2) ACQUIRED VALUE ---------------------------- ---------------------------- NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ----------- ----------- ------------- ----------- ------------- James R. Porter.......... 349,736 $ 826,270 Chad A. Schneller........ 40,000 60,000 25,000 $37,500 Thomas A. King........... 5,000 $ 5,938 200,000 341,875 Shane Gorman............. 78,500 168,250 Stanley F. Marquis....... 99,869 224,795
- --------------- (1) A bonus paid in connection with the exercise of certain stock options has been excluded from Values Realized and Year-End Values. See the column entitled "Bonus -- Other" in the Summary Compensation Table for information regarding such bonus paid in the year ended September 30, 1996. (2) Valuation based on the difference between the option exercise price and the closing sales price of the Common Stock on September 30, 1996, the last trading day of the fiscal year (which was $5.38 per share, as reported by the NASDAQ National Market System). TERMINATION AND CHANGE-OF-CONTROL ARRANGEMENTS In January, 1989, the Board of Directors determined that in the event of a change of control of the Company, employees, including executive officers, would be entitled to certain severance benefits in the event their employment were terminated. A formal severance policy, including the elements previously approved by the Board in 1989, was adopted for employees, including executive officers, in October, 1996. Under the Company's current policy, a change in control is defined as (i) a merger or consolidation in which the stockholders of the Company before the merger or consolidation do not retain at least a majority of the beneficial interest in the voting stock of the surviving corporation, (ii) the sale of all or substantially all of the Company's assets, and/or (iii) the direct or indirect sale or exchange by the stockholders of the Company of more than 50% of the stock of the Company to person(s) or entity(ies), other than the Company or any subsidiary or employee benefit plan of the Company. Should there occur such a change in control and an executive officer's employment be involuntarily terminated within 12 months following such change of control, the officer will become entitled to the following severance benefits: (1) all options then held by the officer will immediately accelerate and become fully exercisable; and (2) minimum severance pay in an aggregate amount equal to twelve times the executive officer's monthly salary in effect on the date of termination, plus the total bonus compensation paid for services rendered in the immediately preceding fiscal year, which amount shall be payable during the twelve month period following the date of termination, in twenty-four successive biweekly payments, net of federal and state tax withholdings; and (3) all employee benefits which the officer was entitled to receive immediately prior to the date of termination, for a period of twelve months following the date of termination. 9 10 Involuntary termination is defined to include, without limitation, a change in duties and functions with respect to an executive officer's position which results in the officer not maintaining an equivalent or greater role in the management of the Company as that performed by the officer prior to the change in control. Options granted under the Company's Amended and Restated 1982 Stock Option Plan, 1990 Employee Stock Purchase Plan and Amended and Restated Outside Directors' Stock Option Plan contain provisions pursuant to which unexercised options may become fully vested and fully exercisable immediately prior to a "change of control" as defined above, and terminate to the extent they are not exercised as of consummation of the change of control. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors sets the base salary of the Company's executive officers and approves bonus programs for executive officers. Option grants to executive officers are made by the Compensation Committee. The following is a summary of policies of the Committee that affected the compensation paid to executive officers, as reflected in the tables set forth elsewhere in this Information Statement. GENERAL COMPENSATION POLICY The Committee's overall policy is to offer the Company's executive officers competitive compensation opportunities based upon their personal performance, the financial performance of the Company and their contribution to that performance. One of the Committee's primary objectives is to have a substantial portion of each executive officer's compensation be contingent upon the Company's performance as well as the executive officer's individual performance. Each executive officer's compensation package is comprised of three elements: (i) base salary which reflects individual performance and salary levels in the industry, (ii) annual variable performance awards payable in cash and tied to the achievement of annual financial performance goals established by the Committee, and (iii) long-term stock-based incentive awards designed to strengthen the mutuality of interests between the executive officers and the Company's stockholders. Generally, as an executive officer's level of responsibility increases, a greater portion of compensation will be dependent upon the Company's financial performance and stock price appreciation. The Company has considered the potential impact of Section 162(m) ("Section 162(m)") of the Internal Revenue Code of 1986, as amended, adopted under the federal Revenue Reconciliation Act of 1993. Section 162(m) disallows a tax deduction by any publicly-held corporation for individual remuneration exceeding $1 million in any taxable year for any of the executive officers named in the Summary Compensation Table, unless such excess compensation is performance-based. Since the targeted cash compensation of each of the executive officers identified in the Summary Compensation Table is well below the $1 million threshold and the Company believes that any options granted under the Company's Amended and Restated 1982 Stock Option Plan and 1990 Employee Stock Purchase Plan will be excluded from the executive officer's remuneration for purposes of Section 162(m), the Committee believes that Section 162(m) will not reduce the tax deductions available to the Company. The Company's policy is to qualify to the extent reasonable its executive officers' compensation for deductibility under applicable tax laws. FACTORS The primary factors taken into account in establishing each executive officer's compensation package for the 1996 fiscal year are summarized below. The relative weight given to each factor varied with each individual in the sole discretion of the Committee. The Committee, in its discretion, may apply entirely different factors to each individual's compensation, such as varying the attainment criteria based on expected performance of a growth business versus a mature business. 10 11 BASE SALARY The base salary for each officer is set on the basis of personal performance, the salary levels in effect for similarly-situated executives at high technology companies in the Company's geographic area with whom the Company competes to hire and retain executives (with the respective executive officer's salaries generally set to correspond with the executive's experience and performance level) and internal comparability considerations. As a general matter, year-to-year adjustments to each executive officer's base salary are based upon personal performance for the year, changes in the general level of base salaries of persons in positions comparable to that of the executive officer within the industry and prior salary adjustments. The Company's fiscal 1995 financial performance was also a factor in establishing base salary increases for fiscal 1996. After taking these factors into account, base compensation was held at 1995 base salary levels for all but two executive officers. In aggregate the base salaries for executive officers increased 0.1% for fiscal 1996. ANNUAL INCENTIVE COMPENSATION In setting annual bonus compensation, the Committee considered the historical, aggregate executive compensation for each executive officer, the aggregate compensation paid to similarly-situated executives at high technology companies in the Company's geographic area with whom the Company competes to hire and retain executives and the Company's fiscal 1995 financial performance. Annual bonuses are earned by each executive officer on the basis of the Company's achievement of corporate performance targets established by the Committee at the start of the fiscal year. The individual bonus targets for fiscal 1996 were based on percentages of base salary tied to attainment of designated achievement targets. The Committee-approved achievement targets were based on revenue and operating contributions at the corporate, division and segment levels, varying by executive officer in light of the differing positions and responsibilities of each executive officer. LONG-TERM STOCK-BASED INCENTIVE COMPENSATION Stock option grants are reviewed annually by the Committee. Grants in a particular year are designed to align the interests of the executive officer with those of the stockholders and provide each individual with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. Each grant generally allows the executive officer to acquire shares of the Company's common stock at a fixed price per share (the market price on the grant date) over a ten year period, thus providing a return to the executive officer only if the market price of the shares appreciates over the option term. Options granted to executive officers generally vest at the rate of 20% per year and become fully vested after five years. The size of the option grant to each executive officer, including the Chief Executive Officer, is set at a level which is intended to create a meaningful opportunity for stock ownership based upon the individual's current position with the Company, the size of comparable grants made to individuals in similar positions in the industry, the individual's personal performance in recent periods and the number of options held by the individual at the time of grant. The relative weight given to these factors varies with each individual in the sole discretion of the Committee. STOCK OWNERSHIP BY MANAGEMENT The Committee believes stock ownership further aligns executive officers' interests with those of the Company's shareholders. Consistent with this philosophy, the Company previously established a policy that executive officers of the Company are to own stock equivalent to the following compensation standards within a three-year period, measured from October 1, 1993: President -- stock ownership equivalent to two times 1993 total compensation (salary plus cash bonus); Executive Vice President and Vice President -- stock ownership equivalent to the respective 1993 total compensation; and Other Officers -- stock ownership equivalent to the respective 1993 base salary. Hires subsequent to October 31, 1993 at the officer level must meet the respective stock ownership level within five years from the date of hire, based on the first full fiscal year's compensation after hire or promotion. Six of the current executive officers are required to meet the stock ownership target by October 1, 1997. As of October 1, 1996, all six had achieved the target. 11 12 CEO COMPENSATION In setting the compensation payable to the Company's Chief Executive Officer, James R. Porter, the Committee sought to be competitive with high technology companies in the Company's geographic area, while at the same time assuring that a significant percentage of such compensation was tied to Company's financial performance and stock price appreciation. The Committee established Mr. Porter's base salary in the same manner and applying the same criteria that it used generally to establish the base salaries of the other executive officers. Accordingly, in setting Mr. Porter's base salary, the Committee considered his personal performance for the year, changes in the general level of base salaries of CEOs at high technology companies in the Company's geographic area, prior salary adjustments and corporate performance factors. The remaining component of Mr. Porter's 1996 fiscal year compensation was dependent upon achieving certain corporate performance targets as set forth in his Committee-approved bonus plan. The amount of any cash bonus to be paid to him for the 1996 fiscal year was dependent upon the Company's attainment of performance factors tied to its levels of revenue and operating income. Submitted by the Compensation Committee of the Company's Board of Directors: William W. Stevens Henry M. Gay George O. Harmon 12 13 COMPARISON OF STOCKHOLDER RETURN Set forth below are line graphs comparing the annual percentage change in the cumulative total return on the Company's Common Stock with the cumulative total return of the Standard & Poor's 500 Index and a composite index comprised of the Standard & Poor's (S&P) Software and Service Index and the S&P Computer Index (i) for the period commencing on September 30, 1991 and ending on September 30, 1996, and (ii) for the period commencing on September 30, 1985 and ending on September 30, 1996. STOCKHOLDER RETURNS 1991-1996(2)
MEASUREMENT PERIOD TRIAD SYSTEMS COMBINED IN- (FISCAL YEAR COVERED) CORPORATION S&P 500 INDEX DEX(1) 1991 100 100 100 1992 167.86 111.05 103.11 1993 150.00 125.49 109.40 1994 132.14 130.11 137.56 1995 164.29 168.82 199.61 1996 153.57 203.14 275.55
13 14 In the following graph, the Company has presented comparative stockholder return information over the period from September 30, 1985, the year James R. Porter joined the Company as Chief Executive Officer, through September 30, 1996. During 1989, the Company faced an unsuccessful hostile takeover attempt and effected a stockholder-approved Plan of Recapitalization paying $15.00 per share in cash to all stockholders. STOCKHOLDER RETURNS 1985-1996(2)
MEASUREMENT PERIOD TRIAD SYSTEMS COMBINED IN- (FISCAL YEAR COVERED) CORPORATION S&P 500 INDEX DEX(1) 1985 100 100 100 1986 112.70 131.60 119.97 1987 169.84 188.67 173.34 1988 190.48 165.22 125.34 1989 273.20 219.75 142.87 1990 115.03 199.44 105.99 1991 201.31 261.60 140.66 1992 339.91 290.50 150.55 1993 301.96 328.28 168.96 1994 266.01 340.38 209.28 1995 330.71 441.62 304.05 1996 309.15 532.04 425.21
(1) The Combined Index was calculated by the Company by weighting equally the S&P Computer Index and the S&P Software and Service Index, as prepared by Standard & Poor's Compustat Services, Inc. (2) Assumes that $100.00 was invested on September 30, 1991 and September 30, 1985, respectively, at the closing sales price of Shares and in each index, and that all dividends were reinvested. Returns are measured through the last trading day of each of the Company's fiscal years. No cash dividends have been declared on the Company's Common Stock, except a cash payment of $15.00 per share that was paid on the Company's Common Stock in connection with the Company's recapitalization in August 1989 and is assumed to have been reinvested. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns. Stockholder returns presented in the performance graphs are generally not necessarily indicative of future results. The higher the baseline stock price, the less volatile the graphic presentation of fluctuations; therefore, the Company's stock value when compared to S&P 500 and the Combined Index, can fluctuate more broadly and changes can appear exaggerated in a graphic presentation. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION William W. Stevens, Henry M. Gay and George O. Harmon served as members of the Board of Directors' Compensation Committee during fiscal 1996. Mr. Stevens was President and Chief Executive Officer of the Company from inception until September 1985. Mr. Gay was Vice President, Marketing from inception until 1980 and Secretary from 1972 to September 1987. 14 15 COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended ("Section 16(a)"), requires the Company's executive officers, directors and persons who beneficially own more than 10% of a registered class of the Company's equity securities to file with the Commission initial reports of beneficial ownership on Form 3 and reports of changes in beneficial ownership on Forms 4 and 5 with respect to the Company's Common Stock. Such officers, directors and greater-than-10% beneficial owners are also required by Commission rules to furnish the Company with copies of all Section 16(a) reports they file with the Commission. Based solely on a review of copies of such forms received by the Company, and written representations from certain reporting persons that no other reports were required for such persons, the Company believes that all Section 16(a) filing requirements applicable to its officers, directors and greater-than-10% beneficial owners were complied with during the fiscal year ended September 30, 1996. COMMENCEMENT OF SERVICE None of Parent's Board designees will begin serving as directors of the Company until at least ten days after the date this Information Statement is filed with the Commission and mailed to the Company's stockholders of record. 15 16 [TRIAD LETTERHEAD] November 12, 1996 Dear Triad Stockholders: Enclosed is a copy of the Company's Information Statement pursuant to Section 14(f) of the Securities Exchange Act of 1934 and Rule 14f-1 thereunder (the "Information Statement"). Pursuant to the Agreement and Plan of Merger (the "Merger Agreement") dated as of October 17, 1996 between the Company, Cooperative Computing, Inc. ("CCI") and CCI Acquisition Corp., an affiliate of CCI ("CCI Acquisition"), CCI Acquisition commenced a cash tender offer (the "Offer") to purchase all outstanding shares of the Company's Common Stock at $9.25 per share on October 23, 1996. The Offer is scheduled to expire on November 20, 1996. Pursuant to the Merger Agreement, CCI has the right to appoint a majority of the Company's Board of Directors. The Company expects that CCI will exercise this right shortly after the consummation of the Offer. This Information Statement is required to be sent to all stockholders in advance of a change in the majority of the Board of Directors of the Company without a meeting of the Company's stockholders. NO VOTE OR OTHER ACTION OF THE COMPANY'S STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS INFORMATION STATEMENT. No proxies are being solicited and you are requested not to send the Company a proxy. However, you are urged to read this Information Statement carefully. On behalf of the Board of Directors and officers of the Company, thank you for your continued interest in the affairs of the Company. Very best wishes, /s/ JAMES R. PORTER - ------------------- James R. Porter President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----