##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission
File Number 333-49389
 Activant Solutions Inc.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    94-2160013
(I.R.S. Employer
Identification No.)804 Las Cimas Parkway
Austin, Texas
(Address of principal executive offices)
    
    78746
(Zip Code)
 (512) 328-2300
 þ o
  o o þ
 o þ
  Class
    
    Outstanding at February 10, 2006Common Stock
    
    1,000 shares




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##### 



PAGEFORWARD-LOOKING STATEMENTS

    
    3PART I  FINANCIAL INFORMATION
    
    
    4ITEM 1.  FINANCIAL STATEMENTS (Unaudited)
    
    
    4Consolidated Balance Sheets as of September 30, 2005 and December 31, 2005
    
    
    4Consolidated Statements of Operations and Comprehensive Income for the
three months ended December 31, 2004 and December 31, 2005
    
    
    5Consolidated Statements of Cash Flows for the three months ended December
31, 2004 and December 31, 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
    
    
    18ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    26ITEM 4.  CONTROLS AND PROCEDURES
    
    
    26PART II  OTHER INFORMATION
    
    
    27ITEM 1.  LEGAL PROCEEDINGS
    
    
    27ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    27ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
    
    
    27ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    27ITEM 5.  OTHER INFORMATION
    
    
    27ITEM 6.  EXHIBITS
    
    
    27SIGNATURE
    
    
    28Indemnity Agreement - Joseph W. NicholsonIndemnity Agreement - Kathleen J. CunninghamCertification Pursuant to Section 302 - A. Laurence JonesCertification Pursuant to Section 302 - Greg PetersenCertification Pursuant to Section 906 - A. Laurence JonesCertification Pursuant to Section 906 - Greg Petersen
  2




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
 INFORMATION SET FORTH IN THIS QUARTERLY REPORT ON FORM 10-Q REGARDING EXPECTED OR POSSIBLE
FUTURE EVENTS, INCLUDING STATEMENTS OF THE PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE GROWTH,
OPERATIONS, PRODUCTS AND SERVICES AND STATEMENTS RELATING TO FUTURE ECONOMIC PERFORMANCE, IS
FORWARD-LOOKING AND SUBJECT TO RISKS AND UNCERTAINTIES. FOR THOSE STATEMENTS, WE CLAIM THE
PROTECTION OF THE SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS PROVIDED FOR BY SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON ESTIMATES
AND ASSUMPTIONS MADE BY OUR MANAGEMENT, WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY
UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO
ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED, AND IT IS LIKELY
THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE THE FOLLOWING:
 
    
    LOSS OR OBSOLESCENCE OF THE PROPRIETARY TECHNOLOGY ON WHICH WE DEPEND;
    
    CHANGES IN THE MARKETS IN WHICH WE COMPETE INCLUDING THE MANNER IN WHICH AUTO PARTS OR
HARDWARE, LUMBER AND BUILDING MATERIALS ARE SOURCED, SOLD, DISTRIBUTED OR INVENTORIED, AND
CHANGES IN ECONOMIC CONDITIONS IN THESE MARKETS GENERALLY;
    
    CLAIMS BY THIRD PARTIES THAT WE ARE INFRINGING ON THEIR INTELLECTUAL PROPERTY RIGHTS;
    
    LOSS OF OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL;
    
    INCREASED COMPETITION OR FAILURE TO EFFECTIVELY COMPETE;
    
    LOSS OF KEY CUSTOMERS OR INCREASE IN ATTRITION RATES WITH RESPECT TO REVENUE WHICH
MANAGEMENT VIEWS AS RECURRING;
    
    MANUFACTURING DEFECTS OR ERRORS IN OUR SOFTWARE OR DATABASES;
    
    PROLONGED UNFAVORABLE GENERAL ECONOMIC AND MARKET CONDITIONS;
    
    FAILURE TO RECOUP THE COST OF INVESTMENT IN NEW BUSINESSES INTO WHICH WE MAY EXPAND;
    
    INCREASES IN OUR COST OF BORROWINGS OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL, AND
    
    OUR INABILITY TO INTEGRATE PROPHET 21 AND SPEEDWARE CORPORATION, INC. INTO OUR
OPERATIONS.
 MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF US AND OUR MANAGEMENT. IN ADDITION, OTHER
FACTORS THAT COULD AFFECT OUR FUTURE RESULTS AND COULD CAUSE THOSE RESULTS TO DIFFER MATERIALLY
FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS THAT ARE DISCUSSED AT GREATER LENGTH UNDER
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND
ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND UNDER RISK FACTORS IN OUR ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2005. THESE RISKS, UNCERTAINTIES AND OTHER FACTORS
SHOULD NOT BE CONSTRUED AS EXHAUSTIVE, AND WE DO NOT UNDERTAKE, AND SPECIFICALLY DISCLAIM ANY
OBLIGATION TO UPDATE, ANY FORWARD-LOOKING STATEMENTS TO REFLECT OCCURRENCES OR UNANTICIPATED EVENTS
OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
 3




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\

September 30,
    
    
    December 31,2005
    
    
    2005(Unaudited)ASSETS:Current assets:Cash and cash equivalents
    
    $
    10,952
    
    
    $
    11,735Trade accounts receivable, net of allowance for doubtful accounts
of $5,208 and $5,298 at September 30, 2005 and December 31, 2005,
respectively
    
    
    54,913
    
    
    
    61,749Inventories, net
    
    
    4,103
    
    
    
    4,649Deferred income taxes
    
    
    4,832
    
    
    
    5,106Prepaid income taxes
    
    
    361
    
    
    
    820Prepaid expenses and other current assets
    
    
    5,983
    
    
    
    5,749Total current assets
    
    
    81,144
    
    
    
    89,808Property and equipment, net
    
    
    8,627
    
    
    
    8,482Capitalized computer software costs, net
    
    
    3,865
    
    
    
    3,886Databases, net
    
    
    4,975
    
    
    
    4,886Goodwill
    
    
    343,963
    
    
    
    344,006Intangible assets, net
    
    
    114,804
    
    
    
    111,079Deferred financing costs
    
    
    12,756
    
    
    
    13,659Other assets
    
    
    4,490
    
    
    
    3,900Total assets
    
    $
    5    74,624
    
    
    $
    5    79,706LIABILITIES AND STOCKHOLDERS DEFICIT:Current liabilities:Accounts payable
    
    $
    16,076
    
    
    $
    16,291Payroll related accruals
    
    
    16,261
    
    
    
    16,721Deferred revenue
    
    
    34,179
    
    
    
    32,642Short-term debt
    
    
    149
    
    
    
    6,085Accrued expenses and other current liabilities
    
    
    17,775
    
    
    
    12,386Total current liabilities
    
    
    84,440
    
    
    
    84,125Long-term debt, net of discount
    
    
    415,328
    
    
    
    420,392Deferred tax liabilities
    
    
    35,183
    
    
    
    35,183Other liabilities
    
    
    6,805
    
    
    
    6,342Total liabilities
    
    
    541,756
    
    
    
    546,042Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common Stock:Par value $0.01, authorized, issued and outstanding, 1,000
shares at September 30, 2005 and December 31, 2005
    
    
    
    
    
    
    Additional paid-in capital
    
    
    121,554
    
    
    
    118,210Retained deficit
    
    
    (89,136
    )
    
    
    (84,838
    )Other accumulated comprehensive income:Cumulative translation adjustment
    
    
    450
    
    
    
    292Total stockholders deficit
    
    
    32,868
    
    
    
    33,664Total liabilities and stockholders deficit
    
    $
    574,624
    
    
    $
    579,706
  4




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##### Table of Contents



Three Months EndedDecember 31,2004
    
    
    2005Revenues:Systems
    
    $
    25,175
    
    
    $
    40,923Services
    
    
    35,764
    
    
    
    57,208Total revenues
    
    
    60,939
    
    
    
    98,131Cost of revenues:Systems
    
    
    14,800
    
    
    
    20,880Services
    
    
    13,972
    
    
    
    21,300Total cost of revenues
    
    
    28,772
    
    
    
    42,180Gross profit
    
    
    32,167
    
    
    
    55,951Operating expenses:Sales and marketing
    
    
    8,510
    
    
    
    12,887Product development
    
    
    4,070
    
    
    
    9,542General and administrative
    
    
    7,189
    
    
    
    10,470Amortization of purchased intangible assets
    
    
    197
    
    
    
    3,725Total operating expenses
    
    
    19,966
    
    
    
    36,624Operating income
    
    
    12,201
    
    
    
    19,327Interest expense
    
    
    (4,421
    )
    
    
    (11,785
    )Write-off of prior debt issuance costs
    
    
    
    
    
    
    (1,206
    )Other income, net
    
    
    448
    
    
    
    614Income before income taxes
    
    
    8,228
    
    
    
    6,950Income tax expense
    
    
    3,184
    
    
    
    2,652Net income
    
    $
    5,044
    
    
    $
    4,298Comprehensive income:Net income
    
    $
    5,044
    
    
    $
    4,298Foreign currency translation adjustment
    
    
    456
    
    
    
    (158
    )Comprehensive income
    
    $
    5,500
    
    
    $
    4,140
  5




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##### Table of Contents



Three Months EndedDecember 31,2004
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    5,044
    
    
    $
    4,298Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,314
    
    
    
    1,506Amortization of intangible assets
    
    
    2,071
    
    
    
    5,261Amortization of deferred issuance costs
    
    
    203
    
    
    
    596Write-off of prior debt issuance costs
    
    
    
    
    
    
    1,206Provision for doubtful accounts
    
    
    682
    
    
    
    599Other, net
    
    
    450
    
    
    
    (32
    )Changes in assets and liabilities:Trade accounts receivable
    
    
    (2,924
    )
    
    
    (8,335
    )Inventories
    
    
    (650
    )
    
    
    (546
    )Prepaid expenses and other assets
    
    
    3,416
    
    
    
    (225
    )Accounts payable
    
    
    (602
    )
    
    
    215Deferred revenue
    
    
    1,032
    
    
    
    (1,537
    )Accrued expenses and other liabilities
    
    
    (7,337
    )
    
    
    (5,392
    )Net cash provided by (used in) operating activities
    
    
    2,699
    
    
    
    (2,386
    )INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (510
    )
    
    
    (1,412
    )Capitalized computer software costs and databases
    
    
    (1,205
    )
    
    
    (1,468
    )Purchase price adjustments
    
    
    
    
    
    
    508Proceeds from disposition of equity interest
    
    
    
    
    
    
    679Net cash used in investing activities
    
    
    (1,715
    )
    
    
    (1,693
    )FINANCING ACTIVITIESProceeds from long-term debt
    
    
    
    
    
    
    145,000Repayment of senior unsecured bridge loan
    
    
    
    
    
    
    (140,000
    )Proceeds from credit facility
    
    
    
    
    
    
    6,000Payment on long-term debt
    
    
    (74
    )
    
    
    (64
    )Dividends to parent
    
    
    
    
    
    
    (3,369
    )Debt issuance costs
    
    
    
    
    
    
    (2,705
    )Net cash provided by (used in) financing activities
    
    
    (74
    )
    
    
    4,862Net change in cash and cash equivalents
    
    
    910
    
    
    
    783Cash and cash equivalents, beginning of period
    
    
    32,065
    
    
    
    10,952Cash and cash equivalents, end of period
    
    $
    32,975
    
    
    $
    11,735Supplemental disclosures of cash flow informationCash paid during the period for:Interest
    
    $
    8,244
    
    
    $
    17,350Income taxes
    
    $
    
    
    
    $
    768
  6




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##### Table of Contents



Speedware Corporation Inc.:
 Prophet 21, Inc.:
 The Systems House:
 Pro forma results (unaudited)
  7




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##### Table of Contents



Three Months Ended December 31,2004
    
    
    2005(in thousands)
    
    (pro forma)
    
    
    (actual)Total revenues
    
    $
    93,352
    
    
    $
    98,131Total cost of revenues
    
    
    39,545
    
    
    
    42,180Gross profit
    
    
    53,807
    
    
    
    55,951Total operating expenses
    
    
    33,077
    
    
    
    32,899Amortization of purchased intangibles
    
    
    3,726
    
    
    
    3,725Operating income
    
    
    17,004
    
    
    
    19,327Interest expense
    
    
    (11,343
    )
    
    
    (11,785
    )Other income (expense), net
    
    
    436
    
    
    
    (592
    )Income before taxes
    
    
    6,097
    
    
    
    6,950Income tax expense
    
    
    2,629
    
    
    
    2,652Net income
    
    $
    3,468
    
    
    $
    4,298
   (in thousands)
    
    September 30, 2005
    
    
    December 31, 200510 1/2 % senior notes due 2011, net of discount
    
    $
    155,328
    
    
    $
    155,392Floating rate senior notes due 2010
    
    
    120,000
    
    
    
    265,000Senior unsecured bridge loan
    
    
    140,000
    
    
    
    Revolving credit facility
    
    
    
    
    
    
    6,000Other
    
    
    149
    
    
    
    85Total debt
    
    
    415,477
    
    
    
    426,477Current portion
    
    
    (149
    )
    
    
    (6,085
    )Long-term debt
    
    $
    415,328
    
    
    $
    420,392
   8




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##### Table of Contents



Risk-free interest rate
    
    4.4
%Weighted-average expected life of the options
    
    6.52
yearsDividend rate
    
    0
%Assumed volatility
    
    50
%Turnover
    
    6.52
%
 9




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##### Table of Contents




    
    Systems, which is comprised primarily of proprietary software applications, third-party
hardware and peripherals and implementation and training;
    
    Product Support, which is comprised of daily operating support through our advice line,
software updates, preventive and remedial on-site maintenance and depot repair services;
    
    Content and Data Services, which is comprised primarily of databases, exchanges and
other information services, including our electronic catalog in the automotive parts
aftermarket, and
    
    Other Services, which is comprised primarily of business products, such as forms and
other paper products.
   Three months ended December 31, 2004Product
    
    
    Content &
    
    
    Other(in thousands)
    
    Systems
    
    
    Support
    
    
    Data Services
    
    
    Services
    
    
    TotalRevenues
    
    $
    25,175
    
    
    $
    19,908
    
    
    $
    14,445
    
    
    $
    1,411
    
    
    $
    60,939Cost of Revenues
    
    
    14,800
    
    
    
    9,149
    
    
    
    3,896
    
    
    
    927
    
    
    
    28,772Gross Profit
    
    $
    10,375
    
    
    $
    10,759
    
    
    $
    10,549
    
    
    $
    484
    
    
    $
    32,167Gross Profit as a Percentage of Revenues
    
    
    41.2
    %
    
    
    54.0
    %
    
    
    73.0
    %
    
    
    34.3
    %
    
    
    52.8
    %
 Three months ended December 31, 2005Product
    
    
    Content &
    
    
    OtherSystems
    
    
    Support
    
    
    Data Services
    
    
    Services
    
    
    TotalRevenues
    
    $
    40,923
    
    
    $
    39,334
    
    
    $
    15,976
    
    
    $
    1,898
    
    
    $
    98,131Cost of Revenues
    
    
    20,880
    
    
    
    15,679
    
    
    
    4,314
    
    
    
    1,307
    
    
    
    42,180Gross Profit
    
    $
    20,043
    
    
    $
    23,655
    
    
    $
    11,662
    
    
    $
    591
    
    
    $
    55,951Gross Profit as a Percentage of Revenues
    
    
    49.0
    %
    
    
    60.1
    %
    
    
    73.0
    %
    
    
    31.1
    %
    
    
    57.0
    %
  
    
    The hardlines and lumber vertical market consists of independent
hardware retailers, home improvement centers, paint, glass and
wallpaper stores, farm supply stores, retail nurseries and gardens,
and independent lumber and building material yards.
 
    
    The wholesale distribution vertical market includes distributors of a
range of products including electrical supply, medical supply,
plumbing, heating and air conditioning, brick, stone and related
materials, roofing, siding, insulation, industrial machinery and
equipment, industrial supplies and service establishment equipment.
 10




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##### Table of Contents




    
    Auto consists of businesses engaged in the manufacture, distribution,
sale and installation of new and remanufactured parts used in the
maintenance and repair of automobiles and light trucks.
 
    
    The productivity tools business, which primarily consists of software migration and
application development tools, was acquired as a part of our acquisition of Speedware.
  Three months ended December 31,(in thousands)
    
    2004
    
    
    2005Systems Revenues:Hardlines and Lumber
    
    $
    20,883
    
    
    $
    22,824Auto
    
    
    3,420
    
    
    
    4,225Wholesale Distribution
    
    
    872
    
    
    
    12,406Productivity Tools
    
    
    
    
    
    
    1,468Total Systems Revenues
    
    $
    25,175
    
    
    $
    40,923Product Support Revenues:Hardlines and Lumber
    
    $
    10,378
    
    
    $
    15,661Auto
    
    
    9,099
    
    
    
    7,860Wholesale Distribution
    
    
    431
    
    
    
    13,931Productivity Tools
    
    
    
    
    
    
    1,882Total Product Support Revenues
    
    $
    19,908
    
    
    $
    39,334Content and Data Services Revenues:Hardlines and Lumber
    
    $
    1,251
    
    
    $
    1,459Auto
    
    
    12,680
    
    
    
    12,416Wholesale Distribution
    
    
    514
    
    
    
    2,101Productivity Tools
    
    
    
    
    
    
    Total Content and Data Services Revenues
    
    $
    14,445
    
    
    $
    15,976Other Revenues:Hardlines and Lumber
    
    $
    1,330
    
    
    $
    1,729Auto
    
    
    
    
    
    
    129Wholesale Distribution
    
    
    81
    
    
    
    40Productivity Tools
    
    
    
    
    
    
    Total Other Revenues
    
    $
    1,411
    
    
    $
    1,898Total Revenues:Hardlines and Lumber
    
    $
    33,842
    
    
    $
    41,673Auto
    
    
    25,199
    
    
    
    24,630Wholesale Distribution
    
    
    1,898
    
    
    
    28,478Productivity Tools
    
    
    
    
    
    
    3,350Total Revenues
    
    $
    60,939
    
    
    $
    98,131
 11




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Geographic segments
  (in thousands)
    
    Three months ended December 31,2004
    
    
    2005Revenues:Americas
    
    $
    59,202
    
    
    $
    96,448Europe
    
    
    1,737
    
    
    
    1,683Total revenues
    
    $
    60,939
    
    
    $
    98,131
 September 30, 2005
    
    
    December 31, 2005Assets:Americas
    
    $
    572,104
    
    
    $
    577,208Europe
    
    
    2,520
    
    
    
    2,498Total assets
    
    $
    574,624
    
    
    $
    579,706
    12




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Consolidating Balance Sheet as of December 31, 2005
 (in thousands)
    
    GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-GuarantorOperations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    6,510
    
    
    $
    3,932
    
    
    $
    1,293
    
    
    $
    
    
    
    $
    11,735Trade accounts receivable, net of
allowance for doubtful accounts
    
    
    46,056
    
    
    
    11,520
    
    
    
    4,173
    
    
    
    
    
    
    
    61,749Inventories, net
    
    
    3,868
    
    
    
    680
    
    
    
    101
    
    
    
    
    
    
    
    4,649Prepaid expenses and other current
assets
    
    
    5,750
    
    
    
    4,246
    
    
    
    1,679
    
    
    
    
    
    
    
    11,675Total current assets
    
    
    62,184
    
    
    
    20,378
    
    
    
    7,246
    
    
    
    
    
    
    
    89,808Property and equipment, net
    
    
    5,404
    
    
    
    2,460
    
    
    
    618
    
    
    
    
    
    
    
    8,482Capitalized computer software costs
and databases, net
    
    
    8,772
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,772Goodwill
    
    
    344,006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344,006Intangible assets, net
    
    
    106,700
    
    
    
    
    
    
    
    4,379
    
    
    
    
    
    
    
    111,079Investments in subsidiaries
    
    
    34,550
    
    
    
    6,313
    
    
    
    2,792
    
    
    
    (43,655
    )
    
    
    Deferred financing costs
    
    
    13,659
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,659Other assets
    
    
    3,726
    
    
    
    147
    
    
    
    27
    
    
    
    
    
    
    
    3,900Total assets
    
    $
    579,001
    
    
    $
    29,298
    
    
    $
    15,062
    
    
    $
    (43,655
    )
    
    $
    579,706Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    11,056
    
    
    $
    4,384
    
    
    $
    851
    
    
    $
    
    
    
    $
    16,291Intercompany payables (receivables)
    
    
    82,105
    
    
    
    (83,602
    )
    
    
    1,497
    
    
    
    
    
    
    
    Payroll related accruals
    
    
    11,611
    
    
    
    4,235
    
    
    
    875
    
    
    
    
    
    
    
    16,721Deferred revenue
    
    
    24,493
    
    
    
    4,150
    
    
    
    3,999
    
    
    
    
    
    
    
    32,642Short-term debt
    
    
    6,000
    
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    6,085Accrued expenses and other current
liabilities
    
    
    5,869
    
    
    
    5,364
    
    
    
    1,153
    
    
    
    
    
    
    
    12,386Total current liabilities
    
    
    141,134
    
    
    
    (65,384
    )
    
    
    8,375
    
    
    
    
    
    
    
    84,125Long-term debt, net of discount
    
    
    420,392
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    420,392Deferred tax liabilities and other
liabilities
    
    
    33,739
    
    
    
    8,219
    
    
    
    (433
    )
    
    
    
    
    
    
    41,525Total liabilities
    
    
    595,265
    
    
    
    (57,165
    )
    
    
    7,942
    
    
    
    
    
    
    
    546,042Total stockholders equity (deficit)
    
    
    (16,264
    )
    
    
    86,463
    
    
    
    7,120
    
    
    
    (43,655
    )
    
    
    33,664Total liabilities and stockholders
equity (deficit)
    
    $
    579,001
    
    
    $
    29,298
    
    
    $
    15,062
    
    
    $
    (43,655
    )
    
    $
    579,706
 13




---



##### Table of Contents



Consolidating Balance Sheet as of September 30, 2005
 (in thousands)
    
    GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-GuarantorOperations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    5,800
    
    
    $
    3,943
    
    
    $
    1,209
    
    
    $
    
    
    
    $
    10,952Trade accounts receivable, net of
allowance for doubtful accounts
    
    
    35,199
    
    
    
    15,321
    
    
    
    4,393
    
    
    
    
    
    
    
    54,913Inventories, net
    
    
    3,213
    
    
    
    820
    
    
    
    70
    
    
    
    
    
    
    
    4,103Prepaid expenses and other current assets
    
    
    5,504
    
    
    
    4,136
    
    
    
    1,536
    
    
    
    
    
    
    
    11,176Total current assets
    
    
    49,716
    
    
    
    24,220
    
    
    
    7,208
    
    
    
    
    
    
    
    81,144Property and equipment, net
    
    
    5,277
    
    
    
    2,702
    
    
    
    648
    
    
    
    
    
    
    
    8,627Capitalized computer software costs and
database, net
    
    
    8,840
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,840Goodwill
    
    
    343,963
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343,963Intangible assets, net
    
    
    110,218
    
    
    
    
    
    
    
    4,586
    
    
    
    
    
    
    
    114,804Investments in subsidiaries
    
    
    33,907
    
    
    
    6,807
    
    
    
    2,832
    
    
    
    (43,546
    )
    
    
    Deferred financing costs
    
    
    12,756
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,756Other assets
    
    
    4,322
    
    
    
    137
    
    
    
    31
    
    
    
    
    
    
    
    4,490Total assets
    
    $
    568,999
    
    
    $
    33,866
    
    
    $
    15,305
    
    
    $
    (43,546
    )
    
    $
    574,624Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    10,299
    
    
    $
    4,790
    
    
    $
    987
    
    
    $
    
    
    
    $
    16,076Intercompany payables (receivables)
    
    
    71,606
    
    
    
    (73,571
    )
    
    
    1,965
    
    
    
    
    
    
    
    Payroll related accruals
    
    
    11,222
    
    
    
    4,071
    
    
    
    968
    
    
    
    
    
    
    
    16,261Deferred revenue
    
    
    19,734
    
    
    
    10,552
    
    
    
    3,893
    
    
    
    
    
    
    
    34,179Short-term debt
    
    
    
    
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    149Accrued expenses and other current
liabilities
    
    
    11,296
    
    
    
    5,887
    
    
    
    592
    
    
    
    
    
    
    
    17,775Total current liabilities
    
    
    124,157
    
    
    
    (48,122
    )
    
    
    8,405
    
    
    
    
    
    
    
    84,440Long-term debt, net of discount
    
    
    415,328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    415,328Deferred tax liabilities and other
liabilities
    
    
    34,091
    
    
    
    8,329
    
    
    
    (432
    )
    
    
    
    
    
    
    41,988Total liabilities
    
    
    573,576
    
    
    
    (39,793
    )
    
    
    7,973
    
    
    
    
    
    
    
    541,756Total stockholders equity (deficit)
    
    
    (4,577
    )
    
    
    73,659
    
    
    
    7,332
    
    
    
    (43,546
    )
    
    
    32,868Total liabilities and stockholders equity
(deficit)
    
    $
    568,999
    
    
    $
    33,866
    
    
    $
    15,305
    
    
    $
    (43,546
    )
    
    $
    574,624
 14




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##### Table of Contents



Consolidating Statement of Operations for the Three Months Ended December 31, 2005
 (in thousands)
    
    GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-GuarantorOperations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Systems
    
    $
    26,028
    
    
    $
    14,378
    
    
    $
    517
    
    
    $
    
    
    
    $
    40,923Services
    
    
    33,583
    
    
    
    19,560
    
    
    
    4,065
    
    
    
    
    
    
    
    57,208Total revenues
    
    
    59,611
    
    
    
    33,938
    
    
    
    4,582
    
    
    
    
    
    
    
    98,131Cost of revenues:Systems
    
    
    15,447
    
    
    
    4,698
    
    
    
    735
    
    
    
    
    
    
    
    20,880Services
    
    
    13,586
    
    
    
    5,627
    
    
    
    2,087
    
    
    
    
    
    
    
    21,300Total cost of revenues
    
    
    29,033
    
    
    
    10,325
    
    
    
    2,822
    
    
    
    
    
    
    
    42,180Gross profit
    
    
    30,578
    
    
    
    23,613
    
    
    
    1,760
    
    
    
    
    
    
    
    55,951Operating expenses:Sales and marketing
    
    
    8,542
    
    
    
    3,636
    
    
    
    709
    
    
    
    
    
    
    
    12,887Product development
    
    
    4,733
    
    
    
    4,260
    
    
    
    549
    
    
    
    
    
    
    
    9,542General and administrative
    
    
    6,776
    
    
    
    2,592
    
    
    
    1,102
    
    
    
    
    
    
    
    10,470Amortization of purchased
intangible assets
    
    
    3,725
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,725Total operating expenses
    
    
    23,776
    
    
    
    10,488
    
    
    
    2,360
    
    
    
    
    
    
    
    36,624Operating income
    
    
    6,802
    
    
    
    13,125
    
    
    
    (600
    )
    
    
    
    
    
    
    19,327Interest expense
    
    
    (11,781
    )
    
    
    (5
    )
    
    
    1
    
    
    
    
    
    
    
    (11,785
    )Write-off of prior debt issuance costs
    
    
    (1,206
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,206
    )Other income, net
    
    
    157
    
    
    
    131
    
    
    
    326
    
    
    
    
    
    
    
    614Income (loss) before income taxes
    
    
    (6,028
    )
    
    
    13,251
    
    
    
    (273
    )
    
    
    
    
    
    
    6,950Income tax expense
    
    
    2,239
    
    
    
    447
    
    
    
    (34
    )
    
    
    
    
    
    
    2,652Net income (loss)
    
    $
    (8,267
    )
    
    $
    12,804
    
    
    $
    (239
    )
    
    $
    
    
    
    $
    4,298
 15




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##### Table of Contents



Consolidating Statement of Operations for the Three Months Ended December 31, 2004
 (in thousands)
    
    GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-GuarantorOperations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Systems
    
    $
    24,681
    
    
    $
    
    
    
    $
    541
    
    
    $
    (47
    )
    
    $
    25,175Services
    
    
    32,836
    
    
    
    178
    
    
    
    2,750
    
    
    
    
    
    
    
    35,764Total revenues
    
    
    57,517
    
    
    
    178
    
    
    
    3,291
    
    
    
    (47
    )
    
    
    60,939Cost of revenues:Systems
    
    
    14,555
    
    
    
    
    
    
    
    292
    
    
    
    (47
    )
    
    
    14,800Services
    
    
    12,524
    
    
    
    
    
    
    
    1,448
    
    
    
    
    
    
    
    13,972Total cost of revenues
    
    
    27,079
    
    
    
    
    
    
    
    1,740
    
    
    
    (47
    )
    
    
    28,772Gross profit
    
    
    30,438
    
    
    
    178
    
    
    
    1,551
    
    
    
    
    
    
    
    32,167Operating expenses:Sales and marketing
    
    
    8,003
    
    
    
    
    
    
    
    507
    
    
    
    
    
    
    
    8,510Product development
    
    
    3,962
    
    
    
    
    
    
    
    108
    
    
    
    
    
    
    
    4,070General and administrative
    
    
    6,384
    
    
    
    376
    
    
    
    429
    
    
    
    
    
    
    
    7,189Amortization of purchased
intangible assets
    
    
    197
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197Total operating expenses
    
    
    18,546
    
    
    
    376
    
    
    
    1,044
    
    
    
    
    
    
    
    19,966Operating income
    
    
    11,892
    
    
    
    (198
    )
    
    
    507
    
    
    
    
    
    
    
    12,201Interest expense
    
    
    (4,411
    )
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    (4,421
    )Other income, net
    
    
    402
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    448Income (loss) before income taxes
    
    
    7,883
    
    
    
    (208
    )
    
    
    553
    
    
    
    
    
    
    
    8,228Income tax expense
    
    
    3,185
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    3,184Net income (loss)
    
    $
    4,698
    
    
    $
    (208
    )
    
    $
    554
    
    
    $
    
    
    
    $
    5,044
 16




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##### Table of Contents



Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2005
 (in thousands)
    
    GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-GuarantorOperations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in)
operating activities
    
    $
    (2,677
    )
    
    $
    98
    
    
    $
    193
    
    
    $
    
    
    
    $
    (2,386
    )Investing activitiesPurchase of property and equipment
    
    
    (1,258
    )
    
    
    (45
    )
    
    
    (109
    )
    
    
    
    
    
    
    (1,412
    )Capitalized software costs and
databases
    
    
    (1,468
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,468
    )Purchase price adjustments
    
    
    508
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    508Equity distributions from partnerships
    
    
    679
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    679Net cash used in investing activities
    
    
    (1,539
    )
    
    
    (45
    )
    
    
    (109
    )
    
    
    
    
    
    
    (1,693
    )Financing activitiesProceeds from long-term debt
    
    
    145,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,000Repayment of senior unsecured bridge
loan
    
    
    (140,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (140,000
    )Proceeds from credit facility
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000Payment on long-term debt
    
    
    
    
    
    
    (64
    )
    
    
    
    
    
    
    
    
    
    
    (64
    )Dividend to parent
    
    
    (3,369
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,369
    )Debt issuance costs
    
    
    (2,705
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,705
    )Net cash provided by (used in)
financing activities
    
    
    4,926
    
    
    
    (64
    )
    
    
    
    
    
    
    
    
    
    
    4,862Net change in cash and cash
equivalents
    
    
    710
    
    
    
    (11
    )
    
    
    84
    
    
    
    
    
    
    
    783Cash and cash equivalents, beginning
of period
    
    
    5,800
    
    
    
    3,943
    
    
    
    1,209
    
    
    
    
    
    
    
    10,952Cash and cash equivalents, end of
period
    
    $
    6,510
    
    
    $
    3,932
    
    
    $
    1,293
    
    
    $
    
    
    
    $
    11,735
 Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2004
 (in thousands)
    
    GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-GuarantorOperations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in)
operating activities
    
    $
    2,614
    
    
    $
    476
    
    
    $
    (391
    )
    
    $
    
    
    
    $
    2,699Investing activitiesPurchase of property and equipment
    
    
    (403
    )
    
    
    
    
    
    
    (107
    )
    
    
    
    
    
    
    (510
    )Capitalized software costs and
databases
    
    
    (1,205
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,205
    )Net cash used in investing activities
    
    
    (1,608
    )
    
    
    
    
    
    
    (107
    )
    
    
    
    
    
    
    (1,715
    )Financing activitiesPayment on long-term debt facility
    
    
    
    
    
    
    (74
    )
    
    
    
    
    
    
    
    
    
    
    (74
    )Net cash used in financing activities
    
    
    
    
    
    
    (74
    )
    
    
    
    
    
    
    
    
    
    
    (74
    )Net change in cash and cash
equivalents
    
    
    1,006
    
    
    
    402
    
    
    
    (498
    )
    
    
    
    
    
    
    910Cash and cash equivalents, beginning
of period
    
    
    28,643
    
    
    
    (107
    )
    
    
    3,529
    
    
    
    
    
    
    
    32,065Cash and cash equivalents, end of
period
    
    $
    29,649
    
    
    $
    295
    
    
    $
    3,031
    
    
    $
    
    
    
    $
    32,975
 17




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##### Table of Contents



Overview
  
    
    Systems, which is comprised primarily of proprietary software applications,
implementation and training and third-party software, hardware and peripherals. For the
three months ended December 31, 2005, systems revenues accounted for approximately 42% of
our total revenues;
    
    Product Support, which is comprised primarily of customer support activities, including
support through our advice line, software updates, preventive and remedial on-site
maintenance and depot repair services. Our product support services are generally provided
on a subscription basis, and accordingly, revenues from this segment are generally
recurring in nature. For the three months ended December 31, 2005, product support
revenues accounted for approximately 40% of our total revenues;
    
    Content and Data Services, which is comprised primarily of proprietary database and
data management products for the vertical markets we serve (such as our comprehensive
electronic automotive parts and applications catalog and point-of-sale business analysis
data), connectivity services, e-commerce, networking and security monitoring management
solutions. Our content and data services are generally provided on a monthly subscription
basis and accordingly, revenues from this segment are generally recurring in nature. For
the three months ended December 31, 2005, content and data services revenues accounted for
approximately 16% of our total revenues; and
    
    Other Services, which is comprised primarily of business products, such as forms and
other paper products. For the three months ended December 31, 2005, other services
revenues accounted for approximately 2% of our total revenues.
  
    
    The hardlines and lumber vertical market consists of independent hardware retailers,
home improvement centers, paint, glass and wallpaper stores, farm supply stores, retail
nurseries and gardens and independent lumber and building material dealers primarily in
the United States. For the three months ended December 31, 2005, we generated
approximately 42% of our total revenues from the hardlines and lumber vertical market.
    
    The wholesale distribution vertical market consists of distributors of a range of
products including electrical supply, plumbing, medical supply, heating and air
conditioning, brick, stone and related materials, roofing, siding, insulation, industrial
machinery and equipment, industrial supplies, and service establishment equipment vendors,
primarily in the United States. For the three months ended December 31, 2005, we generated
approximately 29% of our total revenues from the wholesale distribution vertical market.
 18




---



##### Table of Contents




    
    Auto consists of customers involved in the manufacture, distribution, sale and
installation of new and remanufactured parts used in the maintenance and repair of
automobiles and light trucks, and includes manufacturers, warehouse distributors, parts
stores, professional installers and several chains in North America and Europe. For the
three months ended December 31, 2005, we generated approximately 25% of our total revenues
from Auto.
    
    The productivity tools business, which primarily consists of software migration and
application development tools, which we acquired as a part of the Speedware acquisition.
For the three months ended December 31, 2005, we generated approximately 3% of our total
revenues from the productivity tools business.
  Key Components of Results of Operations
 Revenues.
 Cost of revenues. Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed.
 Sales and marketing expense.
 Product development expense.
 General and administrative expense.
 Acquisitions
 Speedware Corporation Inc.
 19




---



##### Table of Contents



Prophet 21, Inc.
 The Systems House, Inc.
 General Parts, Inc. Relationship
  Segment reporting and classification
   20




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##### Table of Contents



Historical Results of Operations
 Three months ended December 31, 2005 compared to three months ended December 31, 2004
 Revenues.
 Three months ended December 31,(in thousands)
    
    2004
    
    
    2005
    
    
    Variance $
    
    
    Variance %Systems Revenues:Hardlines and Lumber
    
    $
    20,883
    
    
    $
    22,824
    
    
    $
    1,941
    
    
    
    9.3
    %Auto
    
    
    3,420
    
    
    
    4,225
    
    
    
    805
    
    
    
    23.5
    %Wholesale Distribution
    
    
    872
    
    
    
    12,406
    
    
    
    11,534
    
    
    
    1,322.7
    %Productivity Tools
    
    
    
    
    
    
    1,468
    
    
    
    1,468
    
    
    
    Total Systems Revenues
    
    $
    25,175
    
    
    $
    40,923
    
    
    $
    15,748
    
    
    
    62.6
    %Product Support Revenues:Hardlines and Lumber
    
    $
    10,378
    
    
    $
    15,661
    
    
    $
    5,283
    
    
    
    50.9
    %Auto
    
    
    9,099
    
    
    
    7,860
    
    
    
    (1,239
    )
    
    
    (13.6
    )%Wholesale Distribution
    
    
    431
    
    
    
    13,931
    
    
    
    13,500
    
    
    
    3,132.3
    %Productivity Tools
    
    
    
    
    
    
    1,882
    
    
    
    1,882
    
    
    
    Total Product Support Revenues
    
    $
    19,908
    
    
    $
    39,334
    
    
    $
    19,426
    
    
    
    97.6
    %Content and Data Services Revenues:Hardlines and Lumber
    
    $
    1,251
    
    
    $
    1,459
    
    
    $
    208
    
    
    
    16.6
    %Auto
    
    
    12,680
    
    
    
    12,416
    
    
    
    (264
    )
    
    
    (2.1
    )%Wholesale Distribution
    
    
    514
    
    
    
    2,101
    
    
    
    1,587
    
    
    
    308.8
    %Productivity Tools
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Content and Data Services Revenues
    
    $
    14,445
    
    
    $
    15,976
    
    
    $
    1,531
    
    
    
    10.6
    %Other Services Revenues:Hardlines and Lumber
    
    $
    1,330
    
    
    $
    1,729
    
    
    $
    399
    
    
    
    30.0
    %Auto
    
    
    
    
    
    
    129
    
    
    
    129
    
    
    
    Wholesale Distribution
    
    
    81
    
    
    
    40
    
    
    
    (41
    )
    
    
    (50.6
    )%Productivity Tools
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Other Revenues
    
    $
    1,411
    
    
    $
    1,898
    
    
    $
    487
    
    
    
    34.5
    %Total Revenues:Hardlines and Lumber
    
    $
    33,842
    
    
    $
    41,673
    
    
    $
    7,831
    
    
    
    23.1
    %Auto
    
    
    25,199
    
    
    
    24,630
    
    
    
    (569
    )
    
    
    (2.3
    )%Wholesale Distribution
    
    
    1,898
    
    
    
    28,478
    
    
    
    26,580
    
    
    
    1,400.4
    %Productivity Tools
    
    
    
    
    
    
    3,350
    
    
    
    3,350
    
    
    
    Total Revenues
    
    $
    60,939
    
    
    $
    98,131
    
    
    $
    37,192
    
    
    
    61.0
    %
  Factors affecting Systems revenues for the three months ended December 31, 2005.
 
    
    Systems revenues from our hardlines and lumber vertical market increased by $1.9
million, or 9.3%, primarily due
 21




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##### Table of Contents



to $1.2 million of revenues attributable to the Speedware
acquisition. The remaining increase was a result of sales of new and upgraded software
applications to new and existing customers affiliated with the three largest cooperatives
in the retail hardware market.
    
    Systems revenue for Auto increased by $0.8 million, or 23.5%, due to increased
focus on migrating customers from older, legacy systems platforms to our Prism system
platform and higher sales of Prism peripherals and upgrades.
    
    Systems revenue from our wholesale distribution vertical market increased by $11.5
million due to revenues attributable to the Speedware and Prophet 21 acquisitions.
    
    The $1.5 million increase in productivity tools systems revenues is attributable to the
Speedware acquisition.
 Factors affecting Product Support revenues for the three months ended December 31, 2005.
 
    
    Product Support revenue from our hardlines and lumber vertical market increased by $5.3
million, or 50.9%, partially due to $4.0 million of revenues attributable to the Speedware
acquisition. The remaining $1.3 million increase is attributable to our increased systems
sales, which over time, results in increased Product Support revenues.
    
    Auto Product Support revenues declined by $1.2 million, or 13.6%. Auto experienced a
decline of approximately $0.5 million in product support revenues associated with customer
attrition from our older systems that we continue to support but do not actively sell to
new customers. We expect that product support revenues from our older systems will continue
to decline. Approximately $0.7 million of the decline was associated with General Parts,
Inc.s decision to begin replacing our J-CON system with its own branded store system. We
do not expect to recapture this product support revenue.
    
    The $13.5 million increase in Product Support revenues from our wholesale distribution
vertical market is primarily attributable to the Speedware and Prophet 21 acquisitions.
    
    The $1.9 million increase in productivity tools Product Support revenues is
attributable to the Speedware acquisition.
 Factors affecting Content and Data Services revenues for the three months ended December 31, 2005.
 
    
    Auto Content and Data Services revenues declined by $0.3 million, or 2.1%, due to a
decline of approximately $0.4 million associated with customer attrition from our older
systems that we continue to support but do not actively sell to new customers. An
additional decline of $0.7 million was related to a new contract and simplified service
terms with a large customer. These declines were partially offset by $0.5 million of new
electronic automotive parts and applications catalog sales to non-systems customers and a
$0.3 million increase in revenues from our AConneX connectivity product.
    
    Content and Data Services revenues from our wholesale distribution vertical market
increased by $1.6 million, primarily due to the Prophet 21 acquisition.
 22




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Total cost of revenues and gross margins as a percentage of revenues.
  Three months ended December 31,(in thousands)
    
    2004
    
    
    2005
    
    
    Variance $
    
    
    Variance %Cost of revenues:Systems
    
    $
    14,800
    
    
    $
    20,880
    
    
    $
    6,080
    
    
    
    41.1
    %Product Support
    
    
    9,149
    
    
    
    15,679
    
    
    
    6,530
    
    
    
    71.4
    %Content and Data Services
    
    
    3,896
    
    
    
    4,314
    
    
    
    418
    
    
    
    10.7
    %Other Services
    
    
    927
    
    
    
    1,307
    
    
    
    380
    
    
    
    41.0
    %Total cost of revenues
    
    $
    28,772
    
    
    $
    42,180
    
    
    $
    13,408
    
    
    
    46.6
    %
  Three months endedDecember 31,2004
    
    2005Gross margin as a percentage of revenues by segment:Systems
    
    
    41.2
    %
    
    
    49.0
    %Product Support
    
    
    54.0
    %
    
    
    60.1
    %Content and Data Services
    
    
    73.0
    %
    
    
    73.0
    %Other Services
    
    
    34.3
    %
    
    
    31.1
    %Total gross margin as a percentage of revenues
    
    
    52.8
    %
    
    
    57.0
    %
 Cost of Revenues.
 
    
    Cost of Systems Revenues.Total cost of Systems revenues for the three months ended
December 31, 2005 increased by $6.1 million, or 41.1%, compared to the three months ended
December 31, 2004. This increase was comprised primarily of $6.2 million in costs
attributable to Speedware and Prophet 21 System revenues. Gross margin as a percentage of
revenues increased from 41.2% for the three months ended December 31, 2004 to 49.0% for the
three months ended December 31, 2005. The improvement in Systems gross margin is
predominantly due to the higher margins associated with sales of Speedware and Prophet 21
systems products.
    
    Cost of Product Support Revenues.Cost of Product Support revenues for the three
months ended December 31, 2005 increased by $6.5 million, or 71.4%, compared to the three
months ended December 31, 2004. This increase was comprised primarily of $6.8 million in
costs attributable to Speedware and Prophet 21 Product Support sales. Gross margin as a
percentage of revenues increased from 54.0% for the three months ended December 31, 2004 to
60.1% for the three months ended December 31, 2005. The improvement in Product Support
gross margin is predominantly due to the higher margins associated with sales of Speedware
and Prophet 21 products.
    
    Cost of Content and Data Services Revenues.Cost of Content and Data Services revenues
for the three months ended December 31, 2005 increased by $0.4 million, or 10.7%, compared
to the three months ended December 31, 2004. Gross margin as a percentage of Content and
Data Services revenues remained constant at 73.0% for the three months ended December 31,
2005,
however we expect our cost of Content and Data Services revenues to increase as we raise our
investment in our electronic catalog for Auto.
 Total Operating Expenses.
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Three months ended December 31,(in thousands)
    
    2004
    
    
    2005
    
    
    Variance $
    
    
    Variance %Sales and Marketing Expense
    
    $
    8,510
    
    
    $
    12,887
    
    
    $
    4,377
    
    
    
    51.4
    %Product Development Expense
    
    
    4,070
    
    
    
    9,542
    
    
    
    5,472
    
    
    
    134.4
    %General and Administrative Expense
    
    
    7,189
    
    
    
    10,470
    
    
    
    3,281
    
    
    
    45.6
    %Amortization of Purchased Intangibles
    
    
    197
    
    
    
    3,725
    
    
    
    3,528
    
    
    
    1790.9
    %Total Operating Expenses
    
    $
    19,966
    
    
    $
    36,624
    
    
    $
    16,658
    
    
    
    83.4
    %
  
    
    Sales and Marketing Expense.Sales and marketing expense increased by $4.4 million, or
51.4%, for the three months ended December 31, 2005 compared to the three months ended
December 31, 2004. The increase was primarily a result of the inclusion of $4.0 million of
sales and marketing costs related to the Speedware and Prophet 21 acquisitions.
    
    Product Development Expense.Product development expense increased by $5.5 million, or
134.4%, for the three months ended December 31, 2005 compared to the three months ended
December 31, 2004. Approximately $4.7 million of the increase was related to the inclusion
of product development costs related to the Speedware and Prophet 21 acquisitions. The
remaining $0.8 million increase was largely due an increase in development employees
resulting from an increased level of investment and development activity associated with
projects in early stages of development.
    
    General and Administrative Expense.General and administrative expense increased by $3.3
million, or 45.6%, for the three months ended December 31, 2005 compared to the three months
ended December 31, 2004. The increase was primarily a result of the inclusion of $3.1
million general and administrative costs related to the Speedware and Prophet 21
acquisitions, an increase in facility costs of $0.5 million and a general increase in other
costs. The three months ended December 31, 2004 included $1.0 million of severance
costs associated with the termination of our former Chairman, President and Chief Executive
Officer.
    
    Amortization of Purchased Intangibles.Amortization expense related to purchased
intangible assets was $3.7 million for the three months ended December 31, 2005 compared to
$0.2 million for the three months ended December 31, 2004. The increase resulted from the
amortization of the intangibles associated with the Speedware and Prophet 21 acquisitions.
 Operating Income.
 Interest Expense.
 Net Income.
 24




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Liquidity and Capital Resources
 1 2
 1 2
      25




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(a) Disclosure controls and procedures.
 (b) Internal controls over financial reporting.
 26




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10.1
    
    Indemnity agreement dated January 24, 2006 among Activant Solutions Holdings Inc,
Activant Solutions Inc. and Joseph W. Nicholson*10.2
    
    Indemnity agreement dated January 24, 2006 among Activant Solutions Holdings Inc,
Activant Solutions Inc. and Kathleen J. Cunningham*31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by A. Laurence Jones.*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Greg Petersen.*32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by A. Laurence Jones.*32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Greg Petersen.*
 
 *
    
    Filed Herewith 27




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ACTIVANT SOLUTIONS INC.By:
    
    /s/ GREG PETERSENGreg PetersenExecutive Vice President and Chief Financial Officer(Principal Financial and Duly Authorized Officer)
 28