UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q


RQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period endedMarch 31, 2011


oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period fromto


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 at April 28, 2011Common Stock, par value $0.01 per share10 shares


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ACTIVANT SOLUTIONS INC.





REPORT ON FORM 10-Q


FOR THE QUARTER ENDED MARCH 31, 2011


INDEX


PageForward-Looking Statements2PART I — FINANCIAL INFORMATION3Item 1. Financial Statements3Condensed Consolidated Balance Sheets as of March 31, 2011 and September 30, 2010 (Unaudited)3Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended March 31, 2011 and 2010 (Unaudited)4Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2011 and 2010 (Unaudited)5Notes to Condensed Consolidated Financial Statements (Unaudited)6Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations26Item 3. Quantitative and Qualitative Disclosures About Market Risk44Item 4. Controls and Procedures44PART II — OTHER INFORMATION45Item 1. Legal Proceedings45Item 1A. Risk Factors45Item 2. Unregistered Sales of Equity Securities and Use of Proceeds46Item 3. Defaults Upon Senior Securities46Item 4. Removed and Reserved46Item 5. Other Information46Item 6. Exhibits46SIGNATURE47EXHIBIT INDEX48EX-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 II, Item 1A — Risk Factors” and under “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, housing 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 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;

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|• | uncertainties related to our recently announced merger agreement with affiliates of funds advised by Apax Partners, L.P. and Apax Partners LLP; 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)March 31, 2011September 30, 2010ASSETS:Current assets:Cash and cash equivalents$88,992$74,290Trade accounts receivable, net of allowance for doubtful accounts of $3,522 at                       March 31, 2011 and $3,958 at September 30, 201032,78136,200Inventories2,2784,447Deferred income taxes5,5293,961Income taxes receivable9791,441Prepaid expenses and other current assets4,6245,018Total current assets135,183125,357Property and equipment, net7,6526,049Intangible assets, net154,597167,358Goodwill541,454541,454Deferred financing costs8,0916,671Other assets4,9005,017Total assets$851,877$851,906LIABILITIES AND STOCKHOLDER’S EQUITY:Current liabilities:Accounts payable$14,903$20,131Payroll related accruals15,34217,229Deferred revenue32,59829,196Current portion of long-term debt2,2932,566Accrued interest payable9,1758,039Accrued expenses and other current liabilities16,69211,973Total current liabilities91,00389,134Long-term debt, net of discount494,536496,829Deferred tax liabilities48,27251,136Other liabilities9,24117,945Total liabilities643,052655,044Commitments and contingencies——Common Stock:Par value $0.01, authorized 1,000 shares, 10 shares issued and outstanding at     March 31, 2011 and September 30, 2010——Additional paid-in capital263,217261,337Accumulated deficit(50,661)(56,119)Other accumulated comprehensive loss:Unrealized loss on cash flow hedges(2,529)(5,426)Cumulative translation adjustment(1,202)(2,930)Total stockholder’s equity208,825196,862Total liabilities and stockholder’s equity$851,877$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 EndedSix Months EndedMarch 31,March 31,(in thousands)2011201020112010Revenues:Systems$30,508$34,145$59,363$61,461Services61,60460,875122,589121,684Total revenues92,11295,020181,952183,145Cost of revenues (exclusive of depreciation and amortization of $5.0 million, $4.8 million, $10.0 million and $9.2 million for the three months ended March 31, 2011 and 2010 and six months ended March 31, 2011 and 2010, respectively, included in amounts shown separately below):Systems (Note 6)16,07019,09331,25034,109Services (Note 6)18,73819,91038,66339,370Total cost of revenues34,80839,00369,91373,479Gross profit57,30456,017112,039109,666Operating expenses:Sales and marketing (Note 6)14,21714,34228,34528,554Product development (Note 6)8,6628,62017,59817,366General and administrative (Note 6)6,9396,35916,11512,529Depreciation and amortization9,99110,29620,12319,782Restructuring costs(3)1,068211,974Total operating expenses39,80640,68582,20280,205Operating income17,49815,33229,83729,461Interest expense(9,313)(7,784)(17,786)(15,703)Other income, net110141220431Income from continuing operations before income taxes8,2957,68912,27114,189Income tax expense6,3472,7116,8135,643Income from continuing operations1,9484,9785,4588,546Loss from discontinued operations, net of income taxes (Note 9)—(996)—(42)Net income$1,948$3,982$5,458$8,504Comprehensive income:Net income$1,948$3,982$5,458$8,504Unrealized gain on cash flow hedges1,8533672,8971,553Foreign currency translation adjustment286(824)1,728(806)Comprehensive income$4,087$3,525$10,083$9,251


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)


Six Months EndedMarch 31,(in thousands)20112010Operating activities:Net income$5,458$8,504Loss from discontinued operations, net of income taxes—42Adjustments to reconcile income from continuing operations to net cash provided by operating activities:Stock-based compensation expense1,8801,906Depreciation1,9922,832Amortization of intangible assets18,13116,950Amortization of deferred financing costs1,1741,105Provision for doubtful accounts1,120757Deferred income taxes(4,432)(2,506)Changes in assets and liabilities:Trade accounts receivable2,299(2,196)Inventories2,169(112)Prepaid expenses and other assets9731,133Accounts payable(5,228)(749)Deferred revenue3,5245,955Accrued expenses and other(233)(10,859)Net cash provided by operating activities – continuing operations28,82722,762Net cash provided by operating activities – discontinued operations—2,390Net cash provided by operating activities28,82725,152Investing activities:Purchases of property and equipment(3,595)(2,246)Capitalized computer software and database costs(5,370)(5,405)Net cash used in investing activities – continuing operations(8,965)(7,651)Net cash used in investing activities – discontinued operations—(94)Net cash used in investing activities(8,965)(7,745)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 operations14,702(889)Net cash from discontinued operations—2,296Net change in cash and cash equivalents14,7021,407Cash and cash equivalents, beginning of period74,29044,573Cash and cash equivalents, end of period$88,992$45,980Supplemental disclosures of cash flow information:Cash paid during the period for interest$15,475$14,288Cash paid during the period for income taxes$11,504$14,613Cash received during the period for income taxes$(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


March 31, 2011


(UNAUDITED)





NOTE 1 — BASIS OF PRESENTATION





The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, 2010, included in our annual report on Form 10-K, filed with the Securities and Exchange Commission. In the opinion of our management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring items, considered necessary to present fairly our financial position at March 31, 2011 and September 30, 2010, and the results of our operations for the three and six months ended March 31, 2011 and March 31, 2010 and the cash flows for the six months ended March 31, 2011 and March 31, 2010 . 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 March 31, 2011 , actual results could differ from those estimates and operating results for the three and six months ended March 31, 2011 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.





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 Standard 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 and six months ended March 31, 2011 , 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 and six months ended March 31, 2011 , 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.


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NOTE 3 — DEBT


Total debt consisted of the following (in thousands) :


March 31, 2011September 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(2,293)(2,566)Total long-term debt, net of discount$494,536$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 six months ended March 31, 2011 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 March 31, 2011 , 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 six months ended March 31, 2011 , 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 March 31, 2011 .  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 (for a total interest rate of 2.31% as of March 31, 2011);

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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 (for a total interest rate of 2.81% as of March 31, 2011);

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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 (for a total interest rate of 4.81% as of March 31, 2011);

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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 March 31, 2011 , 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 March 31, 2011 , 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 March 31, 2011 , we had an outstanding interest rate swap with a notional amount of $140.0 million .  As of and for the six months ended March 31, 2011 , there is no cumulative ineffectiveness related to this interest rate swap.


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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 an effective hedge.  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 March 31, 2011 and 2010 , we recorded an unrealized gain of $2.9 million ($1.9 million net of tax) and $0.6 million ($0.4 million net of tax), respectively.   For the six months ended March 31, 2011 and 2010, we recorded an unrealized gain of $4.6 million ($2.9 million net of tax) and $2.4 million ($1.6 million net of tax), respectively.  At March 31, 2011 , cumulative net unrealized losses of approximately $4.2 million ($2.5 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 six months ended March 31, 2011  (in thousands) :


Unrealized loss in OCI at beginning of period$(8,850)Net increase in fair value4,618Unrealized loss in OCI at end of period$(4,232)





The following tables summarize the fair value and realized and unrealized losses of the interest rate swaps as of and for the six months ended March 31, 2011  (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$(4,232)


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$(3,607)$4,618Interest Expense$—


____________________________________


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

|    |                                                               
|--- | --------------------------------------------------------------
|(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.  As a result of these repurchases, senior subordinated


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notes representing $114.3 million in principal amount were outstanding as of March 31, 2011 .  There were no repurchases of notes during the six months ended March 31, 2011 and 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;

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

|  |                          
|- | -------------------------
|• | 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

|  |                                                           
|- | ----------------------------------------------------------
|• | 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 March 31, 2011 , 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.




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




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




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





We use derivative financial instruments, specifically interest rate swaps, for non-trading purposes. We entered into interest rate swaps to manage and reduce the risk inherent in interest rate fluctuations arising from previously 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 March 31, 2011 , 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 March 31, 2011  (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)3,026——3,026Liabilities:Interest rate swap due 2011(3)—(4,232)—(4,232)Deferred compensation plan liabilities (4)(2,392)——(2,392)Total$16,292$(4,232)$—$12,060


_______________________________


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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 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 March 31, 2011 had a carrying amount of $496.8 million and


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fair value of $501.1 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





Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses, investment credits, research and development tax credits and other permanent differences.  Income tax expense was $6.3 million and $2.7 million for the three months ended March 31, 2011 and March 31, 2010, respectively, resulting in effective tax rates of 76.5% and 35.3% , respectively. Income tax expense was $6.8 million and $5.6 million for the six months ended March 31, 2011 and March 31, 2010, respectively, resulting in effective tax rates of 55.5% and 39.8% , respectively. The effective tax rate for the three months ended March 31, 2011 increased from the prior periods, primarily due to $3.0 million of income taxes recorded for discrete items incurred during the period, including taxes related to the repatriation of earnings of a foreign subsidiary, tax return adjustments and an increase in unrecognized tax benefits for uncertain tax positions.  The effective tax rate for the six months ended March 31, 2011 increased from the prior period, primarily due to $2.0 million of income taxes recorded for discrete items incurred in the period, including taxes related to the repatriation of earnings of a foreign subsidiary, partially offset by the release of a valuation allowance against state net operating losses as a result of the merger between Activant Solutions Inc. and its wholly-owned subsidiary Activant Wholesale Distribution Solutions Inc.





At March 31, 2011, we had gross unrecognized tax benefits of $2.4 million, of which $2.2 million would affect the effective tax rate if recognized. We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes.  During the six months ended March 31, 2011, we had a gross increase of $1.0 million in unrecognized tax benefits related to uncertain tax positions.





Fiscal years 2008 through 2011 remain open to examination for domestic federal tax purposes.  In addition, fiscal years 2004 through 2011 remain open to examination by state and foreign taxing jurisdictions to which we and our subsidiaries are subject. We are not currently under audit in any major taxing jurisdiction.





NOTE 6 — EMPLOYEE STOCK PLANS


Stock-based Compensation Expense


The following table summarizes stock-based compensation expense for the three and six months ended March 31, 2011 and 2010 and its allocation within the condensed consolidated statements of operations and comprehensive income (in thousands) :


Three Months EndedSix Months EndedMarch 31,March 31,2011201020112010Cost of revenuesSystems$18$18$36$26Services5857117118Operating expensesSales and marketing334326669690Product development7476148151General and administrative454441910921Total stock based compensation expense from continuing operations9389181,8801,906Total stock based compensation expense from discontinued operations—10—20Total stock based compensation expense$938$928$1,880$1,926





NOTE 7 — RESTRUCTURING COSTS





During the six months ended March 31, 2011 , we did not have significant restructuring related charges, however during the six months ended March 31, 2010 , 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.


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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 $1.1 million and $2.0 million for the three and six months ended March 31, 2010 , respectively, related to workforce reductions (comprised of severance and related benefits) and the consolidation of space within multiple facilities locations, 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 March 31, 2011 , was approximately $0.7 million and the changes in our restructuring liabilities for the six months then ended were as follows (in thousands) :


Balance atBalance atSeptember 30, 2010Restructuring ChargesPaymentsMarch 31,  20112011 Actions — Facility Closings$—$52$(4)$482010 Actions — Severance and Related Benefits763(60)(703)—2010 Actions — Facility Closings57511(183)4032009 Actions — Facility Closings38818(190)216$1,726$21$(1,080)$667





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:





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | 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

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chains in North America.





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





Our reportable segment financial information for the three and six months ended March 31, 2011 and 2010 is as follows (in thousands) :


Three Months Ended March 31, 2011Six Months Ended March 31, 2011Retail Distribution GroupWholesale Distribution GroupTotalRetail Distribution GroupWholesale Distribution GroupTotalRevenues$50,828$41,284$92,112$101,436$80,516$181,952Contribution margin$17,134$17,869$35,003$32,818$34,041$66,859Three Months Ended March 31, 2010Six Months Ended March 31, 2010Retail Distribution GroupWholesale Distribution GroupTotalRetail Distribution GroupWholesale Distribution GroupTotalRevenues$55,938$39,082$95,020$108,014$75,131$183,145Contribution margin$17,824$16,016$33,840$34,135$31,139$65,274





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.














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


Three Months Ended March 31,Six Months Ended March 31,2011201020112010Segment contribution margin$35,003$33,840$66,859$65,274Corporate and unallocated costs(6,579)(6,226)(14,998)(12,151)Stock-based compensation expense(938)(918)(1,880)(1,906)Depreciation and amortization(9,991)(10,296)(20,123)(19,782)Restructuring costs3(1,068)(21)(1,974)Interest expense(9,313)(7,784)(17,786)(15,703)Other income, net110141220431Income from continuing operations before income taxes$8,295$7,689$12,271$14,189





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 and six months ended March 31, 2010 is summarized as follows (in thousands) : Three months ended          March 31, 2010Six months ended          March 31, 2010Revenue from discontinued operations$2,711$6,185Expenses from discontinued operations2,3234,403Income from discontinued operations before income taxes3881,782Income tax expense1,3841,824Loss from discontinued operations, net of income taxes$(996)$(42)





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 sought 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, as well as certain royalties that Activant claims IAP owes to Activant.


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.


On January 17, 2011, Activant filed a motion for partial summary judgment requesting that the arbitration panel dismiss all of


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IAP's claims against Activant.  The arbitration panel held a hearing on Activant's summary judgment motion on February 14, 2011, and on February 22, 2011, the panel granted Activant's summary judgment motion, thereby dismissing all of IAP's claims against Activant.  Activant's affirmative claims against IAP remain pending, and Activant expects that there will be a hearing on the merits of its claims against IAP during the summer of 2011.


Although we intend to continue to litigate Activant's claim against IAP vigorously, there can be no assurance that we will be successful on the remaining claims in the arbitration or on any appeal by IAP.  Even if we are successful, we may incur substantial legal fees and other costs in continuing to litigate 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.





NOTE 11 — GUARANTOR CONSOLIDATION





The senior secured credit agreement and the senior subordinated notes are guaranteed by our existing, wholly-owned domestic subsidiary HM COOP LLC ( the “Guarantor”). Since September 30, 2006, 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., Atlas Disposition Group Inc. (formerly known as Speedware Group, Inc.), and Activant Wholesale Distribution Solutions Inc.  The following subsidiary was merged into Atlas Disposition Group Inc.: Atlas America Inc. (formerly known as Speedware America, Inc.) and the following subsidiaries were 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 consolidated financial statements represent our financial position at March 31, 2011 and September 30, 2010, and the results of our operations for the three and six months ended March 31, 2011 and March 31, 2010 and the cash flows for the six months ended March 31, 2011 and March 31, 2010 of our Guarantors and Non-Guarantors.





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Condensed Consolidating Balance Sheet as of March 31, 2011


(in thousands)GuarantorNon-Guarantor SubsidiariesEliminationsConsolidatedASSETS:Current assets:Cash and cash equivalents$77,125$11,867$—$88,992Trade accounts receivable, net of allowance for doubtful accounts30,0262,755—32,781Inventories2,18692—2,278Deferred income taxes5,5263—5,529Income taxes receivable(16)995—979Prepaid expenses and other current assets4,509115—4,624Total current assets119,35615,827—135,183Property and equipment, net7,57082—7,652Intangible assets, net153,5701,027—154,597Goodwill534,1011,3156,038541,454Investments in subsidiaries17,081—(17,081)—Intercompany receivables (payables)3,318(3,318)——Deferred financing costs8,091——8,091Other assets4,89212(4)4,900Total assets$847,979$14,945$(11,047)$851,877LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)Current liabilities:Accounts payable$14,754$149$—$14,903Payroll related accruals14,712630—15,342Deferred revenue31,5911,007—32,598Current portion of long-term debt2,293——2,293Accrued interest payable9,175——9,175Accrued expenses and other current liabilities18,637(1,945)—16,692Total current liabilities91,162(159)—91,003Long-term debt494,536——494,536Deferred tax and other liabilities57,126387—57,513Total liabilities642,824228—643,052Total stockholder’s equity (deficit)205,15514,717(11,047)208,825Total liabilities and stockholder’s equity (deficit)$847,979$14,945$(11,047)$851,877


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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—5,018Total 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 payable8,039———8,039Accrued 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 March 31, 2011





Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedRevenues:Systems$29,573$—$935$—$30,508Services58,873—2,731—61,604Total revenues88,446—3,666—92,112Cost of revenues:Systems15,623—447—16,070Services17,327—1,411—18,738Total cost of revenues32,950—1,858—34,808Gross profit55,496—1,808—57,304Operating expenses:Sales and marketing13,712—505—14,217Product development8,240—422—8,662General and administrative6,871—68—6,939Depreciation and amortization9,898—93—9,991Restructuring costs72—(75)—(3)Total operating expenses38,793—1,013—39,806Operating income16,703—795—17,498Interest expense(9,291)—(22)—(9,313)Other income (expense), net(176)—286—110Income before income taxes7,236—1,059—8,295Income tax expense6,288—59—6,347Net income$948$—$1,000$—$1,948





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





Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedRevenues:Systems$19,018$14,150$977$—$34,145Services33,99024,2052,680—60,875Total revenues53,00838,3553,657—95,020Cost of revenues:Systems11,4117,028654—19,093Services13,0055,5161,389—19,910Total cost of revenues24,41612,5442,043—39,003Gross profit28,59225,8111,614—56,017Operating expenses:Sales and marketing8,0735,730539—14,342Product development3,7464,479395—8,620General and administrative5,94831596—6,359Depreciation and amortization8,3301,813153—10,296Restructuring costs65838327—1,068Total operating expenses26,75512,7201,210—40,685Operating income1,83713,091404—15,332Interest expense(7,730)(4)(50)—(7,784)Other income (expense), net(381)163359—141Income (loss) from continuing operations before income taxes(6,274)13,250713—7,689Income tax expense1,1024751,134—2,711Income (loss) from continuing operations(7,376)12,775(421)—4,978Income (loss) from discontinued operations, net of income taxes1,458—(2,454)—(996)Net income (loss)$(5,918)$12,775$(2,875)$—$3,982


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Condensed Consolidating Statement of Operations for the Six Months Ended March 31, 2011





Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedRevenues:Systems$43,547$14,023$1,793$—$59,363Services92,81224,2985,479—122,589Total revenues136,35938,3217,272—181,952Cost of revenues:Systems24,1306,271849—31,250Services30,2655,5492,849—38,663Total cost of revenues54,39511,8203,698—69,913Gross profit81,96426,5013,574—112,039Operating expenses:Sales and marketing21,1026,262981—28,345Product development11,9974,769832—17,598General and administrative15,799172144—16,115Depreciation and amortization18,2001,740183—20,123Restructuring costs96—(75)—21Total operating expenses67,19412,9432,065—82,202Operating income14,77013,5581,509—29,837Interest expense(17,800)—14—(17,786)Other income (expense), net1,157106(1,043)—220Income (loss) before income taxes(1,873)13,664480—12,271Income tax expense9675,339507—6,813Net income (loss)$(2,840)$8,325$(27)$—$5,458





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Condensed Consolidating Statement of Operations for the Six Months Ended March 31, 2010





Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedRevenues:Systems$34,126$25,431$1,904$—$61,461Services67,52048,7595,405—121,684Total revenues101,64674,1907,309—183,145Cost of revenues:Systems20,53112,3361,242—34,109Services25,52510,9802,865—39,370Total cost of revenues46,05623,3164,107—73,479Gross profit55,59050,8743,202—109,666Operating expenses:Sales and marketing16,46410,8411,249—28,554Product development7,4129,143811—17,366General and administrative11,593667269—12,529Depreciation and amortization15,9183,565299—19,782Restructuring costs931472571—1,974Total operating expenses52,31824,6883,199—80,205Operating income3,27226,1863—29,461Interest expense(15,645)(8)(50)—(15,703)Other income (expense), net(6,035)2466,220—431Income (loss) from continuing operations before income taxes(18,408)26,4246,173—14,189Income tax expense2,8651,0261,752—5,643Income (loss) from continuing operations(21,273)25,3984,421—8,546Income (loss) from discontinued operations, net of income taxes3,530—(3,572)—(42)Net income (loss)$(17,743)$25,398$849$—$8,504


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Condensed Consolidating Statement of Cash Flows for the Six Months Ended March 31, 2011





Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedOperating activities:Net cash provided by (used in) operating activities$22,770$(7)$6,064$—$28,827Investing activities:Purchase of property and equipment(3,567)—(28)—(3,595)Capitalized computer software costs and databases(5,370)———(5,370)Net cash used in investing activities(8,937)—(28)—(8,965)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 equivalents8,673(7)6,036—14,702Cash and cash equivalents, beginning of period68,45275,831—74,290Cash and cash equivalents, end of period$77,125$—$11,867$—$88,992


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Condensed Consolidating Statement of Cash Flows for the Six Months Ended March 31, 2010


Guarantor(in thousands)Principal OperationsSubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidatedOperating activities:Net cash provided by operating activities - continuing operations$19,293$92$3,377$—$22,762Net cash provided by (used in) operating activities - discontinued operations2,406—(16)—2,390Net cash provided by operating activities21,699923,361—25,152Investing activities:Purchase of property and equipment(2,098)(126)(22)—(2,246)Capitalized computer software costs and databases(5,405)———(5,405)Net cash used in investing activities - continuing operations(7,503)(126)(22)—(7,651)Net cash used in investing activities - discontinued operations(41)—(53)—(94)Net cash used in investing activities(7,544)(126)(75)—(7,745)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(4,210)(34)3,355—(889)Net cash from discontinued operations2,365—(69)—2,296Net change in cash and cash equivalents(1,845)(34)3,286—1,407Cash and cash equivalents, beginning of period42,0012152,357—44,573Cash and cash equivalents, end of period$40,156$181$5,643$—$45,980


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NOTE 12 - SUBSEQUENT EVENT





On April 4, 2011, Activant Group Inc., a Delaware corporation (“AGI”), the parent company of Activant Solutions Inc., a Delaware corporation (the “Company”), entered into an Agreement and Plan of Merger, dated as of April 4, 2011 (the “Merger Agreement”), by and among Eagle Parent, Inc., a Delaware corporation (“Eagle Parent”), Sun5 Merger Sub, Inc., a Delaware corporation and a wholly- owned subsidiary of Parent (“Merger Sub,” and together with Eagle Parent, “Buyer”), AGI and Hellman & Friedman Capital Partners V, L.P., a Delaware limited partnership (“H&F”), solely in its capacity as agent and attorney-in-fact for AGI's stockholders and common optionholders, providing for the merger of Merger Sub with and into AGI, with AGI continuing as the surviving corporation (the “Merger”) and becoming a wholly-owned subsidiary of Eagle Parent.  Eagle Parent and Merger Sub are affiliates of funds advised by Apax Partners, L.P. and Apax Partners LLP (the “Apax Funds”).





Upon consummation of the Merger, Buyer will pay, or cause to be paid, consideration for the outstanding AGI equity (including “in-the-money” stock options outstanding immediately prior to the consummation of the Merger) consisting of $890.0 million in cash, less indebtedness, certain fees, expenses, bonus payments and other payments to be made by or on behalf of Buyer, plus cash on hand, an assumed tax benefit and the exercise price of stock options and plus or minus the amount of a net working capital adjustment, in each case, as specified in the Merger Agreement and subject to certain other adjustments specified in the Merger Agreement.  Immediately prior to the consummation of the Merger, AGI will repurchase from H&F the one authorized and outstanding share of Series A preferred stock of AGI for $1.00 in cash.





The Merger Agreement was unanimously approved by AGI's board of directors. After the execution and delivery of the Merger Agreement by the parties thereto, the holders of a majority of the outstanding voting securities of AGI executed and delivered to Buyer a written consent approving the Merger Agreement and the transactions contemplated thereby.





Simultaneously with the execution and delivery of the Merger Agreement, Eagle Parent entered into that Agreement and Plan of Merger, dated as of April 4, 2011 (the “Epicor Merger Agreement”), by and among Eagle Parent, Element Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Eagle Parent (“Epicor Acquisition Sub”) and Epicor Software Corporation, a Delaware corporation (“Epicor”), providing for the merger of Epicor Acquisition Sub with and into Epicor, with Epicor continuing as the surviving corporation (the “Epicor Merger”) and becoming a wholly-owned subsidiary of Eagle Parent.  Under the Epicor Merger Agreement, Eagle Parent has commenced a tender offer (the “Epicor Offer”) to acquire all of the outstanding common stock of Epicor, followed by the Epicor Merger, in which all remaining outstanding Epicor shares will be acquired at the same price paid in the Epicor Offer. The consummation of the Epicor Merger is conditioned on customary closing conditions and the satisfaction of the closing conditions for the Merger.





The consummation of the Merger and the obligations of each party to consummate the Merger are subject to certain closing conditions specified in the Merger Agreement, including, among others, the receipt of required United States antitrust approvals and clearances (which have been obtained as of April 15, 2011) and compliance with the various covenants contained in the Merger Agreement and the concurrent closing of the Epicor Merger.





Eagle Parent has secured committed financing, consisting of equity financing commitment letters from the Apax Funds (collectively, the “Equity Financing Commitment”) and a debt financing commitment (the “Debt Financing Commitment” and, together with the Equity Financing Commitment, the “Financing Commitments”). Pursuant to the terms of the Debt Financing Commitment, which will be used to finance both the Merger, the Epicor Offer and the Epicor Merger, the lenders will provide a senior secured term loan facility, a senior secured revolving credit facility and a senior unsecured bridge term loan facility. The bridge term loan facility will be provided in the event that, and to the extent that, Eagle Parent does not issue and sell senior unsecured notes on or prior to the closing date of the Merger. The obligations under the Debt Financing Commitment are subject to certain conditions specified in the Debt Financing Commitment.





The proceeds of the Financing Commitments will be used by Eagle Parent for payment of the aggregate merger consideration in the Merger and the Epicor Merger and Epicor Offer (as applicable), payment of fees and expenses related to the transactions contemplated by the Merger Agreement and Epicor Merger Agreement and the repayment, repurchase and/or redemption of the existing indebtedness of AGI and the Company and its subsidiaries in connection with the Merger (namely, the Company's 9 1/2% Senior Subordinated Notes due 2016) and current term and revolving credit facilities and existing indebtedness of Epicor.


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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 in this report under “Part II, Item 1A — Risk Factors” and under “Part I, Item 1A — Risk Factors” of 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 reflect 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 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 primary 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 six months endedMarch 31, 2011, we generated approximately56%of our total revenues from the retail 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 six months endedMarch 31, 2011, we generated approximately44%of our total revenues from

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the distribution 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 occasionally 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, certain 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, compensation 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, compensation 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, 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.  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, 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, 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.







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|  |                                                                                                                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Restructuring costs— Restructuring costs relate to management approved restructuring actions to eliminate certain employee positions and to consolidate certain excess facilities with the intent to streamline and focus our operations and more properly align our cost structure with our projected revenue streams. Restructuring costs are not allocated to our segments.




Non-Operating Expenses





Our non-operating expenses consist of the following:





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




|  |                                                                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | 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





While there are promising signs of strength in the United States economy, there continues to be prolonged tight credit, high unemployment and a weak residential housing market.  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 throughout our fiscal year 2011.





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 as compared to the prior year primarily due to the completion of payment card industry compliance requirements, which had generated additional selling opportunities in our fiscal year 2010.  We have seen this trend continue into our second quarter of fiscal year 2011 and  anticipate that it will carry on through our third quarter as retailers were generally required to be compliant by July 2010.  We did see an increase in sales of additional products and services to our existing customers during the three months ended March 31, 2011 compared to the three months ended December 31, 2010.  Our retail segment has experienced and may continue to experience customers deferring decisions on new system purchases.





The distribution segment continues to see economic strength across many of the vertical markets it serves which is translating into more large account activity and increased sales of additional products and services to our existing customers.





We continually monitor our cost model as we face mixed economic signals in the 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 for the six months ended March 31, 2011 were $28.8 million .  We have continued 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 six months ended March 31, 2011 .





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 March 31, 2011 and based on our forecast for the remaining of 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 March 31, 2011 Compared to Three Months Ended March 31, 2010





Total revenues





Our Retail Distribution Group and Wholesale Distribution Group segments accounted for approximately 55% and 45% , respectively, of our revenues during the three months ended March 31, 2011 . This compares to the three months ended March 31, 2010 , where our Retail Distribution Group and Wholesale Distribution Group segments accounted for approximately 59% and 41% , 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 March 31,20112010Variance $Variance %Retail Distribution Group revenues:Systems$14,551$19,987$(5,436)(27.2)%Services36,27735,9513260.9%Total Retail Distribution Group revenues$50,828$55,938$(5,110)(9.1)%Wholesale Distribution Group revenues:Systems$15,957$14,158$1,79912.7%Services25,32724,9244031.6%Total Wholesale Distribution Group revenues$41,284$39,082$2,2025.6%Total revenues:Systems$30,508$34,145$(3,637)(10.7)%Services61,60460,8757291.2%Total revenues$92,112$95,020$(2,908)(3.1)%





Total revenues for the three months ended March 31, 2011 decreased by $2.9 million , or 3.1% , compared to the three months ended March 31, 2010 . The decrease in revenues over the comparable period a year ago is primarily a result of a decrease in systems revenues in Retail Distribution Group, partially offset by an increase in systems and services revenues in Wholesale Distribution Group as well as an increase in services revenues in Retail Distribution Group.





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Retail Distribution Group revenues— Retail Distribution Group revenues decreased by$5.1 million, or9.1%.  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 as well as a decrease in license and professional services revenues.  Services revenues increased primarily as a result of increased revenue from content and connectivity offerings and price increases for support services, partially offset by ongoing legacy platform attrition.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Wholesale Distribution Group revenues— Wholesale Distribution Group revenues increased by$2.2 million, or5.6%.  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 an increase in content and connectivity offerings sold as well as our support price increases, partially offset by legacy platform 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 March 31,20112010VarianceCost of systems revenues$16,070$19,093$(3,023)Systems gross margins47.3%44.1%Cost of services revenues$18,738$19,910$(1,172)Services gross margins69.6%67.3%Total cost of revenues$34,808$39,003$(4,195)Total gross margins62.2%59.0%





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Cost of systems revenues and systems gross margins— Cost of systems revenues decreased by$3.0 millionprimarily as a result of a decrease in direct costs associated with lower system revenues, a lower mix of hardware sales and an excess and obsolete inventory adjustment in the prior year.  System gross margins increased by3.2percentage points in the three months endedMarch 31, 2011from the comparable period a year ago, primarily as a result of a mix shift resulting in lower hardware revenues and higher software revenues and a decrease in material costs due to the prior year excess and obsolete inventory adjustment, partially offset by an overall decrease in systems revenues.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Cost of services revenues and services gross margins— Cost of services revenues decreased by$1.2 millionprimarily as a result of lower compensation related expenses.  Services gross margins increased by2.3percentage points in the three months endedMarch 31, 2011from the comparable period a year ago primarily as a result of increased revenues as well as a decrease in compensation related expenses.







Total operating expenses





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





Three Months Ended March 31,20112010Variance $Variance %Sales and marketing$14,217$14,342$(125)(0.9)%Product development8,6628,620420.5%General and administrative6,9396,3595809.1%Depreciation and amortization9,99110,296(305)(3.0)%Restructuring costs(3)1,068(1,071)(100.3)%Total operating expenses$39,806$40,685$(879)(2.2)%





Total operating expenses decreased by $0.9 million , or 2.2% , for the three months ended March 31, 2011 , compared to the three months ended March 31, 2010 . The decrease was driven primarily by restructuring activities and higher depreciation in the prior year, partially offset by an increase in acquisition-related and other strategic initiative costs, one-time legal fees related to the Internet Autoparts, Inc. ("IAP") litigation and compensation related expenses, partially offset by lower bad debt expense.





|  |                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Sales and marketing—Sales and marketing expenses decreased by$0.1 million, or0.9%, for the three months endedMarch 31, 2011compared to the three months endedMarch 31, 2010. The decrease was primarily the result of  a decrease of $0.6 million in bad debt expense and $0.1 million in outside services, partially offset by an increase of $0.6 million in compensation and employee related expenses.




|  |                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Product development—Product development expenses remained relatively flat with an increase of0.5%for the three months endedMarch 31, 2011compared to the three months endedMarch 31, 2010.




|  |                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------
|• | General and administrative—General and administrative expenses increased by$0.6 million, or9.1%, for the three

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months ended March 31, 2011 compared to the three months ended March 31, 2010 . The increase is primarily the result of $0.4 million in acquisition related costs, $0.3 million in one-time legal costs associated with the IAP litigation and $0.2 million in compensation related expenses, partially offset by a $0.4 million decrease in professional and outside services expenses.





|  |                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Depreciation and amortization—Depreciation and amortization expense was$10.0 millionfor the three months endedMarch 31, 2011compared to$10.3 millionfor the three months endedMarch 31, 2010.  The decrease was primarily a result of a lower depreciation expense as a result of higher dollar amounts of assets placed in service in the prior year period.  Depreciation and amortization is not allocated to our segments.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Restructuring costs— During the three months endedMarch 31, 2011, we did not have significant restructuring related charges, however during fiscal year 2010, 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 endedMarch 31, 2010, we recorded restructuring charges approximately$1.1 million. See Note 7 to our unaudited condensed consolidated financial statements.




Interest expense





Interest expense for the three months ended March 31, 2011 and 2010 was $9.3 million and $7.8 million , respectively. The increase in interest expense was primarily a result of the amendment of our revolving credit facility, which resulted in higher interest rates, 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 March 31, 2011 compared to the three months ended March 31, 2010 remained relatively flat with income during both periods of $0.1 million .





Income tax expense





We recognized income tax expense of $6.3 million , or 76.5% of pre-tax income, for the three months ended March 31, 2011 compared to income tax expense of $2.7 million , or 35.3% of pre-tax income from continuing operations, in the comparable period in 2010. During the three months ended March 31, 2011 ,  the increase in income tax expense is due primarily to approximately $3.0 million of income taxes recorded for discrete items incurred during the period, including taxes related to repatriation of earnings from a foreign subsidiary and an increase in unrecognized tax benefits for uncertain tax positions. Our effective tax rate for the three months ended March 31, 2011 differed from the statutory rate primarily due to the cost of repatriation of earnings from a foreign subsidiary and state taxes, net of U.S. federal income tax benefit. 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 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


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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 March 31, 2011 and 2010 is as follows (in thousands) :





Three Months Ended March 31,20112010Variance $Variance %Retail Distribution Group$17,134$17,824$(690)(3.9)%Wholesale Distribution Group17,86916,0161,85311.6%Total contribution margin$35,003$33,840$1,1633.4%





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Retail Distribution Group contribution margin— The contribution margin for Retail Distribution Group decreased by$0.7 million.  Gross margins were $0.8 million lower primarily as a result of lower gross margins on lower systems revenue, a lower mix of hardware sales as well as lower compensation related expenses.  Sales and marketing expenses decreased by $0.1 million primarily as a result of lower commissions, partially offset by an increase in marketing related expenses.  Product development expenses remained relatively flat.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Wholesale Distribution Group contribution margin— The contribution margin for Wholesale Distribution Group increased by$1.9 million.  Gross margins were $2.0 million higher primarily as a result of higher gross margins on higher systems revenue.  Sales and marketing expenses remained relatively flat as a result of an increase in compensation related expenses, partially offset by a decrease in bad debt expense and marketing related expenses.  Product development expenses increased by $0.1 million, primarily as a result of higher outside services.




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


Three Months EndedMarch 31,20112010Segment contribution margin$35,003$33,840Corporate and unallocated costs(6,579)(6,226)Stock-based compensation expense(938)(918)Depreciation and amortization(9,991)(10,296)Restructuring costs3(1,068)Interest expense(9,313)(7,784)Other income, net110141Income from continuing operations before income taxes$8,295$7,689


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Six Months Ended March 31, 2011 Compared to Six Months Ended March 31, 2010





Total revenues





Our Retail Distribution Group and Wholesale Distribution Group segments accounted for approximately 56% and 44% , respectively, of our revenues during the six months ended March 31, 2011 . This compares to the six months ended March 31, 2010 , where our Retail Distribution Group and Wholesale Distribution Group segments accounted for approximately 59% and 41% , 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) :


Six Months Ended March 31,20112010Variance $Variance %Retail Distribution Group revenues:Systems$29,360$35,966$(6,606)(18.4)%Services72,07672,04828—%Total Retail Distribution Group revenues$101,436$108,014$(6,578)(6.1)%Wholesale Distribution Group revenues:Systems$30,003$25,495$4,50817.7%Services50,51349,6368771.8%Total Wholesale Distribution Group revenues$80,516$75,131$5,3857.2%Total revenues:Systems$59,363$61,461$(2,098)(3.4)%Services122,589121,6849050.7%Total revenues$181,952$183,145$(1,193)(0.7)%





Total revenues for the six months ended March 31, 2011 decreased by $1.2 million , or 0.7% , compared to the six months ended March 31, 2010 . The decrease in revenues over the comparable period a year ago is primarily a result of a decrease in systems revenues in Retail  Distribution Group, partially offset by an increase in systems and services revenues in Wholesale Distribution Group.





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Retail Distribution Group revenues— Retail Distribution Group revenues decreased by$6.6 million, or6.1%. 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 as well as lower new system sales due to continued customer caution and deferred purchasing decisions, partially offset by higher professional services revenues as a result of strong prior year sales.  Services revenues remained relatively flat due to increased revenue from content and connectivity offerings and price increases for support services, partially offset by legacy platform attrition.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Wholesale Distribution Group revenues— Wholesale Distribution Group revenues increased by$5.4 million, or7.2%.  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 an increase in content and connectivity offerings sold as well as support price increases, partially offset by legacy platform 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) : Six Months Ended March 31,20112010VarianceCost of systems revenues$31,250$34,109$(2,859)Systems gross margins47.4%44.5%Cost of services revenues$38,663$39,370$(707)Services gross margins68.5%67.6%Total cost of revenues$69,913$73,479$(3,566)Total gross margins61.6%59.9%





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Cost of systems revenues and systems gross margins— Cost of systems revenues decreased by$2.9 millionprimarily as a result of lower direct costs associated with lower system revenues, a lower mix of hardware sales and an excess and obsolete inventory adjustment in the prior year period, partially offset by higher compensation related expenses.  System gross margins increased by2.9percentage points in the six months endedMarch 31, 2011from the comparable period a year ago primarily as a result of a mix shift resulting in lower hardware revenues and higher software revenues, decrease in material costs due to the prior year excess and obsolete inventory adjustment, partially offset by an overall decrease in systems revenue.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Cost of services revenues and services gross margins— Cost of services revenues decreased by$0.7 millionprimarily as a result of decreased labor related expenses, partially offset by higher third party support and data fees.  Services gross margins increased by0.9percentage points in the six months endedMarch 31, 2011from the comparable period a year ago primarily as a result of increased services revenues as well as decreased compensation related expenses, partially offset by third party support and data fees.




Total operating expenses





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


Six Months Ended March 31,20112010Variance $Variance %Sales and marketing$28,345$28,554$(209)(0.7)%Product development17,59817,3662321.3%General and administrative16,11512,5293,58628.6%Depreciation and amortization20,12319,7823411.7%Restructuring costs211,974(1,953)(98.9)%Total operating expenses$82,202$80,205$1,9972.5%





Total operating expenses increased by $2.0 million , or 2.5% , for the six months ended March 31, 2011 , compared to the six months ended March 31, 2010 .  The increase was driven primarily by an increase in acquisition-related and other strategic initiative costs, compensation related expenses as well as legal costs in conjunction with the amendment of our senior secured credit facilities and  IAP litigation, partially offset by a decrease in restructuring costs and outside services.





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Sales and marketing—Sales and marketing expenses decreased by$0.2 million, or0.7%, for the six months endedMarch 31, 2011compared to the six months endedMarch 31, 2010. The decrease was primarily the result of  $0.3 million in outside services and $0.2 million in compensation related expenses, partially offset by an increase of $0.2 million of travel related expenses and $0.1 million in marketing related expenses.




|  |                                                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Product development—Product development expenses increased by$0.2 million, or1.3%, for the six months endedMarch 31, 2011compared to the six months endedMarch 31, 2010. The increase was primarily the result of a $0.2 million increase in compensation related costs.




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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | General and administrative—General and administrative expenses increased by$3.6 million, or28.6%, for the six months endedMarch 31, 2011compared to the six months endedMarch 31, 2010.  The increase is primarily the result of $2.4 million in acquisition related costs and other strategic initiatives, $0.7 million in compensation and employee related expenses and $1.0 million in one-time legal fees in conjunction with the amendment of our senior secured credit facilities as well as the IAP litigation, partially offset by a decrease of $0.4 million in outside services and $0.1 million in travel related costs.




|  |                                                                                                                                                                                                                                                                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Depreciation and amortization—Depreciation and amortization expense was$20.1 millionfor the six months endedMarch 31, 2011compared to$19.8 millionfor the six months endedMarch 31, 2010.  The increase was primarily a result of an increase in purchases of property and equipment compared to the prior year.  Depreciation and amortization is not allocated to our segments.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Restructuring costs— During the six months endedMarch 31, 2011, we did not have significant restructuring related charges, however during the six months ended March 31, 2010, 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 six months ended March 31, 2010, we recorded restructuring charges of approximately$2.0 million, respectively. See Note 7 to our unaudited condensed consolidated financial statements.




Interest expense





Interest expense for the six months ended March 31, 2011 and 2010 was $17.8 million and $15.7 million , respectively. The increase in interest expense was primarily a result of the amendment of our revolving credit facility, which resulted in higher interest rates, 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 six months ended March 31, 2011 was income of $0.2 million compared to $0.4 million in the six months ended March 31, 2010 . The decrease was primarily a result of a decrease in foreign currency gains during the six months ended March 31, 2011 compared to the prior period as well as a loss on dissolution of a subsidiary with cumulative translation losses of $1.4 million during the six months ended March 31, 2011, partially offset by $1.5 million related to a dividend from our joint venture, Internet Autoparts, Inc.





Income tax expense





We recognized income tax expense of $6.8 million , or 55.5% of pre-tax income, for the six months ended March 31, 2011 compared to income tax expense of $5.6 million , or 39.8% of pre-tax income from continuing operations, in the comparable period in 2010. During the six months ended March 31, 2011 , the increase in income tax expense is due primarily to approximately $2.0 million of income taxes recorded for discrete items incurred during the period, primarily related to repatriation of earnings from a foreign subsidiary and an increase in unrecognized tax benefits for uncertain tax positions, partially offset by a release from our valuation allowance. Our effective tax rate for the six months ended March 31, 2011 differed from the statutory rate primarily due to the cost of repatriation of earnings from a foreign subsidiary and state taxes, net of U.S. federal income tax benefit. See Note 5 to our unaudited condensed consolidated financial statements for additional information about income taxes.


Contribution Margin





Contribution margin for the six months ended March 31, 2011 and 2010 is as follows (in thousands) :





Six Months Ended March 31,20112010Variance $Variance %Retail Distribution Group$32,818$34,135$(1,317)(3.9)%Wholesale Distribution Group34,04131,1392,9029.3%Total contribution margin$66,859$65,274$1,5852.4%





|  |                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Retail Distribution Group contribution margin— The contribution margin for Retail Distribution Group decreased by$1.3 million.  Gross margins were $1.9 million lower primarily as a result of lower gross margins on lower systems

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revenue, a lower mix of hardware sales, as well as lower compensation related costs.  Sales and marketing expenses decreased by $0.7 million primarily as a result of lower commissions, partially offset by an increase in marketing 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$2.9 million.  Gross margins were $4.2 million higher as a result of higher gross margins on higher systems and services revenues.  Sales and marketing expenses increased by $1.1 million primarily as a result of an increase in  compensation and employee related expenses, partially offset by a decrease in marketing related expenses and bad debt expense.  Product development expenses increased by $0.2 million primarily as a result of higher compensation related expenses and outside services.




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


Six Months EndedMarch 31,20112010Segment contribution margin$66,859$65,274Corporate and unallocated costs(14,998)(12,151)Stock-based compensation expense(1,880)(1,906)Depreciation and amortization(20,123)(19,782)Restructuring costs(21)(1,974)Interest expense(17,786)(15,703)Other income, net220431Income from continuing operations before income taxes$12,271$14,189


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 March 31, 2011 was $89.0 million .  As of March 31, 2011 , 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


36


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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 six months ended March 31, 2011 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 March 31, 2011 , 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 six months ended March 31, 2011 , 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 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 March 31, 2011 .  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 (for a total interet rate of 2.31% as of March 31, 2011);

|  |                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | under the non-extended incremental term loan, 1.50% with respect to base rate borrowings and 2.50% with respect toEurocurrencyrate borrowings (for a total interest rate of 2.81% as of March 31, 2011);

|  |                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | under the extended term loan, 3.50% with respect to base rate borrowings and 4.50% with respect to Eurocurrency rate borrowings (for a total interest rate of 4.81% as of March 31, 2011);

|  |                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | 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 March 31, 2011 , 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 March 31, 2011 , 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;

|  |                                                                                
|- | -------------------------------------------------------------------------------
|• | 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 March 31, 2011 , we had an outstanding interest rate swap with a notional amount of $140.0 million. As of and for the six months ended March 31, 2011 , 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


38


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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 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). The repurchased notes have been retired.  As a result of these repurchases, senior subordinated notes representing $114.3 million in principal amount were outstanding as of March 31, 2011 .  There were no repurchases of notes during the six months ended March 31, 2011 and 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.




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 March 31, 2011 , 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.








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Six Months Ended March 31, 2011 Compared to Six Months Ended March 31, 2010





Our net cash provided by operating activities from continuing operations for the six months ended March 31, 2011 and 2010 was $28.8 million and $22.8 million , respectively.  As compared to the prior year, the increase was largely attributable to additional cash provided by accrued expenses and other liabilities of $10.6 million, accounts receivable of $4.5 million and inventories of $2.3 million and allowance for doubtful accounts of $0.4 million, partially offset by a decrease in net income from continuing operations (adjusted for higher amortization of intangibles in the current year) as well as an additional use of cash of  $4.5 million for accounts payable, $2.4 million for deferred revenue, $1.9 million for deferred income taxes and $0.2 million for prepaid expenses and other assets.





Our investing activities used net cash of $9.0 million and $7.7 million during the six months ended March 31, 2011 and 2010 , 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.  We purchased property and equipment of $3.6 million and $2.2 million for the six months ended March 31, 2011 and 2010, respectively and capitalized computer software and database development costs of $5.4 million for both the six months ended March 31, 2011 and 2010 .





Our financing activities used net cash of $5.2 million and $16.0 million for the six months ended March 31, 2011 and 2010 , respectively. The decrease in cash used in financing activities was primarily due to payments on our current and long-term debt of $2.6 million during the six months ended March 31, 2011 compared to $16.0 million during the six months ended March 31, 2010 , partially offset by the payment of $2.6 million of deferred financing fees during the six months ended March 31, 2011 .





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





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





Covenant Compliance





Our senior secured credit agreement requires us to meet certain financial tests, including covenants that require us to satisfy a maximum total leverage ratio of consolidated total debt to adjusted EBITDA (consolidated earnings before interest, taxes, depreciation and amortization, further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indenture governing the senior subordinated notes and our senior secured credit facilities) and a minimum interest coverage ratio of adjusted EBITDA to consolidated interest expense, and other financing conditions tests, which become increasingly stringent over the term of the senior secured credit facility. See “Item 2 — 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


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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.





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.






























































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The following is a reconciliation of net income, 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 March 31, 2011 and 2010  (in thousands) .


Twelve Months EndedMarch 31,20112010Net income$21,515$10,953Acquisition costs4,837522Adjusted net income26,35211,475Interest expense33,43334,004Income tax expense and other income-based taxes15,84217,681Depreciation and amortization39,96639,463Gain on asset sales, net of tax(6,178)—Gain on retirement of debt—(4,631)Non-cash charges (dissolution of wholly owned subsidiary, impairment charges and stock-based compensation expense)5,15811,143Non-recurring cash charges and restructuring charges2,5843,519Deferred compensation payments265291Sponsor payments87157Foreign exchange gain(546)(653)Disposed of EBITDA from sale of our productivity tools business385(2,369)Adjusted EBITDA$117,348$110,080





Our financial covenant requirements and ratios as of March 31, 2011 were as follows:


CovenantRequirementsOur RatioSenior Secured Credit Agreement(1)Maximum consolidated total debt to adjusted EBITDA ratio4.25x3.54Minimum adjusted EBITDA to consolidated interest expense2.75x3.78Senior Subordinated Notes(2)Minimum adjusted EBITDA to fixed charges ratio required to incur additional indebtedness pursuant to ratio provisions2.00x3.78


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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our senior secured credit agreement currently requires us to maintain a consolidated total debt to adjusted EBITDA ratio of a maximum of 4.25x; however, this ratio is lowered to a maximum of 4.00x by the end of the quarter ending December 31, 2011 and 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 ofMarch 31, 2011, our consolidated total debt was $415.3 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 $81.5 million. We are also required to maintain an adjusted EBITDA to consolidated interest expense ratio of 2.75x as of  the quarter endedMarch 31, 2011.  Consolidated interest expense is defined in the senior secured credit agreement as consolidated cash interest expense less cash interest income and is further adjusted for certain non-cash interest expenses and other items. Failure to satisfy these ratio requirements would constitute a default under the senior secured credit agreement. If our lenders failed to waive any such default, our repayment obligations under the senior secured credit agreement could be accelerated. 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.




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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 March 31, 2011 , pursuant to our senior secured credit agreement, we had $109.3 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 March 31, 2011 , 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 March 31, 2011 , we had no foreign currency contracts outstanding.





Item 4 — Controls and Procedures





Evaluation of Disclosure Controls and Procedures





The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the SEC in its rules and forms. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the 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 March 31, 2011 . Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures were effective as of March 31, 2011 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 six months ended March 31, 2011 , 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 sought 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, as well as certain royalties that Activant claims IAP owes to Activant.


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.


On January 17, 2011, Activant filed a motion for partial summary judgment requesting that the arbitration panel dismiss all of IAP's claims against Activant.  The arbitration panel held a hearing on Activant's summary judgment motion on February 14, 2011, and on February 22, 2011, the panel granted Activant's summary judgment motion, thereby dismissing all of IAP's claims against Activant.  Activant's affirmative claims against IAP remain pending, and Activant expects that there will be a hearing on the merits of its claims against IAP during the summer of 2011.


Although we intend to continue to litigate Activant's claim against IAP vigorously, there can be no assurance that we will be successful on the remaining claims in the arbitration or on any appeal by IAP.  Even if we are successful, we may incur substantial legal fees and other costs in continuing to litigate 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





Our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, filed with the SEC on December 14, 2010 (the “Annual Report”), includes a detailed discussion of our risk factors under the heading “Part I, Item 1A — Risk Factors.” Set forth below are certain changes from the risk factors previously disclosed in our Annual Report.  You should carefully consider the risk factors discussed in this quarterly report and our Annual Report as well as the other information in this quarterly report. If any of the following risks or the risks discussed in the Annual Report occur, our business, financial condition, results of operations and future growth prospects could suffer.


Uncertainties on the part of our current or prospective customers and the distraction of our management and other personnel caused by our recently announced merger agreement with affiliates of the Apax Funds could negatively affect our business and adversely impact our results of operations.








On April 4, 2011, we announced the pending acquisition of our corporate parent, Activant Group Inc., and the simultaneous pending acquisition of Epicor Software Corporation (“Epicor”), by affiliates of funds advised by Apax Partners L.P. and Apax Partners LLP, (the “Apax Funds”) and the intention of the Apax Funds to combine us with Epicor.  The pending acquisitions are expected to concurrently close in our fiscal third quarter of 2011. The process of completing this transaction and planning for the post-closing integration of the two companies may require significant monetary and personnel resources, which may be disruptive to our business. The announcement of the pending transaction may result in uncertainties on the part of our current and prospective customers and in the distraction of our management and other personnel from our normal activities. For the period prior to the closing of the transaction, and should the transaction not close as currently expected, our business and results of operations could be adversely impacted as a result of the pending transaction, including as a result of, among other things, the following significant


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challenges:





|  |                                                                                                         
|- | --------------------------------------------------------------------------------------------------------
|• | uncertainty among current and prospective customers with regard to the strategy of the combined company;

|  |                                                       
|- | ------------------------------------------------------
|• | distraction of our management and other personnel; and

|  |                            
|- | ---------------------------
|• | retention of key employees.




The impact of these uncertainties in our customer base cannot be predicted and may be very significant, including a reluctance on the part of current or prospective customers to acquire from us new systems or add-on products and associated services or to continue subscriptions  to our services at  their current levels or at all. We have spent and will continue to spend significant resources in conjunction with the pending transaction and integration of the two businesses. Failure to complete the transaction within the currently anticipated timeframe could negatively impact our business, results of operations and cash flows. Additionally, there can be no assurance that we will not incur material charges in future quarters to reflect additional costs associated with this pending merger and integration.





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: April 28, 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 FirstFilingExhibitNumberProvidedHerewith31.1Certification 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





____________________________________________________


*    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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