UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q


R QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended December 31, 2010





£ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from  to


Commission File Number 333-49389


Activant Solutions Inc.


(Exact name of registrant as specified in its charter)


Delaware94-2160013(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification No.)7683 Southfront RoadLivermore, CA94551(Address of principal executive offices)(Zip Code)


(925) 449-0606


(Registrant’s telephone number,


including area code)


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No R Although Activant Solutions Inc. is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act, the company has filed all Exchange Act reports for the preceding 12 months.


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o Activant Solutions Inc. is not currently required to submit and post Interactive Data Files pursuant to Rule 405 of Regulation S-T.


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated fileroAccelerated fileroNon-accelerated filerRSmaller reporting companyo(Do not check if a smaller reporting company)


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


ClassOutstanding atFebruary 9, 2011Common Stock, par value $0.01 per share10shares





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ACTIVANT SOLUTIONS INC.





REPORT ON FORM 10-Q


FOR THE QUARTER ENDED DECEMBER 31, 2010


INDEX


PageForward-Looking Statements2PART I — FINANCIAL INFORMATION3Item 1. Financial Statements (Unaudited)3Condensed Consolidated Balance Sheets as of December 31, 2010 and September 30, 20103Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended December 31, 2010 and 20094Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2010 and 20095Notes to Condensed Consolidated Financial Statements6Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations24Item 3. Quantitative and Qualitative Disclosures About Market Risk38Item 4. Controls and Procedures39PART II — OTHER INFORMATION40Item 1. Legal Proceedings40Item 1A. Risk Factors40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds40Item 3. Defaults Upon Senior Securities40Item 4. Removed and Reserved40Item 5. Other Information40Item 6. Exhibits40SIGNATURE41EXHIBIT INDEX42EX-31.1EX-31.2EX-32.1EX-32.2





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FORWARD-LOOKING STATEMENTS





This report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to safe harbors under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this report under “Part I, Item 2 —Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. We have based these forward-looking statements on our current expectations about future events. While we believe these expectations are reasonable, these forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those discussed in this report under “Part I, Item 2 —Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part I, Item 1A — Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 .


Some of the key factors that could cause actual results to differ from our expectations are:





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|• | unfavorable general economic and market conditions, including tight credit markets, on our customers and on our business;

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|• | the lasting impacts of the U.S. and global capital and credit markets crisis that occurred in 2008 and 2009;

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|• | our substantial indebtedness and our ability to incur additional indebtedness;

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|• | our ability to service our indebtedness;

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|• | certain covenants in our debt documents, including covenants that require us to satisfy a maximum total leverage ratio and a minimum interest coverage ratio;

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|• | failure to anticipate or respond to our customers’ needs and requirements;

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|• | failure to develop new relationships and maintain existing relationships with well-known market participants and/or key customers and/or loss of significant customer revenues;

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|• | shortage or delays in the receipt of equipment or hardware necessary to develop our business management solutions and systems;

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|• | failure to maintain adequate financial and management processes and controls;

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|• | loss of recurring subscription service revenues;

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|• | failure to integrate and retain our senior management personnel;

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|• | failure of our Activant Eagle and Vision products to gain acceptance within the automotive parts aftermarket;

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|• | costs and difficulties of integrating future acquisitions;

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|• | costs associated with additional restructuring activities;

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|• | difficulties associated with outsourcing and offshoring;

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|• | the amount of any additional impairment charges, including to goodwill, due to the unfavorable general economic and market conditions;

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|• | changes in the manner or basis on which we receive third-party information used to maintain our electronic automotive parts and applications catalog;

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|• | failure by certain of our existing customers to upgrade to our current generation of systems;

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|• | failure to effectively compete with other technology providers in connection with the sale of our business management solutions;

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|• | substantial fluctuations in our sales cycles applicable to our systems sales;

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|• | consolidation trends, attrition, migration to competitors’ products and reductions in support levels among our customers and in the market segments in which we operate;

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|• | failure to adequately protect our proprietary rights and intellectual property or limitations on the availability of legal or technical means of effecting such protection;

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|• | claims by third parties that we are infringing on their proprietary rights or other adverse claims;

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|• | defects or errors in our software or information services;

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|• | failure to obtain software and information we license from third parties;

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|• | interruptions of our connectivity applications and our systems;

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|• | claims for damages against us in the event of a failure of our customers’ system installed by us or failed installation of a system sold by us;

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|• | fluctuations in the value of foreign currencies;

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|• | natural disasters, terrorist attacks or other catastrophic events;

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|• | differing interests of debt security holders and our controlling stockholders or investors; and

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|• | the other factors described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2010.




Given these risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements included in this report. The forward-looking statements included in this report are made only as of the date hereof. Except as required by law, we do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.


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PART I — FINANCIAL INFORMATION


Item 1 — Financial Statements





ACTIVANT SOLUTIONS INC.





CONDENSED CONSOLIDATED BALANCE SHEETS


(UNAUDITED) (in thousands, except share data)December 31, 2010September 30, 2010ASSETS:Current assets:Cash and cash equivalents$69,229$74,290Trade accounts receivable, net of allowance for doubtful accounts of $4,210 at December 31, 2010 and $3,958 at September 30, 201030,74636,200Inventories3,3234,447Deferred income taxes6,5943,961Income taxes receivable1,3911,441Prepaid expenses and other current assets5,5075,018Total current assets116,790125,357Property and equipment, net6,5046,049Intangible assets, net160,944167,358Goodwill541,454541,454Deferred financing costs8,7026,671Other assets4,9675,017Total assets$839,361$851,906LIABILITIES AND STOCKHOLDER’S EQUITY:Current liabilities:Accounts payable$16,732$20,131Payroll related accruals10,86517,229Deferred revenue26,70029,196Current portion of long-term debt1,6052,566Accrued interest payable5,9028,039Accrued expenses and other current liabilities18,69111,973Total current liabilities80,49589,134Long-term debt, net of discount495,224496,829Deferred tax liabilities50,35851,136Other liabilities9,48417,945Total liabilities635,561655,044Commitments and contingencies——Common Stock:Par value $0.01, authorized 1,000 shares, 10 shares issued and outstanding at December 31, 2010 and September 30, 2010——Additional paid-in capital262,279261,337Accumulated deficit(52,609)(56,119)Other accumulated comprehensive loss:Unrealized loss on cash flow hedges(4,382)(5,426)Cumulative translation adjustment(1,488)(2,930)Total stockholder’s equity203,800196,862Total liabilities and stockholder’s equity$839,361$851,906





The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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ACTIVANT SOLUTIONS INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


(UNAUDITED)








Three Months EndedDecember 31,(in thousands)20102009Revenues:Systems$28,855$27,316Services60,98560,809Total revenues89,84088,125Cost of revenues (exclusive of depreciation and amortization of $5.0 million and $4.4 million for the three months ended December 31, 2010 and 2009, respectively, included          in amounts shown separately below):Systems (Note 6)15,18015,016Services (Note 6)19,92519,460Total cost of revenues35,10534,476Gross profit54,73553,649Operating expenses:Sales and marketing (Note 6)14,12814,212Product development (Note 6)8,9368,746General and administrative (Note 6)9,1766,170Depreciation and amortization10,1329,486Restructuring costs24906Total operating expenses42,39639,520Operating income12,33914,129Interest expense(8,473)(7,919)Other income, net110290Income from continuing operations before income taxes3,9766,500Income tax expense4662,932Income from continuing operations3,5103,568Income from discontinued operations, net of income taxes (Note 9)—954Net income$3,510$4,522Comprehensive income:Net income$3,510$4,522Unrealized gain on cash flow hedges1,0441,186Foreign currency translation adjustment1,44218Comprehensive income$5,996$5,726


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements





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ACTIVANT SOLUTIONS INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


Three Months EndedDecember 31,(in thousands)20102009Operating activities:Net income$3,510$4,522Income from discontinued operations, net of income taxes—(954)Income from continuing operations3,5103,568Adjustments to reconcile income from continuing operations to net cash provided by operating activities:Stock-based compensation expense942988Depreciation1,0541,107Amortization of intangible assets9,0788,379Amortization of deferred financing costs563552Provision for doubtful accounts838325Deferred income taxes(3,411)(349)Changes in assets and liabilities:Trade accounts receivable4,616548Inventories1,124(1,213)Prepaid expenses and other assets(389)(1,790)Accounts payable(3,399)1,670Deferred revenue(1,999)2,614Accrued expenses and other(8,255)(10,134)Net cash provided by operating activities – continuing operations4,2726,265Net cash used in operating activities – discontinued operations—926Net cash provided by operating activities4,2727,191Investing activities:Purchases of property and equipment(1,509)(846)Capitalized computer software and database costs(2,664)(2,594)Net cash used in investing activities – continuing operations(4,173)(3,440)Net cash used in investing activities – discontinued operations—(7)Net cash used in investing activities(4,173)(3,447)Financing activities:Payment of deferred financing fees(2,594)$—Payments on long-term debt(2,566)(16,000)Net cash used in financing activities(5,160)(16,000)Net cash from continuing operations(5,061)(13,175)Net cash from discontinued operations—919Net change in cash and cash equivalents(5,061)(12,256)Cash and cash equivalents, beginning of period74,29044,573Cash and cash equivalents, end of period$69,229$32,317Supplemental disclosures of cash flow informationCash paid during the period for interest$10,042$9,679Cash paid during the period for income taxes$3,447$6,562Cash received during the period for income taxes$(90)$(127)





The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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ACTIVANT SOLUTIONS INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2010


(UNAUDITED)





NOTE 1 — BASIS OF PRESENTATION





The accompanying condensed consolidated balance sheets as of December 31, 2010 and September 30, 2010 and the accompanying condensed consolidated statements of operations and comprehensive income and cash flows for the three months ended December 31, 2010 and 2009 represent our financial position, results of operations and cash flows as of and for the periods then ended.  The accompanying financial statements include our accounts and the accounts of our wholly-owned subsidiaries.





Our accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. While our management has based their assumptions and estimates on the facts and circumstances existing at December 31, 2010, actual results could differ from those estimates and operating results for the three months ended December 31, 2010 are not necessarily indicative of the results that may be achieved for the fiscal year ending September 30, 2011.  Certain reclassifications have been made to the prior period presentation to conform to the current period presentation.





In the opinion of our management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 , filed with the Securities and Exchange Commission (the “SEC”) on December 14, 2010 .





As further discussed in Note 9, in April 2010, we sold our productivity tools business. Accordingly, we have separately classified the results of operations, assets and liabilities, and cash flows of the discontinued operations in the accompanying condensed consolidated financial statements for all the periods presented. Unless otherwise noted, the accompanying disclosures pertain to our continuing operations.





NOTE 2 — RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS





In October 2009, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”)  that amended the accounting rules addressing revenue recognition for multiple-deliverable revenue arrangements by eliminating the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting provided the deliverables meet certain criteria. Additionally, the ASU provided for elimination of the use of the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price. A hierarchy for estimating such selling price is included in the update. In order to allocate revenue based on each deliverable's relative selling price, we established the best estimated selling price for each item using a hierarchy of vendor specific objective evidence, third party evidence and estimated selling price (“ESP”).  We determined ESP for a product or service by considering multiple factors, including, but not limited to, transaction size, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices.  We adopted this guidance on a prospective basis on October 1, 2010.  For the three months ended December 31, 2010, we have assessed the impact of implementing this guidance and determined it did not have a significant impact on the timing or pattern of revenue recognition.  Additionally, we do not believe it will have a significant impact on the timing or pattern of our future revenue recognition.





In October 2009, the FASB also issued an ASU that provides a list of items to consider when determining whether the software and non-software components function together to deliver a product's essential functionality.  We adopted this guidance on a prospective basis on October 1, 2010, and therefore applied it to relevant revenue arrangements originating or materially modified on or after that date.  For the three months ended December 31, 2010, we have assessed the impact of implementing this guidance and determined it did not have a significant impact on the timing or pattern of revenue recognition.  Additionally, we do not believe


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it will have a significant impact on the timing or pattern of our future revenue recognition.





NOTE 3 — DEBT


Total debt consisted of the following (in thousands) :


December 31, 2010September 30, 2010Senior secured credit facility due 2013 ("non-extended")$97,662$320,009Senior secured credit facility (incremental term loan) due 2013 ("non-extended")11,70465,091Senior secured credit facility due 2016 ("extended")273,168—Senior subordinated notes due 2016114,295114,295Total debt496,829499,395Current portion(1,605)(2,566)Total long-term debt, net of discount$495,224$496,829





Senior Secured Credit Agreement





On November 19, 2010, we amended our senior secured credit agreement (as amended, our “senior secured credit agreement”) to, among other things, extend the maturity date for the repayment of a portion of the term loans outstanding thereunder, extend the date of maturity of the commitments in respect of a portion of our revolving credit facility and provide for additional flexibility in the financial covenant levels. As a result of the amendment, $275.0 million (the “extended term loans”) of the existing term loans entered into under the senior secured credit agreement in 2006 and under the first amendment thereto in 2007 have been extended to mature on February 2, 2016, and $25.5 million (the “extended revolving commitments”) of the existing revolving credit commitments have been extended to mature on May 2, 2013. The existing term loans and the existing revolving credit commitments were formerly set to mature on May 2, 2013 and May 2, 2011, respectively. The term loans that are not extended term loans (the “non-extended term loans”) and the revolving credit commitments that are not extended revolving commitments (the “non-extended revolving commitments”) will have the same maturity dates and pricing as in effect prior to the amendment.





Our senior secured credit agreement provides for (i) a seven-year term loan in the amount of $390.0 million, and (ii) a five-year revolving credit facility that permits loans in an aggregate amount of up to $40.0 million, which includes a $20.0 million letter of credit sublimit and a $20.0 million swing line sublimit.  In addition, subject to certain terms and conditions, the senior secured credit agreement provides for one or more uncommitted incremental term loans and/or revolving credit facilities in an aggregate amount not to exceed $75.0 million, of which in August 2007 we borrowed an incremental term loan of the entire $75.0 million.  The extended term loans and the portion of non-extended term loans that relate to the original term loan of $390.0 million amortize at 0.25% per quarter with the final balance of the non-extended term loans, $96.8 million, payable on May 2, 2013 and the final balance of the extended term loans, $260.6 million, payable on February 2, 2016.  Any prepayments of principal will reduce the quarterly payments due, therefore after consideration of the $2.6 million mandatory payment we made during the three months ended December 31, 2010 our first quarterly payment will be due in June 2011.  The portion of the non-extended term loans that relate to the incremental term loan of $75.0 million will be payable in full on May 2, 2013.  The principal amounts outstanding under the non-extended revolving commitments are due and payable in full on May 2, 2011, and amounts outstanding under the extended revolving commitments are due and payable in full on May 2, 2013. As of December 31, 2010, there were no amounts outstanding under our revolving credit line.





We may be required each year, generally concurrent with the filing of our Annual Report on Form 10-K, to make a mandatory principal prepayment for the preceding fiscal year towards term loans equal to a specified percentage of excess cash flow depending on our actually attained ratio of consolidated total debt to EBITDA (consolidated earnings before interest, taxes, depreciation and amortization, further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indenture governing the senior subordinated notes and our senior secured credit facilities), all as defined in the senior secured credit agreement. Any mandatory prepayments due are reduced dollar-for-dollar by any voluntary prepayments made during the year.  For the period ended September 30, 2006 and for the years ended September 30, 2007, 2008, 2009 and 2010, we repaid $1.9 million, $25.2 million, $15.8 million, $23.5 million and $13.5 million, respectively, in principal towards the term loans.  After consideration of our voluntary prepayments made in fiscal year 2010, we had a remaining mandatory principal repayment due for fiscal year 2010 of approximately $2.6 million. During the three months ended December 31, 2010, we proceeded with the $2.6 million mandatory payment.   Any future excess cash flow- based payments will be dependent upon our attained ratio of consolidated total debt to adjusted EBITDA, upon us generating excess cash flow, and/or upon us making voluntary prepayments, all as defined in the senior secured credit agreement.


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In April 2010, we completed the sale of our productivity tools business for approximately $12.0 million in cash. See Note 9 for more information. The senior secured credit agreement requires us to reinvest such cash proceeds in our business within 12 months of receipt and to prepay an aggregate principal amount of term loans equal to the amount of any cash proceeds not so reinvested within such time period in our business.  We have reinvested these cash proceeds in our business within such 12-month period.





The capital and credit markets have been experiencing extreme volatility and disruption during the past several years. These market conditions have, to a degree, affected our ability to borrow under our senior secured credit facilities. In September 2008, Lehman Brothers Holdings Inc. (“Lehman Brothers”) and on November 1, 2009, CIT Group Inc. (“CIT”), filed petitions under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. In December 2009, CIT confirmed that it had emerged from bankruptcy. A Lehman Brothers subsidiary, Lehman Commercial Paper Inc. (“Lehman CPI”) and a CIT subsidiary, The CIT Group/Equipment Financing, Inc. (“CIT Financing”), are lenders under our senior secured credit agreement, having provided commitments of $7.0 million and $7.5 million, respectively, under the revolving credit facility, of which no amounts were outstanding as of December 31, 2010 .  In October 2010, we attempted to draw down on their commitment and CIT Financing participated in our request for funding while Lehman CPI did not.  As a result, depending upon whether Lehman CPI will participate in any future requests for funding or whether another lender assumes their commitment, our revolving line of credit is effectively reduced from $40.0 million to $33.0 million.





The borrowings under the senior secured credit agreement bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Deutsche Bank Trust Company Americas, and (2) the federal funds rate plus 0.50%; or (b) a reserve adjusted Eurocurrency rate on deposits for periods of one-, two-, three-, or six-months (or, to the extent agreed to by each applicable lender, nine- or twelve-months or less than one month). The initial applicable margin for the borrowings is:





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|• | under the non-extended term loan, 1.00% with respect to base rate borrowings and 2.00% with respect toEurocurrencyrate borrowings (rate of 2.31% as of December 31, 2010);

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|• | under the non-extended incremental term loan, 1.50% with respect to base rate borrowings and 2.50% with respect toEurocurrencyrate borrowings (rate of 2.81% as of December 31, 2010);

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|• | under the extended term loan, 3.50% with respect to base rate borrowings and 4.50% with respect to Eurocurrency rate borrowings (rate of 4.81% as of December 31, 2010);

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|• | under the non-extended revolving credit commitments, 1.00% with respect to base rate borrowings and 2.00% with respect toEurocurrency rate borrowings, which may be reduced subject to our attainment of certain leverage ratios; and

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|• | under theextended revolving commitments, 3.50% with respect to base rate borrowings and 4.50% with respect to Eurocurrencyrate borrowings, which may be reduced subject to our attainment of certain leverage ratios.




In addition and in conjunction with the amendment of the senior secured credit agreement, we were required to pay $2.6 million of deferred financing fees, which are being amortized to interest expense over the remaining term of the respective debt.





In addition to paying interest on outstanding principal under the senior secured credit agreement, we are required to pay a commitment fee to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. The initial commitment fee rate for both extended revolving commitments and non-extended revolving commitments is 0.50% per annum. The commitment fee rate may be reduced subject to our attaining certain leverage ratios.  As of December 31, 2010 , our commitment fee was 0.375% per annum.  We must also pay customary letter of credit fees for issued and outstanding letters of credit. As of December 31, 2010 , we had $0.1 million of letters of credit issued and outstanding.





Substantially all of our assets and those of our subsidiaries are pledged as collateral under the senior secured credit agreement.





Derivative Instruments and Hedging Activities





Our objective in using interest rate swaps is to add stability to interest expense and to manage and reduce the risk inherent in interest rate fluctuations. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. At the time we entered into the senior secured credit agreement, we entered into four interest rate swaps to effectively convert a notional amount of $245.0 million of floating rate debt to fixed rate debt.  In November 2007, 2008 and 2009, interest rate swaps with a notional amount of $25.0 million, $30.0 million and $50.0 million, respectively, matured. As of December 31, 2010 , we had an outstanding interest rate swap with a notional amount of $140.0 million . As of and for the three


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months ended December 31, 2010 , there is no cumulative ineffectiveness related to this interest rate swap.





We account for this interest rate swap as a cash flow hedge in accordance with relevant authoritative accounting principles. Our outstanding interest swap continues to be highly effective after considering the amendment of our senior secured credit agreement.  We estimate the fair value of the interest rate swap based on quoted prices and market observable data of similar instruments. If the interest rate swap agreement is terminated prior to maturity, the fair value of the interest rate swap recorded in accumulated other comprehensive income (loss) (“OCI”) may be recognized in the consolidated statements of operations based on an assessment of the agreements at the time of terminations.  The realized gains and losses on this instrument are recorded in earnings as adjustments to interest expense. The unrealized gains and losses are recognized in OCI. For the three months ended December 31, 2010 and 2009 , we recorded an unrealized gain of $1.7 million ($1.0 million net of tax) and $1.8 million ($1.2 million net of tax), respectively.  At December 31, 2010 , cumulative net unrealized losses of approximately $7.1 million ($4.4 million net of tax) were recorded in OCI, of which the entire amount is expected to be reclassified to net income within the next twelve months, providing an offsetting economic impact against the underlying transaction. To the extent the interest rate swap is deemed ineffective, a portion of the unrealized gains and losses is recorded in interest expense rather than OCI.





The following table summarizes the derivative-related activity, excluding taxes, in OCI for the three months ended December 31, 2010  (in thousands) :


Unrealized loss in OCI at beginning of period$(8,850)Net increase in fair value1,701Unrealized loss in OCI at end of period$(7,149)





The following tables summarize the fair value and realized and unrealized losses of the interest rate swaps as of and for the three months ended December 31, 2010  (in thousands) :


Fair Value of Derivative InstrumentsDerivative AssetsDerivative LiabilitiesNotional AmountLocation in the Condensed Consolidated Balance SheetFair ValueLocation in the Condensed Consolidated Balance SheetFair ValueInterest rate swap due November 2011$140,000Other assets$—Accrued expenses and other current liabilities$(7,149)


Effect of Derivative Instruments on Condensed Consolidated Statements of Operations and OCILoss recognized in earnings(1)Gain recognized in OCIGain/(Loss) reclassified from OCI into earnings(2)LocationAmountAmountLocationAmountInterest rate swapInterest Expense$(1,821)$1,701Interest Expense$—


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|(1) | Includes amounts related to periodic settlements required under our derivative contracts.

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|(2) | Represents ineffectiveness related to the interest rate swaps.




Senior Subordinated Notes due 2016





We also issued $175.0 million aggregate principal amount of 9.5% senior subordinated notes due May 2, 2016. The notes were issued in a private transaction that was not subject to the registration requirements of the Securities Act. The notes subsequently were exchanged for substantially identical notes registered with the SEC, pursuant to a registration rights agreement entered into in connection with the indenture under which these notes were issued.





During fiscal year 2009, we repurchased approximately $60.7 million in face value of our senior subordinated notes in open market transactions for an aggregate purchase price of approximately $41.1 million (including accrued interest of $1.3 million). In connection with the debt repurchase, we wrote off deferred financing costs and other transaction fees of $1.9 million. As a result of these repurchases we recorded a gain on retirement of debt in the amount of $19.0 million. Pursuant to the American Recovery and Reinvestment Act of 2009, we have elected to defer payment of the income taxes associated with these gains until they are paid ratably from 2014 to 2018. The repurchased notes have been retired. There were no repurchases of notes during the three


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months ended December 31, 2010 and 2009 .  As a result of these repurchases, senior subordinated notes representing $114.3 million in principal amount were outstanding as of December 31, 2010 .





Each of our domestic subsidiaries, as primary obligors and not as sureties, jointly and severally, irrevocably and unconditionally guarantees, on an unsecured senior subordinated basis, the performance and full and punctual payment when due, whether at maturity, by acceleration or otherwise, of all of our obligations under the indenture and the notes. The notes are our unsecured senior subordinated obligations and are subordinated in right of payment to all of our existing and future senior indebtedness (including the senior secured credit agreement), are effectively subordinated to all of our secured indebtedness (including the senior secured credit agreement) and are senior in right of payment to all of our existing and future subordinated indebtedness.





The indenture governing our senior subordinated notes limits our (and most of our subsidiaries') ability to:





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|• | incur additional indebtedness;

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|• | pay dividends on or make other distributions or repurchase our capital stock;

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|• | make certain investments;

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|• | enter into certain types of transactions with affiliates;

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|• | use assets as security in other transactions; and

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|• | sell certain assets or merge with or into other companies.




The terms of the senior secured credit agreement and the indenture governing the senior subordinated notes restrict certain activities by us, the most significant of which include limitations on additional indebtedness, liens, guarantees, payment or declaration of dividends, sale of assets and transactions with affiliates. In addition, the senior secured credit agreement requires us to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The senior secured credit agreement and the indenture also contain certain customary affirmative covenants and events of default. At December 31, 2010 , we were in compliance with all of the covenants under the s enior secured credit agreement and the indenture.





Compliance with these covenants is dependent on our results of our operations, which are subject to a number of factors including current economic conditions.  Based on our forecast for the remainder of fiscal year 2011, we currently anticipate that we will be able to meet or exceed the financial tests and covenants of our senior secured credit agreement and indenture during this period.  This expectation is based on our cost and revenue expectations for fiscal year 2011.  Should the current economic conditions cause our business or our vertical markets to deteriorate beyond our expectations we may not be able to satisfy these financial tests and covenants.





In order to help ensure compliance with our covenants under our senior secured credit facilities, we may take additional actions in the future, including implementing additional cost cutting initiatives, making additional repurchases of some of our debt or making further changes to our operations. In the event of a default of the financial covenants referred to above, we may (but no more than two times in four fiscal quarters) cure the default by raising equity capital from our existing investors in an amount sufficient to pass, but not to exceed, the financial covenant. While we believe that these additional remedies provide us with some additional flexibility in maintaining compliance with our tests and covenants, they do not assure us that we will not find ourselves in violation of these tests and covenants. Upon the occurrence of an event of default under the senior secured credit facilities, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. Any such acceleration would also result in a default under the indenture governing the senior subordinated notes.





Subject to the restrictions and limitations set forth under the senior secured credit agreement and the indenture governing the senior subordinated notes, we and our subsidiaries, affiliates or significant stockholders may from time to time, in our sole discretion, purchase, repay, redeem or retire additional amounts of our outstanding debt or equity securities (including any publicly issued debt), in privately negotiated or open market transactions, by tender offer or otherwise.





NOTE 4 — FAIR VALUE





We measure fair value based on authoritative accounting guidance, which defines fair value, establishes a framework for measuring fair value as well as expands on required disclosures regarding fair value measurements.





Inputs are referred to as assumptions that market participants would use in pricing the asset or liability. The uses of inputs in the valuation process are categorized into a three-level fair value hierarchy.





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|• | Level 1 — uses quoted prices in active markets for identical assets or liabilities we have the ability to access.




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|• | Level 2 — uses observable inputs other than quoted prices in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.




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|• | Level 3 — uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment.




Our Level 1 assets and liabilities consist of cash equivalents, which are primarily invested in money market funds, deferred compensation assets, which consist of corporate-owned life insurance policies that are valued at their net cash surrender value, and deferred compensation liabilities, valued based on various publicly traded mutual funds. These assets and liabilities are classified as Level 1 because they are valued using quoted prices and other relevant information generated by market transactions involving identical assets and liabilities.





We use derivative financial instruments, specifically interest rate swaps, for non-trading purposes. We entered into interest rate swaps to manage and reduce the risk inherent in interest rate fluctuations arising from previously non-hedged interest payments associated with floating rate debt. We account for the interest rate swaps discussed above under Note 3 as cash flow hedges. Derivative contracts with negative net fair values are recorded in other current liabilities. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. We have determined that our derivative valuation in its entirety should be classified as Level 2.





We record adjustments to appropriately reflect our nonperformance risk and the respective counterparty’s nonperformance risk in our fair value measurements. As of December 31, 2010 , we have assessed the significance of the impact of nonperformance risk on the overall valuation of our derivative position and have determined that it is not significant to the overall valuation of the derivatives.





The fair value of our cash equivalents, deferred compensation plan assets and liabilities and interest rate swap was determined using the following inputs as of December 31, 2010  (in thousands) :


Quoted Prices in Active Markets for Identical Assets and Liabilities(Level 1)Significant Other Observable Inputs(Level 2)Significant Unobservable Inputs(Level 3)Total Fair ValueAssets:Cash equivalents (1)$15,658$—$—$15,658Deferred compensation plan assets (2)2,988——2,988Liabilities:Interest rate swap due 2011(3)—(7,149)—(7,149)Deferred compensation plan liabilities (4)(2,350)——(2,350)Total$16,296$(7,149)$—$9,147


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|(1) | Included in cash and cash equivalents in our condensed consolidated balance sheet.

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|(2) | Included in other assets in our condensed consolidated balance sheet.

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|(3) | Included in accrued expenses and other current liabilities in our condensed consolidated balance sheet.

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|(4) | Included in other liabilities in our condensed consolidated balance sheet.










Other Financial Assets and Liabilities





Financial assets and liabilities with carrying amounts approximating fair value include cash, trade accounts receivable, accounts


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payable, accrued expenses and other current liabilities. The carrying amount of these financial assets and liabilities approximates fair value because of their short maturities.





Long-term debt, including current portion of long-term debt, as of December 31, 2010 had a carrying amount of $496.8 million and fair value of $495.4 million. As of September 30, 2010 , long-term debt, including current-portion of long-term debt, had a carrying amount of $499.4 million and fair value of $493.3 million. The carrying amount is based on interest rates available upon the date of the issuance of debt and is reported in the condensed consolidated balance sheets. The fair value is based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities.





NOTE 5 — INCOME TAXES





We recorded a provision for income tax expense of $0.5 million and $2.9 million for the three months ended December 31, 2010 and 2009, respectively.  This tax provision was derived by applying an estimated worldwide effective tax rate against consolidated income before income taxes for the three months ended December 31, 2010 and 2009, respectively.  The estimated worldwide effective tax rate contemplated estimated variances from the U.S. federal statutory rate for the fiscal year ending September 30, 2011, including the impact of permanently non-deductible expenses, estimated changes in valuation allowances against deferred tax assets, and state income taxes.  The provision for income tax was further adjusted by discrete events occurring during the quarter, including unrecognized tax benefits and liabilities and the release of the valuation allowance and the decrease in the blended rate as a result of the merger between Activant Solutions Inc. and its wholly-owned subsidiary Activant Wholesale Distribution Solutions Inc.





Our condensed consolidated balance sheet included unrecognized tax benefits (excluding interest and penalties, classified in other non-current liabilities) of approximately $1.4 million and $1.5 million as of December 31, 2010 and September 30, 2010, respectively.  The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $1.2 million and $1.3 million as of December 31, 2010 and September 30, 2010, respectively. The tax years 2009 and 2010 remain open to examination by the major taxing jurisdictions to which we are subject.





We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. The balance of accrued interest and penalties was approximately $0.2 million and $0.3 million as of December 31, 2010 and September 30, 2010, respectively.





It is reasonably possible as of December 31, 2010 that the unrecognized tax benefits will decrease by approximately $0.4 million within the next twelve months, primarily due to tax positions relating to certain tax credits and positions relating to transfer pricing.


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NOTE 6 — EMPLOYEE STOCK PLANS


Stock-based Compensation Expense


The following table summarizes stock-based compensation expense for the three months ended December 31, 2010 and 2009 and its allocation within the condensed consolidated statements of operations and comprehensive income (in thousands) :


Three Months EndedDecember 31,20102009Cost of revenuesSystems$18$8Services5961Operating expensesSales and marketing335364Product development7475General and administrative456480Total stock based compensation expense from continuing operations942988Total stock based compensation expense from discontinued operations—10Total stock based compensation expense$942$998





We also recognized a total income tax benefit in the condensed consolidated statements of operations and comprehensive income related to the total stock-based compensation expense amounts above, of approximately $0.4 million for both the three months ended December 31, 2010 and 2009 .





NOTE 7 — RESTRUCTURING COSTS





During the three months ended December 31, 2010, we did not have significant restructuring related charges, however during the three months ended December 31, 2009 , our management approved restructuring plans to continue to streamline and focus our operations and to more properly align our cost structure with current business conditions and our projected future revenue streams. These plans included the elimination of certain employee positions and the consolidation of space within multiple facilities locations.  All of the affected employees have been notified and terminated, and the facility consolidation has been completed. In accordance with relevant authoritative accounting principles, we recorded restructuring charges of approximately $0.9 million for the three months ended December 31, 2009, related to workforce reductions (comprised of severance and related benefits) and the facility consolidation, including additional charges for past actions related to certain employee termination benefits that are required to be accrued from the time of notification through the date specified in the benefit. All restructuring charges were recorded in “Restructuring Costs” in the condensed consolidated statements of operations and comprehensive income.





Our restructuring liability at December 31, 2010 , was approximately $0.9 million and the changes in our restructuring liabilities for the three months then ended were as follows (in thousands) :


Balance atBalance atSeptember 30, 2010Restructuring ChargesPaymentsDecember 31, 20102010 Actions — Severance and Related Benefits$763$24$(637)$1502010 Actions — Facility Closings575—(91)4842009 Actions — Facility Closings388—(107)281$1,726$24$(835)$915


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NOTE 8 — SEGMENT REPORTING





We are a leading provider of business management solutions to small and mid-market retail and distribution businesses. With over 35 years of operating history, we have developed substantial expertise designing, developing, marketing and supporting business solutions in these markets, which have the shared characteristics of being complex operations with advanced customer service and inventory management needs. We provide complete business management solutions to our customers, including business software, professional services, product support, data, information, supply chain services and, in many cases, some hardware products. All are designed to meet the unique requirements of retailers and distributors. Our integrated, real-time systems include point-of-sale/order entry, inventory and pricing management, customer relations management, eCommerce and general accounting solutions. We believe our solutions enable our customers to increase sales, boost productivity, operate more cost efficiently,  improve inventory turns and enhance trading partner relationships.





We specialize in and target specific vertical industries through our two primary markets: retail and distribution, which we consider our segments for reporting purposes. These segments are determined in accordance with how our management views and evaluates our business and based on the criteria as outlined in authoritative accounting guidance regarding segments.  We believe these segments accurately reflect the manner in which our management views and evaluates the business. As discussed in Note 9, in April 2010, we sold our productivity tools business. These amounts have been separately presented as discontinued operations in the accompanying financial statements. The prior periods have been reclassified to conform to the current period presentation.  Unless otherwise noted, the accompanying disclosures pertain to our continuing operations.





Because these segments reflect the manner in which our management reviews our business, they necessarily involve judgments that our management believes are reasonable in light of the circumstances under which they are made. These judgments may change over time or may be modified to reflect new facts or circumstances. Segments may also be changed or modified to reflect technologies and applications that are newly created, or that change over time, or other business conditions that evolve, each of which may result in reassessing specific segments and the elements included within each of those segments. Future events, including changes in our senior management, may affect the manner in which we present segments in the future.





A description of the businesses served by each of our reportable segments follows:





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|• | Retail Distribution Group segment— The retail market consists of a range of specialty retail and distribution vertical markets, including independent hardware retailers; home improvement centers; paint stores; farm supply stores; retail nurseries and garden centers; lumber and building material dealers; pharmacies; and specialty retailers, primarily in the United States; and customers involved in the manufacture, distribution, sale and installation of new and remanufactured parts used in the maintenance and repair of automobiles and light trucks (including manufacturers, warehouse distributors, parts stores, and professional installers) in North America, the United Kingdom and Ireland, as well as several retail chains in North America.




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|• | Wholesale Distribution Group segment— The distribution market consists of distributors in a wide range of vertical markets, 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.

Segment Revenue and Contribution Margin





The results of the reportable segments are derived directly from our management reporting system.  The results are based on our method of internal reporting and are not necessarily in conformity with GAAP.  Our management measures the performance of each segment based on several metrics, including contribution margin as defined below, which is not a financial measure calculated in accordance with GAAP.  Asset data is not reviewed by our management at the segment level and therefore is not included.





Segment contribution margin includes all segment revenues less the related cost of sales, direct marketing, sales expense, and product development expenses.  A significant portion of each segment’s expenses arises from shared services and centrally managed infrastructure support costs that we allocate to the segments to determine segment contribution margin.  These expenses primarily include information technology services, facilities, and telecommunications costs.








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Our reportable segment financial information for the three months ended December 31, 2010 and 2009 is as follows (in thousands) :





Three Months Ended December 31, 2010Three Months Ended December 31, 2009Retail Distribution GroupWholesale Distribution GroupTotalRetail Distribution GroupWholesale Distribution GroupTotalRevenues$50,608$39,232$89,840$52,077$36,048$88,125Contribution margin$15,684$16,172$31,856$16,311$15,123$31,434





Certain of our operating expenses are not allocated to segments because they are separately managed at the corporate level.  These unallocated costs include marketing costs other than direct marketing, general and administrative costs such as legal and finance, stock-based compensation expense, depreciation and amortization of intangible assets, restructuring costs, interest expense, and other income.





There are significant judgments that our management makes with respect to the direct and indirect allocation of costs that may affect the calculation of contribution margins.  While our management believes these and other related judgments are reasonable and appropriate, others could assess such matters in ways different than our company’s management.





The exclusion of costs not considered directly allocable to individual business segments results in contribution margin not taking into account substantial costs of doing business.  We use contribution margin, in part, to evaluate the performance of, and allocate resources to, each of the segments.  While our management may consider contribution margin to be an important measure of comparative operating performance, this measure should be considered in addition to, but not as a substitute for, net income (loss), cash flow and other measures of financial performance prepared in accordance with GAAP that are otherwise presented in our financial statements.  In addition, our calculation of contribution margin may be different from the calculation used by other companies and, therefore, comparability may be affected.





The reconciliation of total segment contribution margin to our income from continuing operations before income taxes is as follows (in thousands) :





Three Months Ended December 31,20102009Segment contribution margin$31,856$31,434Corporate and unallocated costs(8,419)(5,925)Stock-based compensation expense(942)(988)Depreciation and amortization(10,132)(9,486)Restructuring costs(24)(906)Interest expense(8,473)(7,919)Other income, net110290Income from continuing operations before income taxes$3,976$6,500


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NOTE 9 — DISCONTINUED OPERATIONS





On April 16, 2010, we completed the sale of our productivity tools business.  Accordingly, we have separately classified the results of operations, assets and liabilities, and cash flows of the discontinued operations in the condensed consolidated financial statements for all periods presented.





Income from discontinued operations, net of income taxes, for the three months ended December 31, 2009 is summarized as follows (in thousands) :


Revenue from discontinued operations$3,474Expenses from discontinued operations2,081Income from discontinued operations before income taxes1,393Income tax expense439Income from discontinued operations, net of income taxes$954





The cash receipts and payments related to the discontinued operations have been reflected as cash inflows and outflows, respectively in the condensed consolidated statements of cash flows.





NOTE 10 — LITIGATION





We are a party to various legal proceedings and administrative actions, all of which are of an ordinary or routine nature incidental to our operations, except as otherwise described below. We do not believe that such proceedings and actions will, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations or cash flows, except as otherwise described below.





On July 12, 2010, Internet Autoparts, Inc. (“IAP”) filed a complaint in the District Court of Travis County, Texas (the “District Court”) against Activant Solutions Inc. (“Activant”).  In the complaint, IAP alleged that we aided and abetted breaches  of fiduciary duties by our appointee directors of IAP, and that we tortiously interfered with a contractual relationship of IAP by licensing catalogs and catalog services to General Parts, Inc. (“GPI”), which then allegedly used such catalogs and services to breach a covenant not to compete in IAP’s stockholders agreement. Both Activant and GPI are parties to IAP’s stockholders agreement. IAP seeks to recover unspecified damages, including punitive damages, consequential or special damages, interest and any other relief to which it may be entitled.





On August 6, 2010, Activant answered IAP’s complaint and filed a motion to dismiss or stay IAP’s lawsuit in favor of arbitration. On August 6, 2010, Activant also filed a demand for arbitration against IAP with the American Arbitration Association (“AAA”), seeking a declaratory judgment that Activant’s contracts with IAP expressly permit Activant to license catalogs and catalog services to GPI.





On September 16, 2010, the District Court abated IAP’s lawsuit in favor of arbitration.  IAP then filed an amended answering statement with the AAA and asserted as counterclaims the same claims that it had originally filed in the District Court.  Activant has responded to IAP’s counterclaims.  An arbitration hearing has been scheduled for May 23, 2011.





We believe we have meritorious defenses to this lawsuit. Although we intend to defend the lawsuit vigorously, there can be no assurance that we will be successful in our defense, and damages resulting from an unsuccessful defense could have a material adverse effect on our business, financial condition, results of operations or cash flows. Even if we are successful, we may incur substantial legal fees and other costs in defending the lawsuit and the efforts and attention of our management and technical personnel may be diverted, which could also have a material adverse effect on our business, financial condition, results of operations or cash flows. We own approximately 46% of the outstanding common stock of IAP and hold two of five seats on IAP’s board of directors.


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NOTE 11 — GUARANTOR CONSOLIDATION





The senior secured credit agreement and the senior subordinated notes are guaranteed by our existing, wholly-owned domestic subsidiaries HM COOP LLC and Activant Wholesale Distribution Solutions Inc. (collectively, the “Guarantors”). Since September 30, 2006, (i) the following subsidiaries have been merged into Activant Solutions Inc.:  Triad Systems Financial Corporation, Triad Data Corporation, CCI/TRIAD Gem, Inc., Enterprise Computing Inc., Speedware Holdings, Inc., CCI/ARD, Inc., Triad Systems Corporation, Speedware USA, Inc. and Atlas Disposition Group Inc. (formerly known as Speedware Group, Inc.); (ii) the following subsidiary was merged into Atlas Disposition Group Inc.: Atlas America Inc. (formerly known as Speedware America, Inc.); and (iii) the following subsidiaries have been merged into Activant Wholesale Distribution Solutions Inc. (formerly known as Prophet 21 New Jersey, Inc.): Prophet 21 Investment Corporation, Prophet 21 Canada, Inc., SDI Merger Corporation, Distributor Information Systems Corporation, Trade Services Systems, Inc., STANPak Systems, Inc., Prelude Systems Inc. and Greenland Holding Corp. Our other subsidiaries (collectively, the “Non-Guarantors”) are not guarantors of the senior secured credit agreement and the senior subordinated notes. The accompanying condensed consolidating balance sheets as of December 31, 2010 and September 30, 2010 and the accompanying condensed consolidating statements of operations and cash flows for the three months ended December 31, 2010 and 2009 represent the financial position, results of operations and cash flows of our Guarantors and Non-Guarantors. Effective January 1, 2011, Activant Wholesale Distribution Solutions Inc. was merged into Activant Solutions Inc.


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Condensed Consolidating Balance Sheet as of December 31, 2010


Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedASSETS:Current assets:Cash and cash equivalents$60,849$7$8,373$—$69,229Trade accounts receivable, net of allowance for doubtful accounts13,33114,7532,662—30,746Inventories3,13148144—3,323Deferred income taxes5,4241,1673—6,594Income taxes receivable23(31)1,399—1,391Prepaid expenses and other current assets4,62081374—5,507Total current assets87,37816,75712,655—116,790Property and equipment, net6,07134291—6,504Intangible assets, net145,20014,6421,102—160,944Goodwill442,14491,9561,3166,038541,454Investments in subsidiaries17,081——(17,081)—Intercompany receivables (payables)(129,943)130,994(1,051)——Deferred financing costs8,702———8,702Other assets4,79416413(4)4,967Total assets$581,427$254,855$14,126$(11,047)$839,361LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)Current liabilities:Accounts payable$15,198$1,396$138$—$16,732Payroll related accruals3,0077,366492—10,865Deferred revenue5,79820,333569—26,700Current portion of long-term debt1,605———1,605Accrued interest payable5,902———5,902Accrued expenses and other current liabilities17,7081,980(997)—18,691Total current liabilities49,21831,075202—80,495Long-term debt495,224———495,224Deferred tax and other liabilities59,914(459)387—59,842Total liabilities604,35630,616589—635,561Total stockholder’s equity (deficit)(22,929)224,23913,537(11,047)203,800Total liabilities and stockholder’s equity (deficit)$581,427$254,855$14,126$(11,047)$839,361


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Condensed Consolidating Balance Sheet as of September 30, 2010





Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedASSETS:Current assets:Cash and cash equivalents$68,451$8$5,831$—$74,290Trade accounts receivable, net of allowance for doubtful accounts16,97916,4892,732—36,200Inventories4,21437196—4,447Deferred income taxes2,7341,227——3,961Income taxes receivable555(83)969—1,441Prepaid expenses and other current assets4,62429599—5,018Assets of discontinued operations—————Total current assets97,55717,9739,827—125,357Property and equipment, net5,59735894—6,049Intangible assets, net149,84716,3331,178—167,358Goodwill442,14591,9561,3166,037541,454Investments in subsidiaries17,081——(17,081)—Intercompany receivables (payables)(121,746)120,5281,218——Deferred financing costs6,671———6,671Other assets4,84216513(3)5,017Total assets$601,994$247,313$13,646$(11,047)$851,906LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)Current liabilities:Accounts payable$19,056$919$156$—$20,131Payroll related accruals9,2237,535471—17,229Deferred revenue7,80520,427964—29,196Current portion of long-term debt2,566———2,566Accrued interest payable8,0398,039Accrued expenses and other current liabilities11,0652,271(1,363)—11,973Total current liabilities57,75431,152228—89,134Long-term debt496,829———496,829Deferred tax and other liabilities69,312(599)368—69,081Total liabilities623,89530,553596—655,044Total stockholder’s equity (deficit)(21,901)216,76013,050(11,047)196,862Total liabilities and stockholder’s equity (deficit)$601,994$247,313$13,646$(11,047)$851,906


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Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2010





Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedRevenues:Systems$13,974$14,023$858$—$28,855Services33,93924,2982,748—60,985Total revenues47,91338,3213,606—89,840Cost of revenues:Systems8,5076,271402—15,180Services12,9385,5491,438—19,925Total cost of revenues21,44511,8201,840—35,105Gross profit26,46826,5011,766—54,735Operating expenses:Sales and marketing7,3906,262476—14,128Product development3,7574,769410—8,936General and administrative8,92817276—9,176Depreciation and amortization8,3021,74090—10,132Restructuring costs24———24Total operating expenses28,40112,9431,052—42,396Operating income (loss)(1,933)13,558714—12,339Interest expense(8,509)—36—(8,473)Other income (expense), net1,333106(1,329)—110Income (loss) before income taxes(9,109)13,664(579)—3,976Income tax expense(5,321)5,339448—466Net income (loss)$(3,788)$8,325$(1,027)$—$3,510





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Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2009





Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedRevenues:Systems$15,108$11,281$927$—$27,316Services33,53024,5542,725—60,809Total revenues48,63835,8353,652—88,125Cost of revenues:Systems9,1205,308588—15,016Services12,5205,4641,476—19,460Total cost of revenues21,64010,7722,064—34,476Gross profit26,99825,0631,588—53,649Operating expenses:Sales and marketing8,3915,111710—14,212Product development3,6664,664416—8,746General and administrative5,645352173—6,170Depreciation and amortization7,5881,752146—9,486Restructuring costs27389544—906Total operating expenses25,56311,9681,989—39,520Operating income (loss)1,43513,095(401)—14,129Interest expense(7,915)(4)——(7,919)Other income (expense), net(5,654)835,861—290Income (loss) from continuing operations before income taxes(12,134)13,1745,460—6,500Income tax expense1,763551618—2,932Income (loss) from continuing operations(13,897)12,6234,842—3,568Income (loss) from discontinued operations, net of income taxes2,072—(1,118)—954Net income (loss)$(11,825)$12,623$3,724$—$4,522


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Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2010





Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedNet cash provided by operating activities$1,683$32$2,557$—$4,272Investing activities:Purchase of property and equipment(1,462)(32)(15)—(1,509)Capitalized computer software costs and databases(2,664)———(2,664)Net cash used in investing activities(4,126)(32)(15)—(4,173)Financing activities:Payment of deferred financing fees(2,594)———(2,594)Payment on long-term debt(2,566)———(2,566)Net cash used in financing activities(5,160)———(5,160)Net change in cash and cash equivalents(7,603)—2,542—(5,061)Cash and cash equivalents, beginning of period68,45275,831—74,290Cash and cash equivalents, end of period$60,849$7$8,373$—$69,229


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Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2009


Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedNet cash provided by operating activities - continuing operations$5,060$211$994$—$6,265Net cash provided by (used in) operating activities - discontinued operations943—(17)—926Net cash provided by operating activities6,003211977—7,191Investing activities:Purchase of property and equipment(778)(61)(7)—(846)Capitalized computer software costs and databases(2,594)———(2,594)Net cash used in investing activities - continuing operations(3,372)(61)(7)—(3,440)Net cash used in investing activities - discontinued operations(7)———(7)Net cash used in investing activities(3,379)(61)(7)—(3,447)Financing activities:Payment on long-term debt(16,000)———(16,000)Net cash used in financing activities - continuing operations(16,000)———(16,000)Net cash from continuing operations(14,312)150987—(13,175)Net cash from discontinued operations936—(17)—919Net change in cash and cash equivalents(13,376)150970—(12,256)Cash and cash equivalents, beginning of period42,0012152,357—44,573Cash and cash equivalents, end of period$28,625$365$3,327$—$32,317





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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 “Part I, Item 1A — Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 .





Overview





We are a leading provider of business management solutions to small and mid-market retail and distribution businesses.  With over 35 years of operating history, we have developed substantial expertise designing, developing, marketing and supporting business solutions in these markets, which have the shared characteristics of being complex operations with advanced customer service and inventory management needs. We provide complete business management solutions to our customers, including business software, professional services, product support, data, information, supply chain services and, in many cases, some hardware products. All are designed to meet the unique requirements of retailers and distributors. Our integrated, real-time systems include point-of-sale/order entry, inventory and pricing management, customer relations management, eCommerce and general accounting solutions. We believe our solutions enable our customers to increase sales, boost productivity, operate more cost efficiently, improve inventory turns and enhance trading partner relationships.





We specialize in and target specific vertical industries through our two primary markets: retail and distribution, which we consider our segments for reporting purposes. These segments are determined in accordance with how our management views and evaluates our business and based on the criteria as outlined in authoritative accounting guidance regarding segments. We believe these segments accurately reflect the manner in which our management views and evaluates the business. As discussed in Note 9 to our accompanying unaudited condensed consolidated financial statements, in April 2010, we sold our productivity tools business, which was previously presented in Other. These amounts have been separately presented as discontinued operations in the accompanying financial statements. The prior periods have been reclassified to conform to the current period presentation.  Unless otherwise noted, the accompanying disclosures pertain to our continuing operations.





Because these segments reflect the manner in which our management reviews our business, they necessarily involve judgments that our management believes are reasonable in light of the circumstances under which they are made. These judgments may change over time or may be modified to reflect new facts or circumstances. Segments may also be changed or modified to reflect technologies and applications that are newly created, or that change over time, or other business conditions that evolve, each of which may result in reassessing specific segments and the elements included within each of those segments. Future events, including changes in our senior management, may affect the manner in which we present segments in the future.





In the opinion of our management, this discussion and analysis of our financial condition and results of operations reflects all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results for the periods presented.





The key components of our results of operations are as follows:





Revenues





Our revenues are primarily derived from customers that operate in two markets:  retail and distribution.





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | The retail market consists of a range of specialty retail and distribution vertical markets, including independent hardware retailers; home improvement centers; paint stores; farm supply stores; retail nurseries and garden centers; lumber and building material dealers; pharmacies; and specialty retailers, primarily in the United States; and customers involved in the manufacture, distribution, sale and installation of new and remanufactured parts used in the maintenance and repair of automobiles and light trucks (including manufacturers, warehouse distributors, parts stores, and professional installers) in North America, the United Kingdom and Ireland, as well as several retail chains in North America.  For the three months endedDecember 31, 2010, we generated approximately56.3%of our total revenues from the retail vertical market.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | The distribution market consists of distributors in a wide range of vertical markets, 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 endedDecember 31, 2010, we generated approximately43.7%of our total revenues

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from the distribution vertical market.





Our revenues are generated from the following business management solutions and services:





|  |                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Systems, which is comprised primarily of proprietary software applications, professional services, training, third-party software, hardware and peripherals and forms.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Services, which is comprised primarily of product support, content services and supply chain services. Product support services are comprised of customer support activities, including software, hardware and network support through our help desk, web help, software updates, preventive and remedial on-site maintenance and depot repair services. Our content services are comprised of proprietary database and data management products such as our comprehensive automotive parts catalog, point-of-sale business analysis, and data and data warehousing. Supply chain services are comprised of connectivity services, EDI, eCommerce, hosting, networking and security monitoring management solutions. We generally provide our services on a subscription basis, and accordingly, revenues are generally recurring in nature.




Cost of Revenues





Our cost of revenues and gross margins are derived from systems and services as follows:





|  |                                                                                                                                                                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Cost of systems revenues and systems gross margins— Cost of systems revenues consists primarily of direct costs of software duplication, our logistics organization, cost of hardware, salary related costs of professional services and installation personnel, royalty payments, and allocated overhead expenses.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Cost of services revenues and services gross margins— Cost of services revenues primarily consist of salary related costs, third party maintenance costs and travel associated with our help desk, salary related costs, material and production costs associated with our automotive catalog and other content offerings as well as overhead expenses. Generally, our services revenues have a higher gross margin than our systems revenues.




We allocate overhead expenses including facilities and information technology costs to all departments based on headcount. As such, overhead expenses are included in costs of revenues and each operating expense category.





Operating Expenses





Our operating expenses consist primarily of sales and marketing, product development, and general and administrative expenses as well as non-cash expenses, including depreciation and amortization.





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Sales and marketing— Sales and marketing expense consists primarily of salaries and bonuses, commissions, stock-based compensation expense, travel, marketing promotional expenses and allocated overhead expenses. Our marketing approach is to develop strategic relationships, as well as endorsement and alliance agreements, with many of the well-known market participants in the vertical markets that we serve. This strategy includes obtaining endorsements, warehouse distributor relationships and other alliances. The goal of these programs is to enhance the productivity of the field sales team and to create leveraged selling opportunities as well as offer maximum benefits to our customers by allowing them to implement broad based common business practices.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Product development— Product development expense consists primarily of salaries and bonuses, stock-based compensation expense, outside services and allocated overhead expenses. Our product development strategy combines innovation and the introduction of new technology with our commitment to the long-term support of the unique needs of our customers. We seek to enhance our existing product lines, offer streamlined upgrade and migration options for our existing customers and develop compelling new products for our existing customer base and prospective new customers.




|  |                                                                                                                                                                                                                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | General and administrative— General and administrative expense primarily consists of salaries and bonuses, stock-based compensation expense, outside services, acquisition related costs and facility and information technology allocations for the executive, financial, human resources and legal service functions. General and administrative expenses are not allocated to our segments.




|  |                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Depreciation and amortization— Depreciation and amortization expense consists of depreciation of our fixed assets and amortization of our intangible assets. Depreciation and amortization are not allocated to our segments.




|  |                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------
|• | Restructuring costs— Restructuring costs relate to management approved restructuring actions to eliminate certain

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employee positions and to consolidate certain excess facilities with the intent to streamline and focus our operations and more properly align our cost structure with our projected revenue streams. Restructuring costs are not allocated to our segments.





Non-Operating Expenses





Our non-operating expenses consist of the following:





|  |                                                                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Interest expense— Interest expense represents interest on our outstanding debt as a result of our 2006 merger with Activant Solutions Holdings Inc. and subsequent acquisitions.




|  |                                                                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Other income (expense), net— Other income (expense), net primarily consists of interest income, dividend income, other non-income based taxes, foreign currency gains or losses, gains or losses on disposal of assets and gains or losses on marketable securities.




|  |                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Income tax expense —Income tax expense is based on state, federal and foreign taxable income determined in accordance with current enacted laws and tax rates.




General Business Conditions and Trends





The United States economy continued to slowly recover in 2010. We believe that the pace of the recovery will likely be slow as the U.S. economy experiences prolonged tight credit, high unemployment and ongoing foreclosures, as well as historically low sales of both new and existing homes. The broader macroeconomic environment has impacted our performance in the markets we serve, and we expect it will likely continue to affect the industries we serve and our performance in those industries in our fiscal year 2011.





We continue to see customer caution in making capital expenditure decisions. While we have seen year-over-year total revenue increases for the last few quarters, we also see our potential and current customer base challenged with, among other things, lack of access to adequate credit and attrition due to bankruptcies and business shutdowns.  In the first quarter of fiscal year 2011, our retail segment experienced a softening in sales of additional products and services to our existing customers primarily due to the completion of  payment card industry compliance requirements, which had generated additional selling opportunities. We anticipate that this trend will continue through the third quarter as retailers were generally required to be compliant by July 2010.  Additionally our retail segment has recently experienced and may continue to experience customers deferring decisions on new system purchases.  In our distribution segment, we are starting to see a slow but steady recovery from the economic downturn, which is driving increased sales to existing customers.





We have proactively addressed our cost model as we faced these marketplace and revenue uncertainties. Over the past several years our management implemented restructuring actions primarily related to eliminating certain employee positions and consolidating certain excess facilities.  We also benefited from our intense focus on managing our discretionary expenses and continue to do so wherever practical.





Demand for our systems and support offerings are correlated with the economic conditions in each vertical market and the macroeconomic conditions. We continue to focus on executing in the areas we can control by continuing to provide high value products and services while managing our expenses . Despite the challenging economic environment, cash flows from operating activities remained positive for the three months ended December 31, 2010 at $4.3 million .  We continue to use excess cash to pay down our outstanding debt obligations. We made principal payments of approximately $2.6 million in face value of our debt during the three months ended December 31, 2010 .





If the macroeconomic environment recovery continues to be slow, it could have a negative effect on our revenue growth rate and our operating margins.  If this were to occur, it may impact our ability to meet certain financial tests and covenants under our senior secured credit agreement (as defined below) and the indenture governing our senior subordinated notes. We met our covenants for the three months ended December 31, 2010 and based on our forecast for fiscal year 2011, we currently anticipate that we will be able to continue to meet or exceed these financial tests and covenants.  This expectation is based on our cost and revenue expectations for fiscal year 2011. Should the current economic conditions cause our business or our vertical markets to deteriorate beyond our expectations we may not be able to satisfy these financial tests and covenants.


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Results of Operations





Three Months Ended December 31, 2010 Compared to Three Months Ended December 31, 2009





Total revenues





Our Retail Distribution Group and Wholesale Distribution Group segments accounted for approximately 56.3% and 43.7% , respectively, of our revenues during the three months ended December 31, 2010 . This compares to the three months ended December 31, 2009 , where our Retail Distribution Group and Wholesale Distribution Group segments accounted for approximately 59.1% and 40.9% , respectively, of our revenues. See Note 8 to our unaudited condensed consolidated financial statements for further information on our segments, including a summary of our segment revenues and contribution margin.





The following table sets forth, for the periods indicated, our segment revenues by business management solution and services and the variance thereof (in thousands) :


Three Months Ended December 31,20102009Variance $Variance %Retail Distribution Group revenues:Systems$14,810$15,980$(1,170)(7.3)%Services35,79836,097(299)(0.8)%Total Retail Distribution Group revenues$50,608$52,077$(1,469)(2.8)%Wholesale Distribution Group revenues:Systems$14,045$11,336$2,70923.9%Services25,18724,7124751.9%Total Wholesale Distribution Group revenues$39,232$36,048$3,1848.8%Total revenues:Systems$28,855$27,316$1,5395.6%Services60,98560,8091760.3%Total revenues$89,840$88,125$1,7151.9%





Total revenues for the three months ended December 31, 2010 increased by $1.7 million , or 1.9% , compared to the three months ended December 31, 2009 . The increase in revenues over the comparable period a year ago is primarily a result of an increase in systems and services revenues in Wholesale Distribution Group , partially offset by a decrease in systems and services revenues in Retail  Distribution Group.





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Retail Distribution Group revenues— Retail Distribution Group revenues decreased by$1.5 million, or2.8%. Systems revenues decreased primarily due to lower sales of additional hardware products and software modules to existing customers as a result of stronger prior year sales driven by payment card industry compliance requirements, partially offset by higher license and professional services revenues as a result of current and prior quarter sales.  Services revenues experienced a decrease primarily as a result of ongoing legacy platform attrition, partially offset by support price increases.




|  |                                                                                                                                                                                                                                                                                                                                                                                   
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Wholesale Distribution Group revenues— Wholesale Distribution Group revenues increased by$3.2 million, or8.8%.  Systems revenues increased primarily as a result of strong sales of additional products and modules to existing customers.  Services revenues increased primarily as a result of our price increases for support services, partially offset by customer attrition.




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Total cost of revenues and gross margins as a percentage of revenues





The following table sets forth, for the periods indicated, our gross margin as a percentage of revenues (in thousands) : Three Months Ended December 31,20102009VarianceCost of systems revenues$15,180$15,016$164Systems gross margins47.4%45.0%Cost of services revenues$19,925$19,460$465Services gross margins67.3%68.0%Total cost of revenues$35,105$34,476$629Total gross margins60.9%60.9%





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Cost of systems revenues and systems gross margins— Cost of systems revenues increased by$0.2 millionprimarily as a result of higher direct costs associated with higher system revenues as well as a higher excess and obsolete inventory adjustment, partially offset by lower compensation related expenses.  System gross margins increased by2.4percentage points in the three months endedDecember 31, 2010from the comparable period a year ago. The increase is primarily  attributable to an increase in system sales volume, a higher mix of license sales with higher gross margins as well as improved professional services utilization.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Cost of services revenues and services gross margins— Cost of services revenues increased by$0.5 millionprimarily as a result of increased labor related expenses, outside services and third party support.  Services gross margins decreased by0.7percentage points in the three months endedDecember 31, 2010from the comparable period a year ago primarily as a result of increased compensation related expenses, outside services and third party support on relatively flat revenues.




Total operating expenses





The following table sets forth, for the periods indicated, operating expenses and the variance thereof (in thousands) :


Three Months Ended December 31,20102009Variance $Variance %Sales and marketing$14,128$14,212$(84)(0.6)%Product development8,9368,7461902.2%General and administrative9,1766,1703,00648.7%Depreciation and amortization10,1329,4866466.8%Restructuring costs24906(882)(97.4)%Total operating expenses$42,396$39,520$2,8767.3%





Total operating expenses increased by $2.9 million , or 7.3% , for the three months ended December 31, 2010 , compared to the three months ended December 31, 2009 . The increase was driven primarily by an increase in acquisition-related and other strategic initiative costs, compensation related expenses, bad debt expense and travel related expenses, partially offset  by a decrease in outside services and commissions.





|  |                                                                                                                                                                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Sales and marketing—Sales and marketing expenses decreased by$0.1 million, or0.6%, for the three months endedDecember 31, 2010compared to the three months endedDecember 31, 2009. The decrease was primarily the result of  $0.6 million in compensation related expenses and $0.2 million in outside services, partially offset by an increase of $0.6 million in bad debt expense.




|  |                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Product development—Product development expenses increased$0.2 million, or2.2%, for the three months endedDecember 31, 2010compared to the three months endedDecember 31, 2009. The increase was primarily the result of a $0.2 million increase in compensation related costs, partially offset by lower software development expenses of $0.1 million as a result of more of these costs being capitalized.




|  |                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------
|• | General and administrative—General and administrative expenses increased by$3.0 million, or48.7%, for the three

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months ended December 31, 2010 compared to the three months ended December 31, 2009 . The increase is primarily the result of $2.1 million in acquisition related costs and other strategic initiatives, $0.3 million of legal related costs in conjunction with the amendment of our senior secured credit facilities and $0.6 million in compensation and employee related expenses, partially offset by a $0.1 million reduction in travel costs.





|  |                                                                                                                                                                                                                                                                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Depreciation and amortization—Depreciation and amortization is not allocated to our segments. Depreciation and amortization expense was$10.1 millionfor the three months endedDecember 31, 2010compared to$9.5 millionfor the three months endedDecember 31, 2009.  The increase was primarily a result of an increase in purchases of property and equipment compared to the prior year.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Restructuring costs— During fiscal year2010, our management approved restructuring actions primarily related to eliminating certain employee positions and consolidating certain excess facilities with the intent to streamline and focus our operations and more properly align our cost structure with our projected revenue streams. During the three months endedDecember 31, 2010and2009, we recorded restructuring charges of less than $0.1 million and approximately$0.9 million, respectively. See Note 7 to our unaudited condensed consolidated financial statements.




Interest expense





Interest expense for the three months ended December 31, 2010 and 2009 was $8.5 million and $7.9 million , respectively. The increase in interest expense was primarily a result of the amendment of our revolving credit facility, partially offset by the reduction in our outstanding debt as a result of principal payments made in the past twelve months totaling approximately $10.1 million.





Other income, net





Other income for the three months ended December 31, 2010 was income of $0.1 million compared to $0.3 million in the three months ended December 31, 2009 . The decrease was primarily a result of foreign currency gains of approximately $0.1 million for the three months ended December 31, 2010 compared to approximately $0.4 million during the three months ended December 31, 2009 as well as additional income during the three months ended December 31, 2010 of $1.5 million related to a  dividend from our joint venture, Internet Autoparts, Inc., partially offset by a loss on dissolution of a subsidiary with cumulative translation losses of $1.4 million.





Income tax expense





We recognized income tax expense of $0.5 million , or 11.7% of pre-tax income, for the three months ended December 31, 2010 compared to income tax expense of $2.9 million , or 45.1% of pre-tax income from continuing operations, in the comparable period in 2009. During the three months ended December 31, 2010, the decrease in income tax expense is due primarily to the release of a valuation allowance which had been established against a portion of our state net operating loss carry-forwards and a lower blended rate.  The release of the valuation allowance and the decrease in the blended rate are both a result of the merger between Activant Solutions Inc. and its wholly-owned subsidiary Activant Wholesale Distribution Solutions Inc.  Our effective tax rate for the three months ended December 31, 2010 differed from the statutory rate primarily due to state taxes, net of U.S. federal income tax benefit, and the release of the state net operating loss carry-forward valuation allowance. Substantially all of our operating income was generated from domestic operations during the three months ended December 31, 2010 and 2009. As of December 31, 2010, we had $10.4 million of federal and state loss carry-forwards that expire between 2011 and 2028 and $0.3 million of foreign business tax credit carry-forwards that expire in 2020, if not utilized earlier. As of December 31, 2010, we also had foreign net operating loss carry-forwards of $18.4 million that are not subject to expiration. Undistributed earnings, if any, of our foreign subsidiaries are considered to be permanently reinvested and, accordingly, no U.S. federal or state income taxes have been provided thereon. See Note 5 to our unaudited condensed consolidated financial statements for additional information about income taxes.


Contribution margin





The results of the reportable segments are derived directly from our management reporting system. The results are based on our method of internal reporting and are not necessarily in conformity with accounting principles generally accepted in the United States (“GAAP”). Our management measures the performance of each segment based on several metrics, including contribution margin as defined below, which is not a financial measure calculated in accordance with GAAP. Asset data is not reviewed by our management at the segment level and therefore is not included.





Segment contribution margin includes all segment revenues less the related cost of sales, direct marketing, sales expense, and product development expenses. A significant portion of each segment's expenses arises from shared services and centrally managed infrastructure support costs that we allocate to the segments to determine segment contribution margin. These expenses primarily


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include information technology services, facilities, and telecommunications costs.





Certain of our operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated costs include marketing costs other than direct marketing, general and administrative costs, such as legal and finance, stock-based compensation expense, acquisition related costs, depreciation and amortization of intangible assets, restructuring costs, interest expense, and other income.





There are significant judgments that our management makes with respect to the direct and indirect allocation of costs that may affect the calculation of contribution margins. While our management believes these and other related judgments are reasonable and appropriate, others could assess such matters in ways different than our company's management.





The exclusion of costs not considered directly allocable to individual business segments results in contribution margin not taking into account substantial costs of doing business. We use contribution margin, in part, to evaluate the performance of, and allocate resources to, each of the segments. While our management may consider contribution margin to be an important measure of comparative operating performance, this measure should be considered in addition to, but not as a substitute for, net income (loss), cash flow and other measures of financial performance prepared in accordance with GAAP that are otherwise presented in our financial statements. In addition, our calculation of contribution margin may be different from the calculation used by other companies and, therefore, comparability may be affected.





Contribution margin for the three months ended December 31, 2010 and 2009 is as follows (in thousands) :





Three Months Ended December 31,20102009Variance $Variance %Retail Distribution Group$15,684$16,311$(627)(3.8)%Wholesale Distribution Group16,17215,1231,0496.9%Total contribution margin$31,856$31,434$4221.3%





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Retail Distribution Group contribution margin— The contribution margin for Retail Distribution Group decreased by$0.6 million.  Gross margins were $1.1 million lower primarily as a result of lower gross margins on lower systems revenue as well as higher compensation related and higher allocated costs on services revenue.  Sales and marketing expenses decreased by $0.6 million primarily as a result of lower compensation related expenses.  Product development expenses increased by $0.1 million primarily as a result of higher compensation related expenses




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Wholesale Distribution Group contribution margin— The contribution margin for Wholesale Distribution Group increased by$1.0 million.  Gross margins were $2.1 million higher primarily as a result of higher gross margins on higher systems revenue.  Sales and marketing expenses increased by $1.0 million primarily as a result of an increase in bad debt expense and compensation related expenses.  Product development expenses increased by $0.1 million primarily as a result of higher compensation related expenses.




The reconciliation of total segment contribution margin to our income from continuing operations before income taxes is as follows (in thousands) :


Three Months EndedDecember 31,20102009Segment contribution margin$31,856$31,434Corporate and unallocated costs(8,419)(5,925)Stock-based compensation expense(942)(988)Depreciation and amortization(10,132)(9,486)Restructuring costs(24)(906)Interest expense(8,473)(7,919)Other income, net110290Income from continuing operations before income taxes$3,976$6,500


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Liquidity and Capital Resources





Overview





Our principal liquidity requirements are for debt service, capital expenditures and working capital. Our ability to service our indebtedness will depend on our ability to generate cash in the future.





Our cash and cash equivalents balance at December 31, 2010 was $69.2 million .  As of December 31, 2010 , we had $496.8 million in outstanding indebtedness comprised primarily of $382.5 million aggregate principal amount of senior secured term loans (including an incremental term loan) due 2013 and 2016 pursuant to our senior secured credit agreement and $114.3 million aggregate principal amount of senior subordinated notes due 2016.





Senior Secured Credit Agreement





On November 19, 2010, we amended our senior secured credit agreement (as amended, our “senior secured credit agreement”) to, among other things, extend the maturity date for the repayment of a portion of the term loans outstanding thereunder, extend the date of maturity of the commitments in respect of a portion of our revolving credit facility and provide for additional flexibility in the financial covenant levels. As a result of the amendment, $275.0 million (the “extended term loans”) of the existing term loans entered into under the senior secured credit agreement in 2006 and under the first amendment thereto in 2007 have been extended to mature on February 2, 2016, and $25.5 million (the “extended revolving commitments”) of the existing revolving credit commitments have been extended to mature on May 2, 2013. The existing term loans and the existing revolving credit commitments were formerly set to mature on May 2, 2013 and May 2, 2011, respectively. The term loans that are not extended term loans (the “non-extended term loans”) and the revolving credit commitments that are not extended revolving commitments (the “non-extended revolving commitments”) will have the same maturity dates and pricing as in effect prior to the amendment.





Our senior secured credit agreement provides for (i) a seven-year term loan in the amount of $390.0 million, and (ii) a five-year revolving credit facility that permits loans in an aggregate amount of up to $40.0 million, which includes a $20.0 million letter of credit sublimit and a $20.0 million swing line sublimit.  In addition, subject to certain terms and conditions, the senior secured credit agreement provides for one or more uncommitted incremental term loans and/or revolving credit facilities in an aggregate amount not to exceed $75.0 million, of which in August 2007 we borrowed an incremental term loan of the entire $75.0 million.  The extended term loans and the portion of non-extended term loans that relate to the original term loan of $390.0 million amortize at 0.25% per quarter with the final balance of the non-extended term loans, $96.8 million, payable on May 2, 2013 and the final balance of the extended term loans, $260.6 million, payable on February 2, 2016.  Any prepayments of principal will reduce the quarterly payments due, therefore after consideration of the $2.6 million mandatory payment we made during the three months ended December 31, 2010 our first quarterly payment will be due in June 2011.  The portion of the non-extended term loans that relate to the incremental term loan of $75.0 million will be payable in full on May 2, 2013.  The principal amounts outstanding under the non-extended revolving commitments are due and payable in full on May 2, 2011, and amounts outstanding under the extended revolving commitments are due and payable in full on May 2, 2013. As of December 31, 2010, there were no amounts outstanding under our revolving credit line.





We may be required each year, generally concurrent with the filing of our Annual Report on Form 10-K, to make a mandatory principal prepayment for the preceding fiscal year towards term loans equal to a specified percentage of excess cash flow depending on our actually attained ratio of consolidated total debt to EBITDA (consolidated earnings before interest, taxes, depreciation and amortization, further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indenture governing the senior subordinated notes and our senior secured credit facilities), all as defined in the senior secured credit agreement. Any mandatory prepayments due are reduced dollar-for-dollar by any voluntary prepayments made during the year.  For the period ended September 30, 2006 and for the years ended September 30, 2007, 2008, 2009 and 2010, we repaid $1.9 million, $25.2 million, $15.8 million, $23.5 million and $13.5 million, respectively, in principal towards the term loans.  After consideration of our voluntary prepayments made in fiscal year 2010, we had a remaining mandatory principal repayment due for fiscal year 2010 of approximately $2.6 million. During the three months ended December 31, 2010, we proceeded with the $2.6 million mandatory payment.   Any future excess cash flow- based payments will be dependent upon our attained ratio of consolidated total debt to adjusted EBITDA, upon us generating excess cash flow, and/or upon us making voluntary prepayments, all as defined in the senior secured credit agreement.





In April 2010, we completed the sale of our productivity tools business for approximately $12.0 million in cash. See Note 9 to our unaudited condensed consolidated financial statements for more information. The senior secured credit agreement requires us to reinvest such cash proceeds in our business within 12 months of receipt and to prepay an aggregate principal amount of term


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loans equal to the amount of any cash proceeds not so reinvested within such time period in our business. We have reinvested these cash proceeds in our business within such 12-month period.





The capital and credit markets have been experiencing extreme volatility and disruption during the past several years. These market conditions have, to a degree, affected our ability to borrow under our senior secured credit facilities. In September 2008, Lehman Brothers Holdings Inc. (“Lehman Brothers”) and on November 1, 2009, CIT Group Inc. (“CIT”), filed petitions under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. In December 2009, CIT confirmed that it had emerged from bankruptcy. A Lehman Brothers subsidiary, Lehman Commercial Paper Inc. (“Lehman CPI”) and a CIT subsidiary, The CIT Group/Equipment Financing, Inc. (“CIT Financing”), are lenders under our senior secured credit agreement, having provided commitments of $7.0 million and $7.5 million, respectively, under the revolving credit facility, of which no amounts were outstanding as of December 31, 2010 .  In October 2010, we attempted to draw down on their commitment and CIT Financing participated in our request for funding while Lehman CPI did not. As a result, depending upon whether Lehman CPI will participate in any future requests for funding or whether another lender assumes their commitment, our revolving line of credit is effectively reduced from $40.0 million to $33.0 million.





The borrowings under the senior secured credit agreement bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Deutsche Bank Trust Company Americas, and (2) the federal funds rate plus 0.50%; or (b) a reserve adjusted Eurocurrency rate on deposits for periods of one-, two-, three-, or six-months (or, to the extent agreed to by each applicable lender, nine- or twelve-months or less than one month). The initial applicable margin for the borrowings is:


•


|  |                                                                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | under the non-extended term loan, 1.00% with respect to base rate borrowings and 2.00% with respect toEurocurrencyrate borrowings (rate of 2.31% as of December 31, 2010);

|  |                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | under the non-extended incremental term loan, 1.50% with respect to base rate borrowings and 2.50% with respect toEurocurrencyrate borrowings (rate of 2.81% as of December 31, 2010);

|  |                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | under the extended term loan, 3.50% with respect to base rate borrowings and 4.50% with respect to Eurocurrency rate borrowings (rate of 4.81% as of December 31, 2010);

|  |                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | under the non-extended revolving credit commitments, 1.00% with respect to base rate borrowings and 2.00% with respect toEurocurrency rate borrowings, which may be reduced subject to our attainment of certain leverage ratios; and

|  |                                                                                                                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | under theextended revolving commitments, 3.50% with respect to base rate borrowings and 4.50% with respect to Eurocurrencyrate borrowings, which may be reduced subject to our attainment of certain leverage ratios.




In addition and in conjunction with the amendment of the senior secured credit agreement, we were required to pay $2.6 million of deferred financing fees, which are being amortized to interest expense over the remaining term of the respective debt.





In addition to paying interest on outstanding principal under the senior secured credit agreement, we are required to pay a commitment fee to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. The initial commitment fee rate for both extended revolving commitments and non-extended revolving commitments is 0.50% per annum. The commitment fee rate may be reduced subject to our attaining certain leverage ratios.  As of December 31, 2010 , our commitment fee was 0.375% per annum.  We must also pay customary letter of credit fees for issued and outstanding letters of credit. As of December 31, 2010 , we had $0.1 million of letters of credit issued and outstanding.





Substantially all of our assets and those of our subsidiaries are pledged as collateral under the senior secured credit agreement.





The senior secured credit agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:





|  |                                                                  
|- | -----------------------------------------------------------------
|• | incur additional indebtedness (including contingent liabilities);

|  |                        
|- | -----------------------
|• | create liens on assets;

|  |                                        
|- | ---------------------------------------
|• | enter into sale-leaseback transactions;

|  |                                   
|- | ----------------------------------
|• | engage in mergers or acquisitions;

|  |                   
|- | ------------------
|• | dispose of assets;

|  |                                       
|- | --------------------------------------
|• | pay dividends and restricted payments;

|  |                                             
|- | --------------------------------------------
|• | make investments (including joint ventures);

|  |                           
|- | --------------------------
|• | make capital expenditures;

|  |                                                 
|- | ------------------------------------------------
|• | prepay other indebtedness (including the notes);

|  |                                                
|- | -----------------------------------------------
|• | engage in certain transactions with affiliates;

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|  |                                                                                
|- | -------------------------------------------------------------------------------
|• | amend agreements governing our subordinated indebtedness (including the notes);

|  |                                                                  
|- | -----------------------------------------------------------------
|• | amend organizational documents and other material agreements; and

|  |                                              
|- | ---------------------------------------------
|• | materially change the nature of our business.




In addition, the senior secured credit agreement requires us to maintain the following financial covenants:





|  |                                    
|- | -----------------------------------
|• | a maximum total leverage ratio; and

|  |                                   
|- | ----------------------------------
|• | a minimum interest coverage ratio.




The senior secured credit agreement also contains certain customary affirmative covenants and events of default. Substantially all of our assets and those of our subsidiaries are pledged as collateral under the senior secured credit agreement.





Derivative Instruments and Hedging Activities





Our objective in using interest rate swaps is to add stability to interest expense and to manage and reduce the risk inherent in interest rate fluctuations. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. At the time we entered into the senior secured credit agreement, we entered into four interest rate swaps to effectively convert a notional amount of $245.0 million of floating rate debt to fixed rate debt. In November 2007, 2008 and 2009, interest rate swaps with a notional amount of $25.0 million, $30.0 million and $50.0 million, respectively, matured. As of December 31, 2010 , we had an outstanding interest rate swap with a notional amount of $140.0 million. As of and for the three months ended December 31, 2010 , there is no cumulative ineffectiveness related to this interest rate swap.





Senior Subordinated Notes due 2016





We also issued $175.0 million aggregate principal amount of 9.5% senior subordinated notes due May 2, 2016. The notes were issued in a private transaction that was not subject to the registration requirements of the Securities Act. The notes subsequently were exchanged for substantially identical notes registered with the U.S. Securities and Exchange Commission (“SEC”), pursuant to a registration rights agreement entered into in connection with the indenture under which these notes were issued.





During fiscal year 2010 , we repurchased approximately $60.7 million in face value of our senior subordinated notes in open market transactions for an aggregate purchase price of approximately $41.1 million (including accrued interest). The repurchased notes have been retired. There were no repurchases of notes during the three months ended December 31, 2010 and 2009 .  As a result of these repurchases, senior subordinated notes representing $114.3 million in principal amount were outstanding as of December 31, 2010 .





Each of our domestic subsidiaries, as primary obligors and not as sureties, jointly and severally, irrevocably and unconditionally guarantees, on an unsecured senior subordinated basis, the performance and full and punctual payment when due, whether at maturity, by acceleration or otherwise, of all of our obligations under the indenture and the notes. The notes are our unsecured senior subordinated obligations and are subordinated in right of payment to all of our existing and future senior indebtedness (including the senior secured credit agreement), are effectively subordinated to all of our secured indebtedness (including the senior secured credit agreement) and are senior in right of payment to all of our existing and future subordinated indebtedness.





The indenture governing our senior subordinated notes limits our (and most of our subsidiaries') ability to:





|  |                               
|- | ------------------------------
|• | 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.




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The terms of the senior secured credit agreement and the indenture governing the senior subordinated notes restrict certain activities by us, the most significant of which include limitations on additional indebtedness, liens, guarantees, payment or declaration of dividends, sale of assets and transactions with affiliates. In addition, the senior secured credit agreement requires us to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The senior secured credit agreement and the indenture also contain certain customary affirmative covenants and events of default.  At December 31, 2010 , we were in compliance with all of the covenants under the senior secured credit agreement and the indenture.





Compliance with these covenants is dependent on our results of our operations, which are subject to a number of factors including current economic conditions.  Based on our forecast for the remainder of  fiscal year 2011, we currently anticipate that we will be able to meet or exceed the financial tests and covenants of our senior secured credit agreement and indenture during this period.  This expectation is based on our cost and revenue expectations for fiscal year 2011.  Should the current economic conditions cause our business or our vertical markets to deteriorate beyond our expectations we may not be able to satisfy these financial tests and covenants.





In order to help ensure compliance with our covenants under our senior secured credit facilities, we may take additional actions in the future, including implementing additional cost cutting initiatives, making additional repurchases of some of our debt or making further changes to our operations. In the event of a default of the financial covenants referred to above, we may (but no more than two times in four fiscal quarters) cure the default by raising equity capital from our existing investors in an amount sufficient to pass, but not to exceed, the financial covenant. While we believe that these additional remedies provide us with some additional flexibility in maintaining compliance with our tests and covenants, they do not assure us that we will not find ourselves in violation of these tests and covenants. Upon the occurrence of an event of default under the senior secured credit facilities, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. Any such acceleration would also result in a default under the indenture governing the senior subordinated notes.





Subject to the restrictions and limitations set forth under the senior secured credit agreement and the indenture governing the senior subordinated notes, we and our subsidiaries, affiliates or significant stockholders may from time to time, in our sole discretion, purchase, repay, redeem or retire additional amounts of our outstanding debt or equity securities (including any publicly issued debt), in privately negotiated or open market transactions, by tender offer or otherwise.





Three Months Ended December 31, 2010 Compared to Three Months Ended December 31, 2009





Our net cash provided by operating activities from continuing operations for the three months ended December 31, 2010 and 2009 was $4.3 million and $6.3 million , respectively.  As compared to the prior year, the decrease was largely attributable to an additional use of cash of $5.1 million for accounts payable, $4.6 million for deferred revenue and $3.1 million for deferred income taxes, partially offset by an increase in net income from continuing operations (after giving effect to $0.7 million of higher amortization of intangible assets in the current year) as well as an increase in cash provided by accounts receivable of $4.1 million, inventories of $2.3 million, accrued expenses and other liabilities of $1.9 million, prepaid expenses and other assets of $1.4 million and allowance for doubtful accounts of $0.5 million.





Our investing activities used net cash of $4.2 million and $3.4 million during the three months ended December 31, 2010 and 2009 , respectively.  The increase in cash used in investing activities from the prior year was primarily due to an increase in purchases of property and equipment as well as a slight increase in capitalized computer software and database costs.  We purchased property and equipment of $1.5 million and $0.8 million and capitalized computer software and database development costs of $2.7 million and $2.6 million for the three months ended December 31, 2010 and 2009 , respectively.





Our financing activities used net cash of $5.2 million and $16.0 million for the three months ended December 31, 2010 and 2009 , respectively. The decrease in cash used in financing activities was primarily due to payments on our current and long-term debt of $16.0 million during the three months ended December 31, 2009 compared to $2.6 million during the three months ended December 31, 2010, partially offset by the payment of $2.6 million of deferred financing fees during the three months ended December 31, 2010.





We believe that cash flows from operations, together with amounts available under the senior secured credit agreement, will be sufficient to fund our working capital, capital expenditures and debt service requirements for at least the next twelve months. Our ability to meet our working capital and debt service requirements, however, is subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. If we are not able to meet such requirements, we may be required to seek additional financing. There can be no assurance that we will be able to obtain financing from other sources on terms


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acceptable to us, if at all.





From time to time, we intend to pursue acquisitions, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. We expect to fund future acquisitions primarily with cash flow from operations and borrowings, including borrowing from amounts available under our senior secured credit agreement or through new debt issuances. We may also issue additional equity either directly or in connection with any such acquisitions. There can be no assurance that acquisition funds will be available on terms acceptable to us, or at all.





Covenant Compliance





Our senior secured credit agreement requires us to meet certain financial tests, including covenants that require us to satisfy a maximum total leverage ratio of consolidated total debt to adjusted EBITDA (consolidated earnings before interest, taxes, depreciation and amortization, further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indenture governing the senior subordinated notes and our senior secured credit facilities) and a minimum interest coverage ratio of adjusted EBITDA to consolidated interest expense, and other financing conditions tests, which become increasingly stringent over the term of the senior secured credit facility. See “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources — Senior Secured Credit Agreement.” Based on our forecasts for the remainder of fiscal year 2011 , we currently anticipate that we will be able to meet or exceed these financial tests and covenants during this period. This expectation is based on our cost and revenue expectations for fiscal year 2011, which include certain cost cutting initiatives. Should the current economic conditions cause our business or our vertical markets to deteriorate beyond our expectations or should our cost cutting initiatives prove insufficient we may not be able to satisfy these financial tests and covenants. In addition to these factors, our continued ability to meet those financial ratios and tests can be affected by other events beyond our control or risks in our business (See “Part I, Item 1A — Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 ).





The failure to comply with any of these covenants or tests would cause a default under our senior secured credit facilities. A default, if not waived or cured, could result in acceleration of the outstanding indebtedness under our senior secured credit facilities and our senior subordinated notes, in which case our debt would become immediately due and payable. In addition, a default or acceleration of indebtedness under our senior secured credit facilities or our senior subordinated notes could result in a default or acceleration of other indebtedness we may incur in the future with cross-default or cross-acceleration provisions. If this occurs, we may not be able to pay our debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be available on terms that are acceptable to us, particularly given the current crisis in the debt market in which the general availability of credit is substantially reduced and the cost of borrowing is generally higher with more restrictive terms. Furthermore, if we are required to amend our senior secured credit agreement, we may be required to pay significant amounts to obtain a waiver or the lenders thereunder may require that interest rates applicable to our loans increase as a condition to agreeing to any such amendment. Either such event could harm our financial condition.





In order to help ensure compliance with our covenants under our senior secured credit facilities we may take additional actions in the future to modify our operations or capital structure, including implementing additional cost cutting initiatives. In addition, in the event a default of the financial tests required by our senior secured credit facilities occurs, we may (but no more than two times in four fiscal quarters) cure the default by raising equity capital from our existing investors in an amount sufficient to pass, but not to exceed, the financial test. While we believe that these additional remedies provide us with some additional flexibility in maintaining compliance with our tests and covenants, they do not assure us that we will not find ourselves in violation of these tests and covenants. If repayment under our senior secured credit agreement is accelerated, we cannot assure you that we would have sufficient assets or access to credit to repay our indebtedness.





We use consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”), as further adjusted, a non-GAAP financial measure, to determine our compliance with certain covenants contained in our senior secured credit agreement and in the indenture governing our senior subordinated notes. For covenant calculation purposes, “adjusted EBITDA” is defined as consolidated net income (loss) adjusted to exclude interest, taxes, depreciation and amortization, and further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under our senior secured credit facilities and the indenture governing our senior subordinated notes. The breach of covenants in our senior secured credit agreement that are tied to ratios based on adjusted EBITDA could result in a default under that agreement and under our indenture governing the senior subordinated notes. Our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on adjusted EBITDA.








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Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, the definition of adjusted EBITDA in the indenture allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net income (loss). However, these are expenses that may recur, vary greatly and are difficult to predict. Further, our debt instruments require that adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.





The following is a reconciliation of net income (loss), which is a GAAP measure of our operating results, to adjusted EBITDA (as described in our senior secured credit agreement and the indenture governing our senior subordinated notes, including related calculations) for the twelve months ended December 31, 2010 and 2009  (in thousands) .


Twelve Months EndedDecember 31,20102009Net income (loss)$23,549$(62,712)Acquisition costs4,81995Adjusted net income (loss)28,368(62,617)Interest expense31,90435,908Income tax expense and other income-based taxes13,66122,629Depreciation and amortization40,34738,774Gain on asset sales, net of tax(6,178)—Gain on retirement of debt—(18,958)Non-cash charges (dissolution of wholly owned subsidiary, impairment charges and stock-based compensation expense)5,14893,063Non-recurring cash charges and restructuring charges3,3935,309Deferred compensation payments268294Sponsor payments104162Foreign exchange gain(434)(161)Disposed of EBITDA from sale of our productivity tools business(457)(2,082)Adjusted EBITDA$116,124$112,321


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Our financial covenant requirements and ratios as of December 31, 2010 were as follows:





CovenantRequirementsOur RatioSenior Secured Credit Agreement(1)Maximum consolidated total debt to adjusted EBITDA ratio4.25x3.75Minimum adjusted EBITDA to consolidated interest expense2.75x3.92Senior Subordinated Notes(2)Minimum adjusted EBITDA to fixed charges ratio required to incur additional indebtedness pursuant to ratio provisions2.00x3.92


__________________________________________


|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our senior secured credit agreement currently requires us to maintain a consolidated total debt to adjusted EBITDA ratio of a maximum of 4.25; however, this ratio is lowered to a maximum of 4.00x by the end of the quarter endingDecember 31,2011and 3.75x by the end of the quarter ending March 31, 2013. 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 ofDecember 31, 2010, our consolidated total debt was $435.1 million, consisting of total debt other than certain indebtedness totaling$496.8 million, net of cash and cash equivalents in excess of $7.5 million totaling $61.7 million. We are also required to maintain an adjusted EBITDA to consolidated interest expense ratio of 2.75x as of  the quarter ended  December 31, 2010.  Consolidated interest expense is defined in the senior secured credit agreement as consolidated cash interest expense less cash interest income and is further adjusted for certain non-cash interest expenses and other items. Failure to satisfy these ratio requirements would constitute a default under the senior secured credit agreement. If our lenders failed to waive any such default, our repayment obligations under the senior secured credit agreement could be accelerated. This would also constitute a default under the indenture governing the senior subordinated notes.




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Our ability to incur additional indebtedness and make certain restricted payments under the indenture governing the senior subordinated notes, subject to specified exceptions, is tied to adjusted EBITDA to fixed charges ratio of at least 2.00x, except that we may incur certain indebtedness and make certain restricted payments and certain permitted investments without regard to the ratio. Fixed charges is defined in the indenture governing the senior subordinated notes as consolidated interest expense less interest income, adjusted for acquisitions, and further adjusted for non-cash interest expense.







Recently Issued Accounting Pronouncements





See Note 2 — Recently Issued Accounting Pronouncements to our unaudited condensed consolidated financial statements.


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Item 3 — Quantitative and Qualitative Disclosures about Market Risk





Interest Rate Risk





Historically, our exposure to market risk for changes in interest rates relates primarily to our short and long-term debt obligations. At December 31, 2010 , pursuant to our senior secured credit agreement, we had $109.4 million and $273.2 million aggregate principal amount outstanding of term loans due 2013 and 2016, respectively, and $114.3 million of 9.5% senior subordinated notes due 2016.  The term loans bear interest at floating rates. In May 2006, we entered into four interest rate swaps to manage and reduce the risk inherent in interest rate fluctuations and to effectively convert a notional amount of $245.0 million of floating rate debt to fixed rate debt. In November 2009, 2008 and 2007, interest rate swaps with a notional amount of $50.0 million, $30.0 million and $25.0 million, respectively, matured.  As of December 31, 2010 , we had an outstanding interest rate swap with a notional amount of $140.0 million . Giving effect to the interest rate swap, a 0.25% increase in floating rates would increase our interest expense by $0.4 million annually.  See “Derivative Instruments and Hedging Activities” under Note 3 to our unaudited condensed consolidated financial statements, which section is incorporated herein by reference.





Foreign Currency Risk





The majority of our operations are based in the United States and, accordingly, the majority of our transactions are denominated in U.S. dollars; however, we do have foreign-based operations where transactions are denominated in foreign currencies and are subject to market risk with respect to fluctuations in the relative value of currencies. Currently, we have operations in Canada, the United Kingdom and Ireland and conduct transactions in the local currency of each location.





We monitor our foreign currency exposure and, from time to time, will attempt to reduce our exposure through hedging. At December 31, 2010 , we had no foreign currency contracts outstanding.


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Item 4 — Controls and Procedures





Evaluation of Disclosure Controls and Procedures





The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the SEC in its rules and forms. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of December 31, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures were effective as of December 31, 2010 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.





Changes in Internal Control over Financial Reporting





During the three months ended December 31, 2010 , there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Limitations on Effectiveness of Controls





Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurances that the objectives of the control system are met. The design of a control system reflects resource constraints, and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within our company have been or will be detected.


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PART II — OTHER INFORMATION


Item 1 — Legal Proceedings





We are a party to various legal proceedings and administrative actions, all of which are of an ordinary or routine nature incidental to our operations, except as otherwise described below. We do not believe that such proceedings and actions will, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations or cash flows, except as otherwise described below.





On July 12, 2010, Internet Autoparts, Inc. (“IAP”) filed a complaint in the District Court of Travis County, Texas (the “District Court”) against Activant Solutions Inc. (“Activant”).  In the complaint, IAP alleged that we aided and abetted breaches  of fiduciary duties by our appointee directors of IAP, and that we tortiously interfered with a contractual relationship of IAP by licensing catalogs and catalog services to General Parts, Inc. (“GPI”), which then allegedly used such catalogs and services to breach a covenant not to compete in IAP’s stockholders agreement. Both Activant and GPI are parties to IAP’s stockholders agreement. IAP seeks to recover unspecified damages, including punitive damages, consequential or special damages, interest and any other relief to which it may be entitled.





On August 6, 2010, Activant answered IAP’s complaint and filed a motion to dismiss or stay IAP’s lawsuit in favor of arbitration. On August 6, 2010, Activant also filed a demand for arbitration against IAP with the American Arbitration Association (“AAA”), seeking a declaratory judgment that Activant’s contracts with IAP expressly permit Activant to license catalogs and catalog services to GPI.





On September 16, 2010, the District Court abated IAP’s lawsuit in favor of arbitration.  IAP then filed an amended answering statement with the AAA and asserted as counterclaims the same claims that it had originally filed in the District Court.  Activant has responded to IAP’s counterclaims.  An arbitration hearing has been scheduled for May 23, 2011.





We believe we have meritorious defenses to this lawsuit. Although we intend to defend the lawsuit vigorously, there can be no assurance that we will be successful in our defense, and damages resulting from an unsuccessful defense could have a material adverse effect on our business, financial condition, results of operations or cash flows. Even if we are successful, we may incur substantial legal fees and other costs in defending the lawsuit and the efforts and attention of our management and technical personnel may be diverted, which could also have a material adverse effect on our business, financial condition, results of operations or cash flows. We own approximately 46% of the outstanding common stock of IAP and hold two of five seats on IAP’s board of directors.





Item 1A — Risk Factors


There have been no material changes from the risk factors associated with our business, financial condition and results of operations as set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 .





Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds


None.





Item 3 — Defaults Upon Senior Securities


None.





Item 4 — Removed and Reserved





Item 5 — Other Information


None.





Item 6 — Exhibits


See Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by reference.





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SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


ACTIVANT SOLUTIONS INC.Date: February 9, 2011By:/s/ KATHLEEN M. CRUSCOKathleen M. CruscoExecutive Vice President and Chief Financial Officer(Principal Financial and Duly Authorized Officer)


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EXHIBIT INDEX


Incorporated by ReferenceExhibitNumberExhibit DescriptionFormFileNumberDate of FirstFilingExhibitNumberProvidedHerewith21.1List of Subsidiaries of Activant Solutions Inc.----X31.1Certification pursuant to Section 302 of----Xthe Sarbanes-Oxley Act of 2002 by Pervez A. Qureshi31.2Certification pursuant to Section 302 of----Xthe Sarbanes-Oxley Act of 2002 by Kathleen M. Crusco32.1*Certification pursuant to Section 906 of----Xthe Sarbanes-Oxley Act of 2002 by Pervez A. Qureshi32.2 *Certification pursuant to Section 906 of----Xthe Sarbanes-Oxley Act of 2002 by Kathleen M. Crusco





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*    This certification is not deemed “filed” for purposes of Section 18 of  the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section.  Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.











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