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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2008
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 333-49389
 Activant Solutions Inc.
  Delaware
    
    94-2160013(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)7683 Southfront RoadLivermore, CA
    
    94551(Address of principal executive offices)
    
    (Zip Code)
 (925) 449-0606
 o þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding at February 11, 2009Common Stock, par value $0.01 per share
    
    10 shares




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##### 



ACTIVANT SOLUTIONS INC.
 REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2008
 INDEX
 PageForward-Looking Statements
    
    
    2PART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2008 and September 30, 2008
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months
Ended December 31, 2008 
and December 31, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2008
and December 31, 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II  OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31SIGNATURE
    
    
    32EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2




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FORWARD-LOOKING STATEMENTS
   
    
    the negative affect of the current credit crisis and unfavorable market conditions on
our customers and on our business;
    
    the financial crisis in the U.S. and global capital and credit markets;
    
    our substantial indebtedness and our ability to incur additional indebtedness;
    
    certain covenants in our debt documents, including covenants that require us to satisfy
a maximum total leverage ratio and a minimum interest coverage ratio;
    
    failure to anticipate or respond to our customers needs and requirements;
    
    failure of our proprietary technology to support our customers future needs or it
becoming obsolete;
    
    failure to develop new relationships and maintain existing relationships with key
industry participants and/or key customers and/or loss of significant customer revenues;
    
    loss of recurring subscription service revenues;
    
    failure to integrate and retain our senior management personnel;
    
    failure of our Activant Eagle and Vision products to gain acceptance within the
automotive parts aftermarket;
    
    costs and difficulties of integrating recent and future acquisitions, including our
acquisitions of Silk Systems and Intuits distribution software management division
(Eclipse);
    
    the amount of our anticipated goodwill impairment charges resulting from our first
quarter of fiscal year 2009 impairment analysis and any additional impairment charges due
to the continuing global economic uncertainty and credit crisis;
    
    changes in the manner or basis on which we receive third-party information used to
maintain our electronic automotive parts and applications catalog;
    
    failure by certain of our existing customers to upgrade to our current generation of
systems;
    
    failure to effectively compete;
    
    substantial fluctuations in, or failure to maintain current systems sales levels of
one-time sales of software licenses and hardware;
    
    consolidation trends among our customers and consolidation trends in the market segments
in which we operate;
    
    failure to adequately protect our proprietary rights and intellectual property or
limitations on the availability of legal or technical means of effecting such protection;
    
    claims by third parties that we are infringing on their proprietary rights or other
adverse claims;
    
    defects or errors in our software or information services;
    
    interruptions of our connectivity applications or catastrophic failure of our data
center, telecommunications or information technology infrastructure;
    
    claims for damages against us in the event of a failure of our customers systems;
    
    fluctuations in the value of foreign currencies;
    
    differing interests of debt security holders and our controlling stockholders or
investors; and
    
    the other factors described under the heading Risk Factors in our Annual Report on
Form 10-K for the year ended September 30, 2008 and elsewhere in this report, including
under Part II, Item 1A of this report.
  2




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PART I  FINANCIAL INFORMATION
 
 Item 1  Financial Statements
 ACTIVANT SOLUTIONS INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 December 31,
    
    
    September 30,(in thousands, except share data)
    
    2008
    
    
    2008ASSETS:Current assets:Cash and cash equivalents
    
    $
    67,479
    
    
    $
    64,789Trade accounts receivable, net of allowance
for doubtful accounts of $5,250 and $5,415 at
December 31, 2008 and September 30, 2008,
respectively
    
    
    47,624
    
    
    
    46,572Inventories, net
    
    
    5,098
    
    
    
    5,310Deferred income taxes
    
    
    6,954
    
    
    
    6,226Income taxes receivable
    
    
    
    
    
    
    1,186Prepaid expenses and other current assets
    
    
    4,654
    
    
    
    5,124Total current assets
    
    
    131,809
    
    
    
    129,207Property and equipment, net
    
    
    7,971
    
    
    
    8,942Intangible assets, net
    
    
    210,703
    
    
    
    217,058Goodwill
    
    
    637,209
    
    
    
    662,209Deferred financing costs
    
    
    12,512
    
    
    
    13,130Other assets
    
    
    1,810
    
    
    
    2,172Total assets
    
    $
    1,002,014
    
    
    $
    1,032,718LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Accounts payable
    
    $
    18,594
    
    
    $
    19,181Payroll related accruals
    
    
    16,523
    
    
    
    15,020Deferred revenue
    
    
    34,727
    
    
    
    33,952Current portion of long-term debt
    
    
    
    
    
    
    3,325Accrued expenses and other current liabilities
    
    
    15,415
    
    
    
    15,484Total current liabilities
    
    
    85,259
    
    
    
    86,962Long-term debt
    
    
    613,600
    
    
    
    613,787Deferred tax liabilities
    
    
    49,125
    
    
    
    54,028Other liabilities
    
    
    24,840
    
    
    
    18,625Total liabilities
    
    
    772,824
    
    
    
    773,402Commitments and contingencies
    
    
    
    
    
    
    Common Stock:Par value $0.01 per share, 1,000 shares
authorized, 10 shares issued and outstanding,
at December 31, 2008 and September 30, 2008
    
    
    
    
    
    
    Additional paid-in capital
    
    
    255,197
    
    
    
    254,148Retained
earnings (accumulated deficit)
    
    
    (13,446
    )
    
    
    11,355Other accumulated comprehensive loss:Unrealized loss on cash flow hedges
    
    
    (10,294
    )
    
    
    (5,585
    )Cumulative translation adjustment
    
    
    (2,267
    )
    
    
    (602
    )Total stockholders equity
    
    
    229,190
    
    
    
    259,316Total liabilities and stockholders equity
    
    $
    1,002,014
    
    
    $
    1,032,718
  3




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ACTIVANT SOLUTIONS INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
 Three Months EndedDecember 31,(in thousands)
    
    2008
    
    
    2007Revenues:Systems
    
    $
    33,532
    
    
    $
    45,917Services
    
    
    62,734
    
    
    
    62,993Total revenues
    
    
    96,266
    
    
    
    108,910Cost of revenues (exclusive of
depreciation and amortization shown
separately below):Systems (1)
    
    
    17,965
    
    
    
    26,397Services (1)
    
    
    22,005
    
    
    
    23,223Total cost of revenues
    
    
    39,970
    
    
    
    49,620Gross profit
    
    
    56,296
    
    
    
    59,290Operating expenses:Sales and marketing (1)
    
    
    15,017
    
    
    
    16,425Product development (1)
    
    
    10,158
    
    
    
    12,124General and administrative (1)
    
    
    5,730
    
    
    
    7,496Depreciation and amortization
    
    
    9,705
    
    
    
    8,595Impairment of goodwill
    
    
    25,000
    
    
    
    Acquisition related costs
    
    
    176
    
    
    
    251Restructuring costs
    
    
    1,758
    
    
    
    168Total operating expenses
    
    
    67,544
    
    
    
    45,059Operating income (loss)
    
    
    (11,248
    )
    
    
    14,231Interest expense
    
    
    (12,988
    )
    
    
    (13,690
    )Other income (expense), net
    
    
    (329
    )
    
    
    564Income (loss) before income taxes
    
    
    (24,565
    )
    
    
    1,105Income tax expense
    
    
    236
    
    
    
    512Net income (loss)
    
    $
    (24,801
    )
    
    $
    593Comprehensive loss:Net income (loss)
    
    $
    (24,801
    )
    
    $
    593Unrealized loss on cash flow hedges
    
    
    (4,709
    )
    
    
    (2,651
    )Foreign currency translation adjustment
    
    
    (1,665
    )
    
    
    (49
    )Comprehensive loss
    
    $
    (31,175
    )
    
    $
    (2,107
    )
 
 (1)
    
    Includes stock-based compensation expense as follows: Cost of revenuesSystems
    
    $
    10
    
    
    $
    8Services
    
    
    49
    
    
    
    69Operating expensesSales and marketing
    
    
    228
    
    
    
    204Product development
    
    
    76
    
    
    
    72General and administrative
    
    
    700
    
    
    
    529Total
    
    $
    1,063
    
    
    $
    882
  4




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ACTIVANT SOLUTIONS INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months EndedDecember 31,(in thousands)
    
    2008
    
    
    2007Operating activities:Net income (loss)
    
    $
    (24,801
    )
    
    $
    593Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Impairment of goodwill
    
    
    25,000
    
    
    
    Stock-based compensation expense
    
    
    1,063
    
    
    
    882Depreciation
    
    
    1,445
    
    
    
    1,509Amortization of intangible assets
    
    
    8,260
    
    
    
    7,086Amortization of deferred financing costs
    
    
    618
    
    
    
    623Provision for doubtful accounts
    
    
    193
    
    
    
    1,253Deferred income taxes
    
    
    (5,631
    )
    
    
    (4,599
    )Changes in assets and liabilities:Trade accounts receivable
    
    
    (1,245
    )
    
    
    (1,059
    )Inventories
    
    
    212
    
    
    
    (1,491
    )Prepaid expenses and other assets
    
    
    2,018
    
    
    
    574Accounts payable
    
    
    (587
    )
    
    
    (1,350
    )Deferred revenue
    
    
    775
    
    
    
    (1,359
    )Accrued expenses and other liabilities
    
    
    1,289
    
    
    
    566Net cash provided by operating activities
    
    
    8,609
    
    
    
    3,228Investing activities:Purchase of property and equipment
    
    
    (488
    )
    
    
    (1,120
    )Capitalized computer software costs and databases
    
    
    (1,905
    )
    
    
    (1,667
    )Net cash used in investing activities
    
    
    (2,393
    )
    
    
    (2,787
    )Financing activities:Payment on long-term debt
    
    
    (3,512
    )
    
    
    (187
    )Repurchase of common stock
    
    
    (14
    )
    
    
    Deferred financing costs
    
    
    
    
    
    
    (107
    )Net cash used in financing activities
    
    
    (3,526
    )
    
    
    (294
    )Net change in cash and cash equivalents
    
    
    2,690
    
    
    
    147Cash and cash equivalents, beginning of period
    
    
    64,789
    
    
    
    33,379Cash and cash equivalents, end of period
    
    $
    67,479
    
    
    $
    33,526Supplemental disclosures of cash flow informationCash paid during the period for interest
    
    $
    14,901
    
    
    $
    17,173Cash paid during the period for income taxes (net of receipts)
    
    $
    612
    
    
    $
    944
  5




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ACTIVANT SOLUTIONS INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2008 (UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION
    NOTE 2  NEW ACCOUNTING PRONOUNCEMENTS
 Fair Value Measurements Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease Classifications or
Measurements under Statement 13 Effective Date of FASB Statement No. 157, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not
Active. Accounting for Leases
 NOTE 3  GOODWILL
 (in thousands)
 December 31,
    
    
    September 30,2008
    
    
    2008
    
    
    2007Hardlines and Lumber
    
    $
    167,980
    
    
    $
    186,480
    
    
    $
    187,462Wholesale Distribution
    
    
    335,018
    
    
    
    335,018
    
    
    
    343,140Automotive
    
    
    122,034
    
    
    
    128,534
    
    
    
    129,350Other
    
    
    12,177
    
    
    
    12,177
    
    
    
    12,254Total
    
    $
    637,209
    
    
    $
    662,209
    
    
    $
    672,206
 Business Goodwill and Other
 6




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Intangible Assets
 NOTE 4  DEBT
  (in thousands)
    

December 31, 2008
    
    

September 30, 2008Senior secured term loan due 2013
    
    $
    418,600
    
    
    $
    422,112Senior subordinated notes due 2016
    
    
    175,000
    
    
    
    175,000Revolving credit facility due 2011
    
    
    20,000
    
    
    
    20,000Total debt
    
    
    613,600
    
    
    
    617,112Current portion
    
    
    
    
    
    
    (3,325
    )Long-term debt
    
    $
    613,600
    
    
    $
    613,787
 Senior Secured Credit Agreement
     7




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
    
    under the revolving credit facility, 1.25% with respect to base rate borrowings and 2.25%
with respect to Eurodollar rate borrowings, which may be reduced subject to our attainment of
certain leverage ratios;
 
    
    under the term loan, 1.00% with respect to base rate borrowings and 2.00% with respect to
Eurodollar rate borrowings; and
 
    
    under the incremental term loan, 1.50% with respect to base rate borrowings and 2.50% with
respect to Eurodollar rate borrowings.
   Hedging and Derivative Instruments
 in thousands)
 Notional Amount
    
    Maturity Date
    
    Fixed Rate
    
    Fair Value$140,000
    
    
    2011
    
    
    
    5.42
    %
    
    $
    (15,039
    )$  50,000
    
    
    2009
    
    
    
    5.32
    %
    
    $
    (1,839
    )
  Senior Subordinated Notes Due 2016
      8




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NOTE 5  FAIR VALUE
     NOTE 6  INCOME TAXES
 Accounting for Uncertainty in Income
Taxes  An Interpretation of FASB Statement No. 109"(FIN No. 48),
 9




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NOTE 7  EMPLOYEE STOCK PLANS
   Three Months Ended December 31,2008
    
    
    2007Expected term
    
    6.66 years
    
    6.66 yearsExpected volatility
    
    
    72.00
    %
    
    
    50.00
    %Expected dividends
    
    
    0.00
    %
    
    
    0.00
    %Risk-free rate
    
    
    1.55
    %
    
    
    3.46
    %
  NOTE 8  RESTRUCTURING COSTS
 Accounting for Costs Associated with Exit or Disposal Activities
  10




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in thousands
 Balance as of
    
    
    
    
    
    
    
    
    
    
    Balance as ofSeptember 30,
    
    
    Restructuring
    
    
    
    
    
    
    December 31,2008
    
    
    Charges
    
    
    Payments
    
    
    20082009 Actions
    
    $
    
    
    
    $
    1,754
    
    
    $
    (1,221
    )
    
    $
    5332008 Actions
    
    
    216
    
    
    
    4
    
    
    
    (45
    )
    
    
    175$
    216
    
    
    $
    1,758
    
    
    $
    (1,266
    )
    
    $
    708
 NOTE 9  SEGMENT REPORTING
 Disclosures about Segments of an Enterprise
and Related Information.
  
    
    Hardlines and Lumber segment 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 garden centers; independent lumber and
building material dealers; and pharmacies, primarily in the United States.
    
    Wholesale Distribution segment The wholesale distribution vertical market consists of
distributors of a range of products including electrical supply; plumbing; medical supply;
heating and air conditioning; tile; industrial machinery and equipment; industrial
supplies; fluid power; janitorial and sanitation products; paper and packaging; and service
establishment equipment vendors, primarily in the United States.
    
    Automotive segment The automotive vertical market 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 in North America and Europe
as well as several chains in North America.
    
    Other Other primarily consists of our productivity tools business, which is involved
with software migration services and application development tools.
 Segment Revenue and Contribution Margin
   11




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Three Months Ended December 31, 2008
    
    Three Months Ended December 31, 2007Hardlines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Hardlinesand
    
    Wholesale
    
    Auto-
    
    
    
    
    
    
    
    
    
    and
    
    Wholesale
    
    Auto-(in thousands)
    
    Lumber
    
    Distribution
    
    motive
    
    Other
    
    Total
    
    Lumber
    
    Distribution
    
    motive
    
    Other
    
    TotalRevenues
    
    $
    34,224
    
    
    $
    38,399
    
    
    $
    19,688
    
    
    $
    3,955
    
    
    $
    96,266
    
    
    $
    39,790
    
    
    $
    42,440
    
    
    $
    21,785
    
    
    $
    4,895
    
    
    $
    108,910Contribution margin
    
    $
    8,905
    
    
    $
    14,408
    
    
    $
    6,782
    
    
    $
    1,921
    
    
    $
    32,016
    
    
    $
    8,963
    
    
    $
    15,764
    
    
    $
    7,242
    
    
    $
    (211
    )
    
    $
    31,758
     Three Months Ended December 31,(in thousands)
    
    2008
    
    
    2007Segment contribution margin
    
    $
    32,016
    
    
    $
    31,758Corporate and unallocated costs
    
    
    (5,562
    )
    
    
    (7,631
    )Stock-based compensation expense
    
    
    (1,063
    )
    
    
    (882
    )Depreciation and amortization
    
    
    (9,705
    )
    
    
    (8,595
    )Impairment of goodwill
    
    
    (25,000
    )
    
    
    Acquisition related costs
    
    
    (176
    )
    
    
    (251
    )Restructuring costs
    
    
    (1,758
    )
    
    
    (168
    )Interest expense
    
    
    (12,988
    )
    
    
    (13,690
    )Other income (expense), net
    
    
    (329
    )
    
    
    564Income (loss) before income taxes
    
    $
    (24,565
    )
    
    $
    1,105
 12




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NOTE 10  GUARANTOR CONSOLIDATION
  Condensed Consolidating Balance Sheet as of December 31, 2008
 GuarantorNon-Guarantor
    
    
    Guarantor(in thousands)
    
    Principal Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETS:Current assets:Cash and cash equivalents
    
    $
    60,070
    
    
    $
    782
    
    
    $
    6,627
    
    
    $
    
    
    
    $
    67,479Trade accounts receivable, net of allowance
for doubtful accounts
    
    
    30,774
    
    
    
    12,579
    
    
    
    4,271
    
    
    
    
    
    
    
    47,624Inventories, net
    
    
    3,155
    
    
    
    1,745
    
    
    
    198
    
    
    
    
    
    
    
    5,098Deferred income taxes
    
    
    5,454
    
    
    
    1,435
    
    
    
    65
    
    
    
    
    
    
    
    6,954Income taxes receivable
    
    
    (685
    )
    
    
    320
    
    
    
    365
    
    
    
    
    
    
    
    Prepaid expenses and other current assets
    
    
    3,700
    
    
    
    578
    
    
    
    376
    
    
    
    
    
    
    
    4,654Total current assets
    
    
    102,468
    
    
    
    17,439
    
    
    
    11,902
    
    
    
    
    
    
    
    131,809Property and equipment, net
    
    
    6,836
    
    
    
    716
    
    
    
    419
    
    
    
    
    
    
    
    7,971Intangible assets, net
    
    
    180,575
    
    
    
    28,218
    
    
    
    1,910
    
    
    
    
    
    
    
    210,703Goodwill
    
    
    541,370
    
    
    
    91,284
    
    
    
    (1,482
    )
    
    
    6,037
    
    
    
    637,209Investments in subsidiaries
    
    
    11,971
    
    
    
    
    
    
    
    834
    
    
    
    (12,805
    )
    
    
    Intercompany receivables (payables)
    
    
    (22,942
    )
    
    
    38,933
    
    
    
    (15,991
    )
    
    
    
    
    
    
    Deferred financing costs
    
    
    12,512
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,512Other assets
    
    
    1,634
    
    
    
    357
    
    
    
    (181
    )
    
    
    
    
    
    
    1,810Total assets
    
    $
    834,424
    
    
    $
    176,947
    
    
    $
    (2,589
    )
    
    $
    (6,768
    )
    
    $
    1,002,014LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    15,076
    
    
    $
    2,925
    
    
    $
    587
    
    
    $
    6
    
    
    $
    18,594Payroll related accruals
    
    
    1,796
    
    
    
    13,284
    
    
    
    1,443
    
    
    
    
    
    
    
    16,523Deferred revenue
    
    
    11,160
    
    
    
    20,337
    
    
    
    3,230
    
    
    
    
    
    
    
    34,727Accrued expenses and other current liabilities
    
    
    15,305
    
    
    
    703
    
    
    
    (593
    )
    
    
    
    
    
    
    15,415Total current liabilities
    
    
    43,337
    
    
    
    37,249
    
    
    
    4,667
    
    
    
    6
    
    
    
    85,259Long-term debt
    
    
    613,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    613,600Deferred tax and other liabilities
    
    
    78,106
    
    
    
    (2,158
    )
    
    
    (1,983
    )
    
    
    
    
    
    
    73,965Total liabilities
    
    
    735,043
    
    
    
    35,091
    
    
    
    2,684
    
    
    
    6
    
    
    
    772,824Total stockholders equity (deficit)
    
    
    99,381
    
    
    
    141,856
    
    
    
    (5,273
    )
    
    
    (6,774
    )
    
    
    229,190Total liabilities and stockholders equity
(deficit)
    
    $
    834,424
    
    
    $
    176,947
    
    
    $
    (2,589
    )
    
    $
    (6,768
    )
    
    $
    1,002,014
 13




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##### Table of Contents



Condensed Consolidating Balance Sheet as of September 30, 2008
 GuarantorNon-Guarantor
    
    
    Guarantor(in thousands)
    
    Principal Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETS:Current assets:Cash and cash equivalents
    
    $
    55,926
    
    
    $
    2,931
    
    
    $
    5,932
    
    
    $
    
    
    
    $
    64,789Trade accounts receivable, net of allowance for
doubtful accounts
    
    
    27,223
    
    
    
    14,808
    
    
    
    4,541
    
    
    
    
    
    
    
    46,572Inventories, net
    
    
    4,000
    
    
    
    1,050
    
    
    
    260
    
    
    
    
    
    
    
    5,310Income taxes receivable
    
    
    671
    
    
    
    282
    
    
    
    233
    
    
    
    
    
    
    
    1,186Deferred income taxes
    
    
    4,726
    
    
    
    1,435
    
    
    
    65
    
    
    
    
    
    
    
    6,226Prepaid expenses and other current assets
    
    
    4,616
    
    
    
    223
    
    
    
    285
    
    
    
    
    
    
    
    5,124Total current assets
    
    
    97,162
    
    
    
    20,729
    
    
    
    11,316
    
    
    
    
    
    
    
    129,207Property and equipment, net
    
    
    7,586
    
    
    
    852
    
    
    
    504
    
    
    
    
    
    
    
    8,942Intangible assets, net
    
    
    185,128
    
    
    
    29,912
    
    
    
    2,018
    
    
    
    
    
    
    
    217,058Goodwill
    
    
    560,023
    
    
    
    97,631
    
    
    
    (1,482
    )
    
    
    6,037
    
    
    
    662,209Investments in subsidiaries
    
    
    12,018
    
    
    
    
    
    
    
    787
    
    
    
    (12,805
    )
    
    
    Intercompany receivables (payables)
    
    
    4,660
    
    
    
    10,102
    
    
    
    (14,762
    )
    
    
    
    
    
    
    Deferred financing costs
    
    
    13,130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,130Other assets
    
    
    1,769
    
    
    
    362
    
    
    
    41
    
    
    
    
    
    
    
    2,172Total assets
    
    $
    881,476
    
    
    $
    159,588
    
    
    $
    (1,578
    )
    
    $
    (6,768
    )
    
    $
    1,032,718LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT):Current liabilities:Accounts payable
    
    $
    15,938
    
    
    $
    2,347
    
    
    $
    890
    
    
    $
    6
    
    
    $
    19,181Payroll related accruals
    
    
    9,204
    
    
    
    4,132
    
    
    
    1,684
    
    
    
    
    
    
    
    15,020Deferred revenue
    
    
    12,861
    
    
    
    18,306
    
    
    
    2,785
    
    
    
    
    
    
    
    33,952Current portion of long-term debt
    
    
    3,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,325Accrued expenses and other current liabilities
    
    
    16,622
    
    
    
    196
    
    
    
    (1,334
    )
    
    
    
    
    
    
    15,484Total current liabilities
    
    
    57,950
    
    
    
    24,981
    
    
    
    4,025
    
    
    
    6
    
    
    
    86,962Long-term debt, net of discount
    
    
    613,787
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    613,787Deferred tax and other liabilities
    
    
    76,759
    
    
    
    (2,159
    )
    
    
    (1,947
    )
    
    
    
    
    
    
    72,653Total liabilities
    
    
    748,496
    
    
    
    22,822
    
    
    
    2,078
    
    
    
    6
    
    
    
    773,402Total stockholders equity (deficit)
    
    
    132,980
    
    
    
    136,766
    
    
    
    (3,656
    )
    
    
    (6,774
    )
    
    
    259,316Total liabilities and stockholders equity
(deficit)
    
    $
    881,476
    
    
    $
    159,588
    
    
    $
    (1,578
    )
    
    $
    (6,768
    )
    
    $
    1,032,718
 14




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##### Table of Contents



Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2008
 GuarantorGuarantor
    
    
    Non-Guarantor(in thousands)
    
    Principal Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Systems
    
    $
    18,012
    
    
    $
    13,740
    
    
    $
    1,780
    
    
    $
    
    
    
    $
    33,532Services
    
    
    34,766
    
    
    
    23,999
    
    
    
    3,969
    
    
    
    
    
    
    
    62,734Total revenues
    
    
    52,778
    
    
    
    37,739
    
    
    
    5,749
    
    
    
    
    
    
    
    96,266Cost of revenues (exclusive of
depreciation and amortization
shown separately below):Systems
    
    
    10,094
    
    
    
    6,562
    
    
    
    1,309
    
    
    
    
    
    
    
    17,965Services
    
    
    13,828
    
    
    
    6,642
    
    
    
    1,535
    
    
    
    
    
    
    
    22,005Total cost of revenues
    
    
    23,922
    
    
    
    13,204
    
    
    
    2,844
    
    
    
    
    
    
    
    39,970Gross profit
    
    
    28,856
    
    
    
    24,535
    
    
    
    2,905
    
    
    
    
    
    
    
    56,296Operating expenses:Sales and marketing
    
    
    8,737
    
    
    
    5,276
    
    
    
    1,004
    
    
    
    
    
    
    
    15,017Product development
    
    
    4,121
    
    
    
    5,363
    
    
    
    674
    
    
    
    
    
    
    
    10,158General and administrative
    
    
    5,058
    
    
    
    390
    
    
    
    282
    
    
    
    
    
    
    
    5,730Depreciation and amortization
    
    
    7,708
    
    
    
    1,821
    
    
    
    176
    
    
    
    
    
    
    
    9,705Impairment of goodwill
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000Acquisition related costs
    
    
    41
    
    
    
    33
    
    
    
    102
    
    
    
    
    
    
    
    176Restructuring costs
    
    
    923
    
    
    
    53
    
    
    
    782
    
    
    
    
    
    
    
    1,758Total operating expenses
    
    
    51,588
    
    
    
    12,936
    
    
    
    3,020
    
    
    
    
    
    
    
    67,544Operating income (loss)
    
    
    (22,732
    )
    
    
    11,599
    
    
    
    (115
    )
    
    
    
    
    
    
    (11,248
    )Interest expense
    
    
    (12,984
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (12,988
    )Other income (expense), net
    
    
    (218
    )
    
    
    (46
    )
    
    
    (65
    )
    
    
    
    
    
    
    (329
    )Income (loss) before income taxes
    
    
    (35,934
    )
    
    
    11,549
    
    
    
    (180
    )
    
    
    
    
    
    
    (24,565
    )Income tax expense
    
    
    231
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    236Net income (loss)
    
    $
    (36,165
    )
    
    $
    11,549
    
    
    $
    (185
    )
    
    $
    
    
    
    $
    (24,801
    )
 15




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##### Table of Contents



Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2007
 GuarantorGuarantor
    
    
    Non-Guarantor(in thousands)
    
    Principal Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Systems
    
    $
    23,352
    
    
    $
    19,386
    
    
    $
    3,179
    
    
    $
    
    
    
    $
    45,917Services
    
    
    35,555
    
    
    
    23,037
    
    
    
    4,401
    
    
    
    
    
    
    
    62,993Total revenues
    
    
    58,907
    
    
    
    42,423
    
    
    
    7,580
    
    
    
    
    
    
    
    108,910Cost of revenues (exclusive of
depreciation and amortization
shown separately below):Systems
    
    
    14,681
    
    
    
    7,912
    
    
    
    3,804
    
    
    
    
    
    
    
    26,397Services
    
    
    14,722
    
    
    
    6,421
    
    
    
    2,080
    
    
    
    
    
    
    
    23,223Total cost of revenues
    
    
    29,403
    
    
    
    14,333
    
    
    
    5,884
    
    
    
    
    
    
    
    49,620Gross profit
    
    
    29,504
    
    
    
    28,090
    
    
    
    1,696
    
    
    
    
    
    
    
    59,290Operating expenses:Sales and marketing
    
    
    9,238
    
    
    
    5,879
    
    
    
    1,308
    
    
    
    
    
    
    
    16,425Product development
    
    
    5,246
    
    
    
    5,888
    
    
    
    990
    
    
    
    
    
    
    
    12,124General and administrative
    
    
    6,020
    
    
    
    737
    
    
    
    739
    
    
    
    
    
    
    
    7,496Depreciation and amortization
    
    
    7,269
    
    
    
    1,131
    
    
    
    195
    
    
    
    
    
    
    
    8,595Acquisition related costs
    
    
    251
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    251Restructuring costs
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168Total operating expenses
    
    
    28,192
    
    
    
    13,635
    
    
    
    3,232
    
    
    
    
    
    
    
    45,059Operating income (loss)
    
    
    1,312
    
    
    
    14,455
    
    
    
    (1,536
    )
    
    
    
    
    
    
    14,231Interest expense
    
    
    (13,686
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    
    
    
    
    (13,690
    )Other income (expense), net
    
    
    160
    
    
    
    120
    
    
    
    284
    
    
    
    
    
    
    
    564Income (loss) before income taxes
    
    
    (12,214
    )
    
    
    14,574
    
    
    
    (1,255
    )
    
    
    
    
    
    
    1,105Income tax expense
    
    
    511
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    512Net income (loss)
    
    $
    (12,725
    )
    
    $
    14,574
    
    
    $
    (1,256
    )
    
    $
    
    
    
    $
    593
 16




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2008
 GuarantorGuarantor
    
    
    Non-Guarantor(in thousands)
    
    Principal Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in)
operating activities
    
    $
    10,063
    
    
    $
    (2,149
    )
    
    $
    695
    
    
    $
    
    
    
    $
    8,609Investing activities:Purchase of property and equipment
    
    
    (488
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (488
    )Capitalized computer software
costs and databases
    
    
    (1,905
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,905
    )Net cash provided by (used in)
investing activities
    
    
    (2,393
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,393
    )Financing activities:Payment on long-term debt
    
    
    (3,512
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,512
    )Repurchase of common stock
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )Net cash used in financing activities
    
    
    (3,526
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,526
    )Net change in cash and cash
equivalents
    
    
    4,144
    
    
    
    (2,149
    )
    
    
    695
    
    
    
    
    
    
    
    2,690Cash and cash equivalents, beginning
of period
    
    
    55,926
    
    
    
    2,931
    
    
    
    5,932
    
    
    
    
    
    
    
    64,789Cash and cash equivalents, end of
period
    
    $
    60,070
    
    
    $
    782
    
    
    $
    6,627
    
    
    $
    
    
    
    $
    67,479
 Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2007
 GuarantorGuarantor
    
    
    Non-Guarantor(in thousands)
    
    Principal Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating
activities
    
    $
    93
    
    
    $
    906
    
    
    $
    2,229
    
    
    $
    
    
    
    $
    3,228Investing activities:Purchase of property and equipment
    
    
    (1,015
    )
    
    
    (75
    )
    
    
    (30
    )
    
    
    
    
    
    
    (1,120
    )Capitalized computer software
costs and databases
    
    
    (1,667
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,667
    )Net cash used in investing activities
    
    
    (2,682
    )
    
    
    (75
    )
    
    
    (30
    )
    
    
    
    
    
    
    (2,787
    )Financing activities:Payment on long-term debt
    
    
    (187
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (187
    )Deferred financing costs
    
    
    (107
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107
    )Net cash used in financing activities
    
    
    (294
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (294
    )Net change in cash and cash
equivalents
    
    
    (2,883
    )
    
    
    831
    
    
    
    2,199
    
    
    
    
    
    
    
    147Cash and cash equivalents, beginning
of period
    
    
    24,862
    
    
    
    4,154
    
    
    
    4,363
    
    
    
    
    
    
    
    33,379Cash and cash equivalents, end of
period
    
    $
    21,979
    
    
    $
    4,985
    
    
    $
    6,562
    
    
    $
    
    
    
    $
    33,526
 17




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##### Table of Contents



Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 You should read the following discussion and analysis in conjunction with our financial statements
and related notes included above. This discussion contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a variety of factors, including
those set forth under Risk Factors included in our Annual Report on Form 10-K for the year ended
September 30, 2008 and under Part II, Item 1A of this report.
 Overview
 Disclosures about Segments of an Enterprise and Related Information.
   ▪
    
    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 garden centers; independent lumber and building material dealers; and
pharmacies, primarily in the United States. For the three months ended December 31, 2008,
we generated approximately 35.6% 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; tile; industrial machinery and equipment; industrial supplies; fluid power;
janitorial and sanitation products; paper and packaging; and service establishment
equipment vendors, primarily in the United States. For the three months ended December 31,
2008, we generated approximately 39.9% of our total revenues from the wholesale
distribution vertical market.▪
    
    The automotive vertical market 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, 2008, we generated approximately 20.4% of
our total revenues from the automotive vertical market.▪
    
    Other primarily consists of our Productivity Tools business, which is involved with
software migration services and application development tools. For the three months ended
December 31, 2008, we generated approximately 4.1% of our total revenues from other.
  
    
    Systems, which is comprised primarily of proprietary software applications;
implementation services; training; forms and paper products; and third-party software,
hardware and peripherals.
    
    Services, which is comprised primarily of product support, content, and supply chain
services. Product support services are comprised of customer support activities, including
hardware, software and network support through our advice line, software updates,
preventive and remedial on-site maintenance and depot repair services. Our content services
are
 18




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##### Table of Contents



comprised of proprietary database and data management products such as our
comprehensive electronic automotive parts and applications catalog and point-of-sale
business analysis data. Supply chain services are comprised of connectivity services,
ecommerce, networking and security monitoring management solutions. We generally provide
our services on a subscription basis, and accordingly, revenues are generally recurring in
nature.
 Key Trends
  ▪
    
    Extended sales cycles.As a result of the economic downturn and tightening credit
markets, customers and prospective customers remain cautious with new capital investments
leading to extended sales cycles. As result of the slowing economy, in fiscal year 2008 as
well as in the first quarter of fiscal year 2009, our management approved restructuring
actions primarily related to eliminating certain employee positions and consolidating
certain excess facilities. We recorded approximately $1.8 million related to these actions
during the three months ended December 31, 2008, and expect to record additional charges
related thereto in each of the next two fiscal quarters.▪
    
    Consolidation of our customers vertical markets.Over time, our customer base has been
undergoing consolidation. When one of our customers acquires a company that does not
currently use our systems, we typically benefit from new systems sales and increased
services revenues associated with that customer. When a company not currently using our
systems acquires one of our customers, we typically lose services revenues. Consolidations
historically have had  the most significant impact on the automotive and hardlines and lumber vertical
markets.▪
    
    Revenue growth in our wholesale distribution vertical market.Our systems revenues from
the wholesale distribution vertical market grew at a compounded annual growth rate of
approximately 128% from fiscal year 2003 through fiscal year 2008, primarily as a result of
our acquisitions of Prophet 21 and Eclipse. Increased systems revenues generally result in
increased product support revenues in future years as we add new customers and new
products. In each of the last four fiscal years, product support revenues have increased as
we added several new customers to our product support business and sold additional add-on
modules. However, over the past year we experienced a flattening of
revenues in this vertical market and for the three months ended
December 31, 2008, we experienced a 9.5% decline in revenues compared to the
comparable prior year period. We did not have any acquisitions in fiscal year 2008, or in the three months
ended December 31, 2008. This coupled with the weaker economic conditions will prevent us
from sustaining this level of compounded annual growth rate and could
prevent us from achieving any growth in our wholesale distribution
vertical market in future periods.▪
    
    Lower systems sales in the hardlines and lumber vertical market.From fiscal year 2003
to fiscal year 2007 our revenues from the hardlines and lumber vertical market grew at a
compound annual growth rate of 16%. Much of this growth was fueled by growth in the
residential housing market and new store openings with our co-op partners. In the three
months ended December 31, 2008 hardlines and lumber systems revenue decreased 28% due to
fewer store openings attributed to the ongoing economic slowdown in retail and residential
construction. In the near to intermediate term, we expect that this trend will continue to
adversely affect our results of operations in this vertical market.▪
    
    Lower customer retention in our automotive vertical market.Our customer base in the
automotive vertical market continues to decline due to the loss of a major customer
(General Parts, Inc.) and consolidation of independent automotive store locations.
Additionally, as we stop actively developing and selling several of our older systems,
especially in our automotive vertical market, we have experienced reduced rates of customer
retention. We have developed various upgrade paths for these customers and have undertaken
a specific customer services campaign to increase retention rates for customers who elect
to continue to operate with our older systems. Despite our efforts, we have experienced
year-over-year decreases in our automotive product support revenues and we expect lower
levels of customer retention to continue.▪
    
    Goodwill impairment.We account for goodwill in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, BusinessCombinations, and SFAS No. 142, Goodwill
and Other Intangible Assets. Goodwill is tested for impairment on an annual basis as of
July 1, and between annual tests if indicators of potential impairment exist, using a
fair-value-based approach. Our annual testing through fiscal year 2008 indicated no
impairment(s) of goodwill had occurred. As mentioned above, the continuing global economic
uncertainty and credit crisis have negatively impacted the level of overall spending,
including spending in the vertical markets that we serve. As a result, we have determined
it necessary to evaluate goodwill for impairment as of December 31, 2008. In accordance
with SFAS No. 142, we have
 19




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##### Table of Contents



completed step one of the impairment analysis and concluded that
as of December 31, 2008, the fair value of our Hardlines and Lumber and our Automotive
reporting units was below their respective carrying values, including goodwill. As such,
step two of the impairment test was initiated in accordance with SFAS No. 142. Due to its
time consuming nature and the complexities of determining the implied fair value of
goodwill for each of these reporting units, the step two analysis has not been completed as
of the date of this filing. Although this analysis has not been completed, based on the
work performed to date we have recorded an estimated goodwill impairment charge of $25.0
million, comprised of $18.5 million related to Hardlines and Lumber and $6.5 million
related to Automotive. The impairment charges are subject to
finalization of the step two analysis
which we expect to complete during the three months ending
March 31, 2009.
We believe that the preliminary estimate of impairment charges is
reasonable and represents our good faith estimate of the impairment
charges to be incurred; however, it is possible that material
adjustments to the preliminary estimate for Hardlines and Lumber and
for Automotive may be required as the step two analysis is finalized.
  Historical Results of Operations
 Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007
 Total revenues
   Three Months Ended December 31,(in thousands)
    
    2008
    
    
    2007
    
    
    Variance $
    
    
    Variance %Hardlines and Lumber revenues:Systems
    
    $
    14,136
    
    
    $
    19,677
    
    
    $
    (5,541
    )
    
    
    (28.2
    )%Services
    
    
    20,088
    
    
    
    20,113
    
    
    
    (25
    )
    
    
    (0.1
    )%Total Hardlines and Lumber revenues
    
    $
    34,224
    
    
    $
    39,790
    
    
    $
    (5,566
    )
    
    
    (14.0
    )%Wholesale Distribution revenues:Systems
    
    $
    13,740
    
    
    $
    19,385
    
    
    $
    (5,645
    )
    
    
    (29.1
    )%Services
    
    
    24,659
    
    
    
    23,055
    
    
    
    1,604
    
    
    
    7.0
    %Total Wholesale Distribution revenues
    
    $
    38,399
    
    
    $
    42,440
    
    
    $
    (4,041
    )
    
    
    (9.5
    )%Automotive revenues:Systems
    
    $
    3,236
    
    
    $
    3,511
    
    
    $
    (275
    )
    
    
    (7.8
    )%Services
    
    
    16,452
    
    
    
    18,274
    
    
    
    (1,822
    )
    
    
    (10.0
    )%Total Automotive revenues
    
    $
    19,688
    
    
    $
    21,785
    
    
    $
    (2,097
    )
    
    
    (9.6
    )%Other revenues:Systems
    
    $
    2,420
    
    
    $
    3,344
    
    
    $
    (924
    )
    
    
    (27.6
    )%Services
    
    
    1,535
    
    
    
    1,551
    
    
    
    (16
    )
    
    
    (1.0
    )%Total Other revenues
    
    $
    3,955
    
    
    $
    4,895
    
    
    $
    (940
    )
    
    
    (19.2
    )%Total revenues:Systems
    
    $
    33,532
    
    
    $
    45,917
    
    
    $
    (12,385
    )
    
    
    (27.0
    )%Services
    
    
    62,734
    
    
    
    62,993
    
    
    
    (259
    )
    
    
    (0.4
    )%Total revenues
    
    $
    96,266
    
    
    $
    108,910
    
    
    $
    (12,644
    )
    
    
    (11.6
    )%
  20




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##### Table of Contents



▪
    
    Hardlines and Lumber revenues Hardlines and Lumber revenues decreased by $5.6
million, or 14.0%. The systems revenue decrease was attributed to a reduction in the
volume of new system sales and the sale of additional products and modules, primarily as a
result of our customers exhibiting caution on making capital expenditures both due to the
weak economy and a slowing retail and residential housing environment. Services revenues
remained relatively flat.▪
    
    Wholesale Distribution revenues Wholesale Distribution revenues decreased by $4.0
million, or 9.5%. The systems revenue decrease was substantially attributable to a
reduction in the volume of new systems and the sale of additional products and modules,
primarily due to the weak economy and extended customer sales cycles. Services revenue
increased primarily as a result of price increases for support services.▪
    
    Automotive revenues Automotive revenues decreased by $2.1 million, or 9.6%. The
systems revenue decrease was attributed to a reduction in the volume of new system sales.
Services revenue decreased primarily as a result of the known attrition of a major
customer, General Parts Inc., and reductions in the customer base.▪
    
    Other revenues Other revenues decreased $1.0 million, or 19.2%, driven primarily by
lower systems sales as a result of a slow down in planned migrations due to
Hewlett-Packards announcement to continue to support one of its legacy systems through
2010.
 Total cost of revenues and gross margins as a percentage of revenues
  Three Months Ended December 31,(in thousands)
    
    2008
    
    2007
    
    VarianceCost of systems revenues
    
    $
    17,965
    
    
    $
    26,397
    
    
    $
    (8,432
    )Systems gross margins
    
    
    46.4
    %
    
    
    42.5
    %Cost of services revenues
    
    $
    22,005
    
    
    $
    23,223
    
    
    $
    (1,218
    )Services gross margins
    
    
    64.9
    %
    
    
    63.1
    %Total cost of revenues
    
    $
    39,970
    
    
    $
    49,620
    
    
    $
    (9,650
    )Total gross margins
    
    
    58.5
    %
    
    
    54.4
    %
 ▪
    
    Cost of systems revenues and systems gross margins Cost of systems revenues consists
primarily of direct costs of software duplication, our logistics organization, cost of
hardware, salary costs of professional services and installation headcount, royalty
payments, and allocations of overhead expenses, including facility and IT costs.Cost of systems revenues decreased by $8.4 million primarily as a result of lower direct
costs associated with lower overall systems revenues. System gross margins increased by 3.9
percentage points in the three months ended December 31, 2008 from the comparable period a
year ago. The increase is primarily attributable to lower outside service costs in Other
(primarily Productivity Tools business) as well as improved margins on hardware equipment
and hardware installation.▪
    
    Cost of services revenues and services gross margins Cost of services revenues
primarily consist of material and direct labor associated with our advice line, material,
labor and production costs associated with our automotive catalog and allocations of
overhead expenses, including facility and IT costs. Generally, our services revenues have a
higher gross margin than our systems revenues.Cost of services revenues decreased by $1.2 million primarily as a result of labor related
cost reductions. Services gross margins increased by 1.8 percentage points in the three
months ended December 31, 2008 from the comparable period a year ago as a result of the
reduction in labor related costs.
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Total operating expenses
  Three Months Ended December 31,(in thousands)
    
    2008
    
    
    2007
    
    
    Variance $
    
    
    Variance %Sales and marketing
    
    $
    15,017
    
    
    $
    16,425
    
    
    $
    (1,408
    )
    
    
    (8.6
    )%Product development
    
    
    10,158
    
    
    
    12,124
    
    
    
    (1,966
    )
    
    
    (16.2
    )%General and administrative
    
    
    5,730
    
    
    
    7,496
    
    
    
    (1,766
    )
    
    
    (23.6
    )%Depreciation and amortization
    
    
    9,705
    
    
    
    8,595
    
    
    
    1,110
    
    
    
    12.9
    %Impairment of goodwill
    
    
    25,000
    
    
    
    
    
    
    
    25,000
    
    
    
    Acquisition related costs
    
    
    176
    
    
    
    251
    
    
    
    (75
    )
    
    
    (29.9
    )%Restructuring costs
    
    
    1,758
    
    
    
    168
    
    
    
    1,590
    
    
    
    946.4
    %Total operating expenses
    
    $
    67,544
    
    
    $
    45,059
    
    
    $
    22,485
    
    
    
    49.9
    %
  ▪
    
    Sales and marketing Sales and marketing expense consists primarily of salaries and
commissions for our sales force, stock-based compensation expense, marketing expenses and an
allocation of overhead expenses including facilities and IT costs. Sales and marketing
expenses decreased by $1.4 million, or 8.6%, for the three months ended December 31, 2008
compared to the three months ended December 31, 2007. The decrease was primarily the result
of a $0.8 million reduction in salary and commission related expenses and $0.7 million of
lower bad debt expense.▪
    
    Product development Product development expense consists primarily of salaries,
stock-based compensation expense, outside services and an allocation of overhead expenses,
including facilities and IT costs. Product development expense decreased $2.0 million, or
16.2%, for the three months ended December 31, 2008 compared to the three months ended
December 31, 2007. The decrease was primarily the result of a $1.4 million reduction in
salary related costs and $0.2 million in outside services as well as a $0.2 million increase
in software and database capitalization.▪
    
    General and administrative General and administrative expense primarily consists of
salaries and bonuses; stock-based compensation expense; facility costs; finance, human
resource and legal services; IT support and telecommunication costs. General and
administrative expenses decreased by $1.8 million, or 23.6%, for the three months ended
December 31, 2008 compared to the three months ended December 31, 2007. The decrease is
primarily the result of a $0.8 million reduction in salary related costs, $0.3 million in a
one-time insurance cost reduction, $0.3 million in reduced legal fees and outsourced
services, and the non-recurrence of $0.3 million of costs related to strategic initiatives
in the prior year.▪
    
    Depreciation and amortization Depreciation and amortization expense consists of
depreciation of our fixed assets and amortization of our intangible assets. Depreciation
and amortization is not allocated to our segments. Depreciation and amortization expense
was $9.7 million for the three months ended December 31, 2008 compared to $8.6 million for
the three months ended December 31, 2007. The increase resulted primarily from the
amortization of the additional $36.0 million of intangible assets associated with the
acquisition of Eclipse.▪
    
    Acquisition related costs Acquisition related costs for the three months ended
December 31, 2008 and 2007 were $0.2 million and $0.3 million, respectively, which
primarily included consulting fees and other professional services incurred in connection
with systems integration activities related to Eclipse.▪
    
    Impairment of goodwill
Due to the continuing global economic uncertainty and  credit crisis
and the significant decrease in the level of overall spending,
including spending in the vertical markets that we serve, we
determined it necessary to evaluate goodwill for impairment as of
December 31, 2008. Based on the
work performed to date,


  we recorded an estimated goodwill impairment
charge of  $25.0
million, (comprised of $18.5 million related to Hardlines and Lumber
and $6.5 million related to Automotive) during the three months ended December 31, 2008 in accordance with SFAS No. 142. See Note 3 to our unaudited
condensed consolidated financial statements and Key
Trends above.▪
    
    Restructuring costs During the three months ended December 31, 2008, our management
approved additional restructuring actions primarily related to eliminating certain
additional employee positions with the intent to streamline and focus our operations and
more properly align our cost structure with our projected revenue streams. In accordance
with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,we
recorded a charge of approximately $1.8 million related to these actions.
 Interest expense
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Other income (expense), net
  Income tax expense
  Contribution margin
  Three Months Ended December 31,(in thousands)
    
    2008
    
    
    2007
    
    
    Variance $
    
    
    Variance %Hardlines and Lumber
    
    $
    8,905
    
    
    $
    8,963
    
    
    $
    (58
    )
    
    
    (0.6
    )%Wholesale Distribution
    
    
    14,408
    
    
    
    15,764
    
    
    
    (1,356
    )
    
    
    (8.6
    )%Automotive
    
    
    6,782
    
    
    
    7,242
    
    
    
    (460
    )
    
    
    (6.3
    )%Other
    
    
    1,921
    
    
    
    (211
    )
    
    
    2,132
    
    
    
    (1,010.3
    )%Total contribution margin
    
    $
    32,016
    
    
    $
    31,758
    
    
    $
    258
    
    
    
    0.8
    %
   ▪
    
    Hardlines and Lumber contribution margin The contribution margin for Hardlines and
Lumber remained relatively flat despite $5.6 million in lower revenues, which drove lower
gross margins. The decline in gross margins, as a result of the lower revenues was
partially offset by reduced headcount related expenses, improved hardware equipment and
installation margins and support price increases. Sales and marketing expenses decreased
primarily as a result of lower salary and bad debt expenses. Product development expenses
decreased primarily as a result of lower salary related expense.▪
    
    Wholesale Distribution contribution margin The contribution margin for Wholesale
Distribution decreased by $1.4 million primarily as the result of $4.0 million in lower
revenues, which drove lower gross margins. The decline in gross margins as a result of the
lower revenues was partially offset by support price increases and reductions in headcount
related expenses. Sales and marketing expenses decreased primarily as a result of lower
salary, commission and bad debt expenses. Product development expenses decreased primarily
as a result of lower salary related expense.▪
    
    Automotive contribution margin The $0.5 million decrease in contribution margin for
Automotive was primarily due to lower revenues and gross margin associated with the known
attrition of a major customer, General Parts, Inc. and other customer attrition, partially
offset by lower salary related costs, additional database capitalization and lower bad debt
expense.
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##### Table of Contents



▪
    
    Other contribution margin The contribution margin for Other increased by $2.1
million, primarily due to $1.8 million in reduced outside service costs as a result of a
slow down in migrations due to Hewlett-Packards announcement to continue to support one of
its legacy systems through 2010.
  Three Months Ended December 31,(in thousands)
    
    2008
    
    
    2007Segment contribution margin
    
    $
    32,016
    
    
    $
    31,758Corporate and unallocated costs
    
    
    (5,562
    )
    
    
    (7,631
    )Stock-based compensation expense
    
    
    (1,063
    )
    
    
   (882
    )Depreciation and amortization
    
    
    (9,705
    )
    
    
    (8,595
    )Impairment of goodwill
    
    
    (25,000
    )
    
    
    Acquisition related costs
    
    
    (176
    )
    
    
    (251
    )Restructuring costs
    
    
    (1,758
    )
    
    
    (168
    )Interest expense
    
    
    (12,988
    )
    
    
    (13,690
    )Other income (expense), net
    
    
    (329
    )
    
    
    564Income (loss) before income taxes
    
    $
    (24,565
    )
    
    $
    1,105
 Liquidity and Capital Resources
 Overview
   Senior Secured Credit Agreement
    24




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##### Table of Contents




    
    under the revolving credit facility, 1.25% with respect to base rate borrowings and 2.25%
with respect to Eurodollar rate borrowings, which may be reduced subject to our attainment of
certain leverage ratios;
 
    
    under the term loan, 1.00% with respect to base rate borrowings and 2.00% with respect to
Eurodollar rate borrowings; and
 
    
    under the incremental term loan, 1.50% with respect to base rate borrowings and 2.50% with
respect to Eurodollar rate borrowings.
   
    
    incur additional indebtedness (including contingent liabilities);
 
    
    create liens on assets;
 
    
    enter into sale-leaseback transactions;
 
    
    engage in mergers or acquisitions;
 
    
    dispose of assets;
 
    
    pay dividends and restricted payments;
 
    
    make investments (including joint ventures);
 
    
    make capital expenditures;
 
    
    prepay other indebtedness (including the notes);
 
    
    engage in certain transactions with affiliates;
 
    
    amend agreements governing our subordinated indebtedness (including the notes);
 
    
    amend organizational documents and other material agreements; and
 
    
    change the nature of our business.
  
    
    a maximum total leverage ratio; and
 
    
    a minimum interest coverage ratio.
  Hedging and Derivative Instruments
  25




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##### Table of Contents



Senior Subordinated Notes Due 2016
    
    
    incur additional indebtedness;
 
    
    pay dividends on or make other distributions or repurchase our capital stock;
 
    
    make certain investments;
 
    
    enter into certain types of transactions with affiliates;
 
    
    use assets as security in other transactions; and
 
    
    sell certain assets or merge with or into other companies.
   Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007
     26




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Covenant Compliance
     27




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##### Table of Contents



Twelve Months EndedDecember 31,(in thousands)
    
    2008
    
    
    2007Net income (loss)
    
    $
    (21,773
    )
    
    $
    3,498Acquisition costs
    
    
    854
    
    
    
    267Deferred revenue purchase accounting adjustment
    
    
    1,437
    
    
    
    1,223Adjusted net income (loss)
    
    
    (19,482
    )
    
    
    4,988Interest expense
    
    
    50,494
    
    
    
    49,964Income tax expense
    
    
    4,665
    
    
    
    9,229Depreciation and amortization
    
    
    38,365
    
    
    
    31,272Non-cash
charges (impairment charges and  stock-based compensation expense)
    
    
    28,449
    
    
    
    4,303Non-recurring cash charges and restructuring charges
    
    
    6,985
    
    
    
    1,298Deferred compensation payments
    
    
    258
    
    
    
    731Sponsor payments
    
    
    109
    
    
    
    101Foreign exchange gain
    
    
    (257
    )
    
    
    (267
    )Acquired company EBITDA
    
    
    
    
    
    
    12,115Pro- forma adjustments
    
    
    886
    
    
    
    947Adjusted EBITDA
    
    $
    110,472
    
    
    $
    114,681
  CovenantRequirements
    
    
    Our RatioSenior Secured Credit Agreement (1)Maximum consolidated total debt to adjusted EBITDA ratio
    
    
    5.25x
    
    
    
    5.01Minimum adjusted EBITDA to consolidated interest expense
    
    
    2.00x
    
    
    
    2.35Senior Subordinated Notes (2)Minimum
adjusted EBITDA to fixed charges ratio required to incur additional indebtedness pursuant to ratio provisions
    
    
    2.00x
    
    
    
    2.35
 
 (1)
    
    Our senior secured credit agreement requires us to maintain a consolidated total debt
to adjusted EBITDA ratio of a maximum of 4.75x at the end of the fiscal year ending
September 30, 2009, 4.50x by the end of the fiscal year ending September 30, 2010 and 3.75x
by the end of the fiscal year ending September 30, 2011. Consolidated total debt is defined
in the senior secured credit agreement as total debt other than certain indebtedness and is
reduced by the amount of cash and cash equivalents on our consolidated balance sheet in
excess of $7.5 million. As of December 31, 2008, our consolidated total debt was $553.6
million, consisting of total debt other than certain indebtedness totaling $613.6 million,
net of cash and cash equivalents in excess of $7.5 million totaling $60.0 million. We are
also required to maintain a adjusted EBITDA to consolidated interest expense ratio of a
minimum of 2.25x at the end of the fiscal year ending September 30, 2009, 2.50x by the end
of the fiscal year ending September 30, 2010 and 2.75x by the end of the fiscal year ending
September 30, 2011. Consolidated interest expense is defined in the senior secured credit
agreement as consolidated cash interest expense less cash interest income and is further
adjusted for certain non-cash interest expenses and other items. Failure to satisfy these
ratio requirements would constitute a default under the senior secured credit agreement. If
our lenders failed to waive any such default, our repayment obligations under the senior
secured credit agreement could be accelerated which would also constitute a default under
the indenture governing the senior subordinated notes.(2)
    
    Our ability to incur additional indebtedness and make certain restricted payments under
the indenture governing the senior subordinated notes, subject to specified exceptions, is
tied to adjusted EBITDA to fixed charges ratio of at least 2.00x, except that we may incur
certain indebtedness and make certain restricted payments and certain permitted investments
without regard to the ratio. Fixed charges is defined in the indenture governing the senior
subordinated notes as consolidated interest expense less interest income, adjusted for
acquisitions, and further adjusted for non-cash interest expense. Recently Issued Accounting Pronouncements
 Fair Value Measurements Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classifications or Measurements under Statement 13 Effective Date of
FASB Statement No. 157, Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active. Accounting for
Leases
 28




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##### Table of Contents



Item 3 Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk
  Foreign Currency Risk
   
 Item 4 Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  Limitations on Effectiveness of Controls
  29




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1 Legal Proceedings
  
 Item 1A Risk Factors
  We have recorded an estimated goodwill impairment charge and may record an additional charge
in the three months ending March 31, 2009, which could adversely impact our results of operations.
 Goodwill and Other Intangible
Assets
 
 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3 Defaults Upon Senior Securities
  
 Item 4 Submission of Matters to a Vote of Security Holders
  30




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##### Table of Contents



Item 5 Other Information
  
 Item 6 Exhibits
  ExhibitNo.
    
    Description10.1*
    
    Amended and Restated Employment Agreement, dated December 30, 2008, by and between Activant
Group Inc. (f/k/a Lone Star Holding Corp.) and Pervez A. Qureshi***31.1*
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Pervez A. Qureshi31.2*
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Kathleen M. Crusco32.1**
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Pervez A. Qureshi32.2**
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Kathleen M. Crusco
 
 *
    
    Exhibit is filed herewith.**
    
    Exhibit is furnished herewith. This certification is not deemed filed for purposes of Section
18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section.
Such certification will not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the
registrant specifically incorporates it by reference.***
    
    Indicates a management contract or compensatory plan or arrangement. 31




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##### Table of Contents



SIGNATURE
 th
 ACTIVANT SOLUTIONS INC.By: /s/ KATHLEEN M. CRUSCO

Kathleen M. CruscoSenior Vice President and Chief Financial Officer(Principal Financial and Duly Authorized Officer)
 32