##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended June 30, 2008
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from  to
 Commission File Number 333-49389
 Activant Solutions Inc.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    94-2160013
(I.R.S. Employer
Identification No.)7683 Southfront Road 
Livermore, CA
(Address of principal executive offices)
    
    94551
(Zip Code)
 (925) 449-0606
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding at August 6, 2008Common Stock, par value $0.01 per share
    
    10 shares




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##### 



ACTIVANT SOLUTIONS INC.
REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
 INDEX
 FORWARD-LOOKING STATEMENTS
    
    
    3PART I  FINANCIAL INFORMATIONItem 1  Financial Statements (Unaudited)
    
    
    4Condensed Consolidated Balance Sheets as of September 30, 2007 and June 30, 2008
    
    
    4Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended June 30, 2008 and June 30, 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2008 and June 30, 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2   Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3   Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4  Controls and Procedures
    
    
    35PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    36Item 1A  Risk Factors
    
    
    36Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3  Defaults Upon Senior Securities
    
    
    36Item 4  Submission of Matters to a Vote of Security Holders
    
    
    37Item 5  Other Information
    
    
    37Item 6  Exhibits
    
    
    37SIGNATURE
    
    
    38Certification Pursuant to Section 302-Pervez A. QureshiCertification Pursuant to Section 302-Kathleen M. CruscoCertification Pursuant to Section 906-Pervez A. QureshiCertification Pursuant to Section 906-Kathleen M. Crusco
  2




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
   
    
    failure to anticipate or respond to our customers needs and requirements;
    
    failure of our proprietary technology to support our customers future needs or it
becoming obsolete;
    
    failure to develop new relationships and maintain existing relationships with key
industry participants and/or key customers and/or loss of significant customer revenues;
    
    loss of recurring subscription service revenues;
    
    transition of certain of our senior management personnel and the failure to attract,
retain and integrate qualified management personnel;
    
    failure of our Activant Eagle and Vision products to gain acceptance within the
automotive parts aftermarket;
    
    our substantial indebtedness and our ability to incur additional indebtedness;
    
    certain covenants in our debt documents;
    
    costs and difficulties of integrating acquisitions, including our acquisitions of Silk
Systems and Intuits distribution software management division;
    
    possible future impairment charges, depending upon the financial results of our
business, in view of the fact that a significant portion of our total assets consist of
goodwill and other intangible assets;
    
    changes in the manner or basis on which we receive third-party information used to
maintain our electronic automotive parts and applications catalog;
    
    failure by certain of our existing customers to upgrade to our current generation of
systems;
    
    failure to effectively compete;
    
    substantial fluctuations in, or failure to maintain current systems sales levels or
one-time sales of software licenses and hardware;
    
    consolidation trends among our customers and consolidation trends in the market segments
in which we operate;
    
    failure to adequately protect our proprietary rights and intellectual property or
limitations on the availability of legal or technical means of effecting such protection;
    
    claims by third parties that we are infringing on their proprietary rights or other
adverse claims;
    
    defects or errors in our software or information services;
    
    interruptions of our connectivity applications or catastrophic failure of our data
center, telecommunications or information technology infrastructure;
    
    claims for damages against us in the event of a failure of our customers systems;
    
    our ability to assume additional debt on favorable terms, if at all;
    
    prolonged unfavorable general economic and market conditions, especially in the retail,
residential housing market and the lumber industry;
    
    differing interests of debt security holders and our controlling stockholders or
investors; and
    
    the other factors described under the heading Risk Factors in our Annual Report on
Form 10-K for the year ended September 30, 2007 and elsewhere in this report.
  3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited).
  
   September 30,
    
    
    June 30,(in thousands, except share data)
    
    2007
    
    
    2008ASSETS:Current assets:Cash and cash equivalents
    
    $
    33,379
    
    
    $
    59,225Trade accounts receivable, net of allowance for doubtful accounts of
$7,765 and $6,466 at September 30, 2007 and June 30, 2008, respectively
    
    
    58,213
    
    
    
    46,222Inventories, net
    
    
    5,359
    
    
    
    4,966Deferred income taxes
    
    
    8,622
    
    
    
    10,655Income taxes receivable
    
    
    2,681
    
    
    
    2,813Prepaid expenses and other current assets
    
    
    5,736
    
    
    
    6,482Total current assets
    
    
    113,990
    
    
    
    130,363Property and equipment, net
    
    
    10,074
    
    
    
    9,634Intangible assets, net
    
    
    235,566
    
    
    
    223,471Goodwill
    
    
    672,206
    
    
    
    666,672Deferred financing costs
    
    
    15,501
    
    
    
    13,758Other assets
    
    
    4,341
    
    
    
    1,881Total assets
    
    $
    1,051,678
    
    
    $
    1,045,779LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Accounts payable
    
    $
    18,401
    
    
    $
    14,315Payroll related accruals
    
    
    15,974
    
    
    
    16,885Deferred revenue
    
    
    29,671
    
    
    
    31,985Current portion of long-term debt
    
    
    750
    
    
    
    750Accrued expenses and other current liabilities
    
    
    21,618
    
    
    
    22,777Total current liabilities
    
    
    86,414
    
    
    
    86,712Long-term debt, net of discount
    
    
    632,113
    
    
    
    631,550Deferred tax liabilities
    
    
    67,072
    
    
    
    59,374Other liabilities
    
    
    9,885
    
    
    
    11,785Total liabilities
    
    
    795,484
    
    
    
    789,421Commitments and contingencies
    
    
    
    
    
    
    Common Stock:Par value $0.01, authorized 1,000 shares, 10 shares issued and
outstanding, at September 30, 2007 and June 30, 2008
    
    
    
    
    
    
    Additional paid-in capital
    
    
    250,893
    
    
    
    253,159Retained earnings
    
    
    8,003
    
    
    
    9,099Other accumulated comprehensive income (loss):Unrealized loss on cash flow hedges
    
    
    (2,891
    )
    
    
    (5,577
    )Cumulative translation adjustment
    
    
    189
    
    
    
    (323
    )Total stockholders equity
    
    
    256,194
    
    
    
    256,358Total liabilities and stockholders equity
    
    $
    1,051,678
    
    
    $
    1,045,779
  4




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008Revenues:Systems
    
    $
    43,686
    
    
    $
    40,440
    
    
    $
    132,970
    
    
    $
    130,969Services
    
    
    56,563
    
    
    
    63,283
    
    
    
    168,585
    
    
    
    189,756Total revenues
    
    
    100,249
    
    
    
    103,723
    
    
    
    301,555
    
    
    
    320,725Cost of revenues (exclusive of depreciation
and amortization shown separately below):Systems (1)
    
    
    24,646
    
    
    
    22,220
    
    
    
    71,928
    
    
    
    73,439Services (1)
    
    
    20,771
    
    
    
    22,531
    
    
    
    60,749
    
    
    
    68,419Total cost of revenues
    
    
    45,417
    
    
    
    44,751
    
    
    
    132,677
    
    
    
    141,858Gross profit
    
    
    54,832
    
    
    
    58,972
    
    
    
    168,878
    
    
    
    178,867Operating expenses:Sales and marketing (1)
    
    
    14,939
    
    
    
    15,356
    
    
    
    47,669
    
    
    
    47,883Product development (1)
    
    
    10,848
    
    
    
    10,774
    
    
    
    31,183
    
    
    
    33,910General and administrative (1)
    
    
    7,673
    
    
    
    8,906
    
    
    
    22,019
    
    
    
    26,180Depreciation and amortization
    
    
    7,448
    
    
    
    9,640
    
    
    
    21,785
    
    
    
    27,561Acquisition related costs
    
    
    72
    
    
    
    264
    
    
    
    72
    
    
    
    922Restructuring costs
    
    
    276
    
    
    
    1,636
    
    
    
    563
    
    
    
    2,126Total operating expenses
    
    
    41,256
    
    
    
    46,576
    
    
    
    123,291
    
    
    
    138,582Operating income
    
    
    13,576
    
    
    
    12,396
    
    
    
    45,587
    
    
    
    40,285Interest expense
    
    
    (11,774
    )
    
    
    (11,800
    )
    
    
    (35,644
    )
    
    
    (39,672
    )Other income, net
    
    
    327
    
    
    
    469
    
    
    
    786
    
    
    
    1,542Income before income taxes
    
    
    2,129
    
    
    
    1,065
    
    
    
    10,729
    
    
    
    2,155Income tax expense
    
    
    783
    
    
    
    236
    
    
    
    4,414
    
    
    
    790Net income
    
    $
    1,346
    
    
    $
    829
    
    
    $
    6,315
    
    
    $
    1,365Comprehensive income (loss):Net income
    
    $
    1,346
    
    
    $
    829
    
    
    $
    6,315
    
    
    $
    1,365Unrealized gain (loss) on cash flow hedges
    
    
    2,042
    
    
    
    3,966
    
    
    
    1,793
    
    
    
    (2,686
    )Foreign currency translation adjustment
    
    
    18
    
    
    
    (292
    )
    
    
    87
    
    
    
    (512
    )Comprehensive income (loss)
    
    $
    3,406
    
    
    $
    4,503
    
    
    $
    8,195
    
    
    $
    (1,833
    )
 
 (1) Includes share-based payment expense as follows:Cost of revenuesSystems
    
    $
    11
    
    
    $
    6
    
    
    $
    35
    
    
    $
    22Services
    
    
    88
    
    
    
    32
    
    
    
    289
    
    
    
    173Operating expensesSales and marketing
    
    
    252
    
    
    
    194
    
    
    
    837
    
    
    
    612Product development
    
    
    97
    
    
    
    71
    
    
    
    320
    
    
    
    215General and administrative
    
    
    632
    
    
    
    204
    
    
    
    1,812
    
    
    
    1,257Total
    
    $
    1,080
    
    
    $
    507
    
    
    $
    3,293
    
    
    $
    2,279
  5




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##### Table of Contents



Nine Months Ended June 30,(in thousands)
    
    2007
    
    
    2008Operating activities:Net income
    
    $
    6,315
    
    
    $
    1,365Adjustments to reconcile net income to net cash
provided by operating activities:Share-based payment expense
    
    
    3,293
    
    
    
    2,279Depreciation
    
    
    4,489
    
    
    
    4,554Amortization of intangible assets
    
    
    17,296
    
    
    
    23,007Amortization of deferred financing costs
    
    
    1,586
    
    
    
    1,860Provision for doubtful accounts
    
    
    2,970
    
    
    
    2,418Deferred income taxes, net
    
    
    (8,386
    )
    
    
    (9,731
    )Other, net
    
    
    1,697
    
    
    
    (512
    )Changes in assets and liabilities:Trade accounts receivable
    
    
    3,963
    
    
    
    9,573Inventories
    
    
    (1,371
    )
    
    
    393Prepaid expenses and other assets
    
    
    8,972
    
    
    
    1,582Accounts payable
    
    
    (515
    )
    
    
    (4,086
    )Deferred revenue
    
    
    (4,012
    )
    
    
    2,314Accrued expenses and other liabilities
    
    
    (4,260
    )
    
    
    549Net cash provided by operating activities
    
    
    32,037
    
    
    
    35,565Investing activities:Business acquisitions
    
    
    (6,502
    )
    
    
    Purchase of property and equipment
    
    
    (4,989
    )
    
    
    (4,114
    )Capitalized computer software costs and databases
    
    
    (3,987
    )
    
    
    (4,912
    )Purchase price adjustments
    
    
    700
    
    
    
    Net cash used in investing activities
    
    
    (14,778
    )
    
    
    (9,026
    )Financing activities:Repurchase of common stock
    
    
    
    
    
    
    (13
    )Payment on long-term debt
    
    
    (27,000
    )
    
    
    (563
    )Debt issuance costs
    
    
    (1,077
    )
    
    
    (117
    )Net cash used in financing activities
    
    
    (28,077
    )
    
    
    (693
    )Net change in cash and cash equivalents
    
    
    (10,818
    )
    
    
    25,846Cash and cash equivalents, beginning of period
    
    
    36,383
    
    
    
    33,379Cash and cash equivalents, end of period
    
    $
    25,565
    
    
    $
    59,225Supplemental disclosures of cash flow informationCash paid during the period for interest
    
    $
    38,097
    
    
    $
    41,089Cash paid during the period for income taxes
(net of receipts)
    
    $
    9,993
    
    
    $
    6,952
  6




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##### Table of Contents



Three Months Ended June 30, 2007
    
    
    Nine Months Ended June 30, 2007as previously
    
    
    
    
    
    
    
    
    
    
    as previously(in thousands)
    
    reported
    
    
    revised
    
    
    change
    
    
    reported
    
    
    revised
    
    
    changeSystems cost of revenues
    
    $
    404
    
    
    $
    952
    
    
    $
    548
    
    
    $
    1,212
    
    
    $
    2,754
    
    
    $
    1,542Services cost of revenues
    
    
    1,038
    
    
    
    1,512
    
    
    
    474
    
    
    
    3,114
    
    
    
    4,682
    
    
    
    1,568Sales and marketing expense
    
    
    468
    
    
    
    946
    
    
    
    478
    
    
    
    1,404
    
    
    
    2,950
    
    
    
    1,546Product development expense
    
    
    217
    
    
    
    966
    
    
    
    749
    
    
    
    651
    
    
    
    2,918
    
    
    
    2,267General and administrative
expense
    
    
    (2,127
    )
    
    
    (4,376
    )
    
    
    (2,249
    )
    
    
    (6,381
    )
    
    
    (13,304
    )
    
    
    (6,923
    )Net allocations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 7




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##### Table of Contents



The Hierarchy of Generally Accepted Accounting Principles The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles
 Determination of the Useful
Lives of Intangible Assets Goodwill and Other Intangible Assets
 Disclosures about Derivative Instruments and Hedging
Activities
 Business Combinations
 The Fair Value Option for Financial Assets and
Financial Liabilities Fair Value Measurements
 Fair Value Measurements
 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109
 8




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##### Table of Contents



Silk Systems, Inc.
  Eclipse Distribution Management Solutions
  Pro Forma Results
   Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2007
    
    
    2008
    
    
    2007
    
    
    2008(in thousands)
    
    (pro forma)
    
    
    (actual)
    
    
    (pro forma)
    
    
    (actual)Total revenues
    
    $
    113,964
    
    
    $
    103,723
    
    
    $
    343,909
    
    
    $
    320,725Total cost of revenues
    
    
    52,866
    
    
    
    44,751
    
    
    
    155,154
    
    
    
    141,858Gross profit
    
    
    61,098
    
    
    
    58,972
    
    
    
    188,755
    
    
    
    178,867Total operating expenses
    
    
    46,156
    
    
    
    46,576
    
    
    
    138,494
    
    
    
    138,582Operating income
    
    
    14,942
    
    
    
    12,396
    
    
    
    50,261
    
    
    
    40,285Interest expense
    
    
    (13,735
    )
    
    
    (11,800
    )
    
    
    (41,526
    )
    
    
    (39,672
    )Other income, net
    
    
    540
    
    
    
    469
    
    
    
    1,133
    
    
    
    1,542Income before income taxes
    
    
    1,747
    
    
    
    1,065
    
    
    
    9,868
    
    
    
    2,155Income tax expense
    
    
    649
    
    
    
    236
    
    
    
    4,113
    
    
    
    790Net income
    
    $
    1,098
    
    
    $
    829
    
    
    $
    5,755
    
    
    $
    1,365
 9




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##### Table of Contents



September 30,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2008Senior secured term loan due 2013
    
    $
    437,863
    
    
    $
    437,300Senior subordinated notes due 2016
    
    
    175,000
    
    
    
    175,000Revolving credit facility due 2011
    
    
    20,000
    
    
    
    20,000Total debt
    
    
    632,863
    
    
    
    632,300Current portion
    
    
    (750
    )
    
    
    (750
    )Long-term debt
    
    $
    632,113
    
    
    $
    631,550
 Senior Secured Credit Agreement
   
    
    under the revolving credit facility, 1.25% with respect to base rate borrowings and 2.25%
with respect to Eurodollar rate borrowings, which may be reduced subject to our attainment of
certain leverage ratios;
 
    
    under the term loan, 1.00% with respect to base rate borrowings and 2.00% with respect to
Eurodollar rate borrowings; and
 
    
    under the incremental term loan, 1.5% with respect to base rate borrowings and 2.50% with
respect to Eurodollar rate borrowings.
    10




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##### Table of Contents



Senior Subordinated Notes Due 2016
            Activant Solutions Inc.
   11




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##### Table of Contents



Three Months Ended June 30,
    
    Nine Months Ended June 30,2007
    
    2008
    
    2007
    
    2008Expected term
    
    6.66 years
    
    
    6.66 years
    
    
    6.66 years
    
    
    6.66 yearsExpected volatility
    
    
    50.00
    %
    
    
    50.00
    %
    
    
    50.00
    %
    
    
    50.00
    %Expected dividends
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Risk-free rate
    
    
    4.77
    %
    
    
    3.21
    %
    
    
    4.68
    %
    
    
    3.20
    %
   2006 Option PlanWeightedAverage ExerciseNumber of Shares
    
    
    PriceTotal options outstanding at September 30, 2007
    
    
    6,759,073
    
    
    $
    4.38Options granted
    
    
    875,250
    
    
    
    4.53Options forfeited
    
    
    (802,600
    )
    
    
    4.37Options exercised
    
    
    
    
    
    
    Total options outstanding at June 30, 2008
    
    
    6,831,723
    
    
    $
    4.40Total options exercisable at June 30, 2008
    
    
    2,306,528
    
    
    $
    4.37
  Predecessor Company
  12




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##### Table of Contents



Predecessor Company PlanNumber of
    
    
    Weighted AverageShares
    
    
    Exercise PriceTotal options outstanding at September 30, 2007
    
    
    333,334
    
    
    $
    1.00Options granted
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Total options outstanding at June 30, 2008
    
    
    333,334
    
    
    $
    1.00
  Accounting for Costs Associated with Exit or Disposal Activities
   Disclosures about Segments of an Enterprise and Related Information.
  §
    
    Hardlines and Lumber segment The Hardlines and Lumber vertical market consists of
independent hardware retailers; home improvement centers; paint, glass and wallpaper
stores; farm supply stores; retail nurseries and garden centers; and independent lumber and
building material dealers, primarily in the United States.§
    
    Wholesale Distribution segment The wholesale distribution vertical market consists of
distributors of a range of products including electrical supply; plumbing; medical supply;
heating and air conditioning; brick, stone and related materials; roofing; siding;
insulation; industrial machinery and equipment; industrial supplies; fluid power;
janitorial and sanitation products; paper and packaging; and service establishment
equipment vendors, primarily in the United States.§
    
    Automotive segment The automotive vertical market consists of customers involved in
the manufacture, distribution, sale and installation of new and remanufactured parts used
in the maintenance and repair of automobiles and light trucks, and includes manufacturers,
warehouse distributors, parts stores, professional installers and several chains in North
America and Europe.
 13




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##### Table of Contents



§
    
    Other Other primarily consists of our
productivity tools business, which is involved
with software migration services and application development tools.
 Segment Revenue and Contribution Margin
    Three Months Ended June 30, 2007
    
    Nine Months Ended June 30, 2007Hardlines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Hardlinesand
    
    Wholesale
    
    Auto-
    
    
    
    
    
    
    
    
    
    and
    
    Wholesale
    
    Auto-(in thousands)
    
    Lumber
    
    Distribution
    
    motive
    
    Other
    
    Total
    
    Lumber
    
    Distribution
    
    motive
    
    Other
    
    TotalRevenues
    
    $
    42,534
    
    
    $
    29,105
    
    
    $
    22,268
    
    
    $
    6,342
    
    
    $
    100,249
    
    
    $
    128,472
    
    
    $
    89,814
    
    
    $
    67,586
    
    
    $
    15,683
    
    
    $
    301,555Contribution Margin
    
    $
    10,931
    
    
    $
    10,551
    
    
    $
    7,358
    
    
    $
    877
    
    
    $
    29,717
    
    
    $
    34,091
    
    
    $
    31,779
    
    
    $
    24,137
    
    
    $
    2,168
    
    
    $
    92,175
 Three Months Ended June 30, 2008
    
    Nine Months Ended June 30, 2008Hardlines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Hardlinesand
    
    Wholesale
    
    Auto-
    
    
    
    
    
    
    
    
    
    and
    
    Wholesale
    
    Auto-Lumber
    
    Distribution
    
    motive
    
    Other
    
    Total
    
    Lumber
    
    Distribution
    
    motive
    
    Other
    
    TotalRevenues
    
    $
    36,343
    
    
    $
    41,172
    
    
    $
    20,795
    
    
    $
    5,413
    
    
    $
    103,723
    
    
    $
    113,243
    
    
    $
    127,056
    
    
    $
    65,017
    
    
    $
    15,409
    
    
    $
    320,725Contribution Margin
    
    $
    9,621
    
    
    $
    15,820
    
    
    $
    6,610
    
    
    $
    1,318
    
    
    $
    33,369
    
    
    $
    26,754
    
    
    $
    48,343
    
    
    $
    22,029
    
    
    $
    2,002
    
    
    $
    99,128
    14




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##### Table of Contents



Three Months Ended June 30,
    
    
    Nine Months Ended June 30,(in thousands)
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008Segment contribution margin
    
    $
    29,717
    
    
    $
    33,369
    
    
    $
    92,175
    
    
    $
    99,128Corporate and unallocated costs
    
    
    (7,265
    )
    
    
    (8,926
    )
    
    
    (20,875
    )
    
    
    (25,955
    )Share-based payment expense
    
    
    (1,080
    )
    
    
    (507
    )
    
    
    (3,293
    )
    
    
    (2,279
    )Depreciation and amortization
    
    
    (7,448
    )
    
    
    (9,640
    )
    
    
    (21,785
    )
    
    
    (27,561
    )Acquisition related costs
    
    
    (72
    )
    
    
    (264
    )
    
    
    (72
    )
    
    
    (922
    )Restructuring costs
    
    
    (276
    )
    
    
    (1,636
    )
    
    
    (563
    )
    
    
    (2,126
    )Interest expense
    
    
    (11,774
    )
    
    
    (11,800
    )
    
    
    (35,644
    )
    
    
    (39,672
    )Other income, net
    
    
    327
    
    
    
    469
    
    
    
    786
    
    
    
    1,542Income before income taxes
    
    $
    2,129
    
    
    $
    1,065
    
    
    $
    10,729
    
    
    $
    2,155
   Three Months Ended June 30,
    
    
    Nine Months Ended June 30,(in thousands)
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008Revenues:Americas
    
    $
    98,510
    
    
    $
    102,454
    
    
    $
    296,434
    
    
    $
    316,258Europe
    
    
    1,739
    
    
    
    1,269
    
    
    
    5,121
    
    
    
    4,467Total revenues
    
    $
    100,249
    
    
    $
    103,723
    
    
    $
    301,555
    
    
    $
    320,725
 September 30,
    
    
    June 30,2007
    
    
    2008Assets:Americas
    
    $
    1,049,029
    
    
    $
    1,043,363Europe
    
    
    2,649
    
    
    
    2,416Total assets
    
    $
    1,051,678
    
    
    $
    1,045,779
 15




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##### Table of Contents



Condensed Consolidating Balance Sheet as of September 30, 2007
 Guarantor
    
    
    Non-Principal
    
    
    Guarantor
    
    
    Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    24,862
    
    
    $
    4,154
    
    
    $
    4,363
    
    
    $
    
    
    
    $
    33,379Trade accounts receivable, net of allowance for
doubtful accounts
    
    
    40,451
    
    
    
    14,408
    
    
    
    3,354
    
    
    
    
    
    
    
    58,213Inventories, net
    
    
    4,061
    
    
    
    1,014
    
    
    
    284
    
    
    
    
    
    
    
    5,359Income taxes receivable
    
    
    1,638
    
    
    
    514
    
    
    
    529
    
    
    
    
    
    
    
    2,681Deferred income taxes
    
    
    7,534
    
    
    
    942
    
    
    
    146
    
    
    
    
    
    
    
    8,622Prepaid expenses and other current assets
    
    
    5,119
    
    
    
    398
    
    
    
    219
    
    
    
    
    
    
    
    5,736Total current assets
    
    
    83,665
    
    
    
    21,430
    
    
    
    8,895
    
    
    
    
    
    
    
    113,990Property and equipment, net
    
    
    8,066
    
    
    
    1,359
    
    
    
    649
    
    
    
    
    
    
    
    10,074Intangible assets, net
    
    
    203,447
    
    
    
    29,667
    
    
    
    2,452
    
    
    
    
    
    
    
    235,566Goodwill
    
    
    560,880
    
    
    
    103,420
    
    
    
    1,869
    
    
    
    6,037
    
    
    
    672,206Investments in subsidiaries
    
    
    9,656
    
    
    
    
    
    
    
    885
    
    
    
    (10,541
    )
    
    
    Intercompany receivables (payables)
    
    
    78,175
    
    
    
    (52,525
    )
    
    
    (25,650
    )
    
    
    
    
    
    
    Deferred financing costs
    
    
    15,501
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,501Other assets
    
    
    4,108
    
    
    
    143
    
    
    
    95
    
    
    
    (5
    )
    
    
    4,341Total assets
    
    $
    963,498
    
    
    $
    103,494
    
    
    $
    (10,805
    )
    
    $
    (4,509
    )
    
    $
    1,051,678Liabilities and stockholders equity (deficit)Current liabilities:Accounts payable
    
    $
    13,606
    
    
    $
    3,104
    
    
    $
    1,691
    
    
    $
    
    
    
    $
    18,401Payroll related accruals
    
    
    11,168
    
    
    
    3,500
    
    
    
    1,306
    
    
    
    
    
    
    
    15,974Deferred revenue
    
    
    12,277
    
    
    
    16,104
    
    
    
    1,290
    
    
    
    
    
    
    
    29,671Current portion of long-term debt
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Accrued expenses and other current liabilities
    
    
    20,111
    
    
    
    1,472
    
    
    
    35
    
    
    
    
    
    
    
    21,618Total current liabilities
    
    
    57,912
    
    
    
    24,180
    
    
    
    4,322
    
    
    
    
    
    
    
    86,414Long-term debt, net of discount
    
    
    632,113
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    632,113Deferred tax liabilities and other liabilities
    
    
    79,941
    
    
    
    (3,049
    )
    
    
    65
    
    
    
    
    
    
    
    76,957Total liabilities
    
    
    769,966
    
    
    
    21,131
    
    
    
    4,387
    
    
    
    
    
    
    
    795,484Total stockholders equity (deficit)
    
    
    193,532
    
    
    
    82,363
    
    
    
    (15,192
    )
    
    
    (4,509
    )
    
    
    256,194Total liabilities and stockholders equity (deficit)
    
    $
    963,498
    
    
    $
    103,494
    
    
    $
    (10,805
    )
    
    $
    (4,509
    )
    
    $
    1,051,678
 16




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##### Table of Contents



Condensed Consolidating Balance Sheet as of June 30, 2008
 GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    46,432
    
    
    $
    6,095
    
    
    $
    6,698
    
    
    $
    
    
    
    $
    59,225Trade accounts receivable, net
of allowance for doubtful
accounts
    
    
    27,732
    
    
    
    15,404
    
    
    
    3,086
    
    
    
    
    
    
    
    46,222Inventories, net
    
    
    3,810
    
    
    
    1,155
    
    
    
    1
    
    
    
    
    
    
    
    4,966Deferred income taxes
    
    
    9,567
    
    
    
    942
    
    
    
    146
    
    
    
    
    
    
    
    10,655Income taxes receivable
    
    
    2,813
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,813Prepaid expenses and other
current assets
    
    
    5,370
    
    
    
    644
    
    
    
    468
    
    
    
    
    
    
    
    6,482Total current assets
    
    
    95,724
    
    
    
    24,240
    
    
    
    10,399
    
    
    
    
    
    
    
    130,363Property and equipment, net
    
    
    8,139
    
    
    
    966
    
    
    
    529
    
    
    
    
    
    
    
    9,634Intangible assets, net
    
    
    189,738
    
    
    
    31,606
    
    
    
    2,127
    
    
    
    
    
    
    
    223,471Goodwill
    
    
    563,007
    
    
    
    97,422
    
    
    
    206
    
    
    
    6,037
    
    
    
    666,672Investments in subsidiaries
    
    
    9,656
    
    
    
    
    
    
    
    885
    
    
    
    (10,541
    )
    
    
    Intercompany receivables (payables)
    
    
    27,839
    
    
    
    (7,466
    )
    
    
    (20,373
    )
    
    
    
    
    
    
    Deferred financing costs
    
    
    13,758
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,758Other assets
    
    
    1,485
    
    
    
    376
    
    
    
    20
    
    
    
    
    
    
    
    1,881Total assets
    
    $
    909,346
    
    
    $
    147,144
    
    
    $
    (6,207
    )
    
    $
    (4,504
    )
    
    $
    1,045,779Liabilities and stockholders
equity (deficit)Current liabilities:Accounts payable
    
    $
    10,893
    
    
    $
    2,485
    
    
    $
    931
    
    
    $
    6
    
    
    $
    14,315Payroll related accruals
    
    
    10,051
    
    
    
    5,157
    
    
    
    1,677
    
    
    
    
    
    
    
    16,885Deferred revenue
    
    
    12,537
    
    
    
    18,445
    
    
    
    1,003
    
    
    
    
    
    
    
    31,985Current portion of long-term debt
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Accrued expenses and other
current liabilities
    
    
    26,243
    
    
    
    (1,354
    )
    
    
    (2,112
    )
    
    
    
    
    
    
    22,777Total current liabilities
    
    
    60,474
    
    
    
    24,733
    
    
    
    1,499
    
    
    
    6
    
    
    
    86,712Long-term debt, net of discount
    
    
    631,550
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    631,550Deferred tax liabilities and other
liabilities
    
    
    74,180
    
    
    
    (3,049
    )
    
    
    28
    
    
    
    
    
    
    
    71,159Total liabilities
    
    
    766,204
    
    
    
    21,684
    
    
    
    1,527
    
    
    
    6
    
    
    
    789,421Total stockholders equity (deficit)
    
    
    143,142
    
    
    
    125,460
    
    
    
    (7,734
    )
    
    
    (4,510
    )
    
    
    256,358Total liabilities and stockholders
equity (deficit)
    
    $
    909,346
    
    
    $
    147,144
    
    
    $
    (6,207
    )
    
    $
    (4,504
    )
    
    $
    1,045,779
 17




---



##### Table of Contents



Condensed Consolidating Statement of Operations for the Three Months Ended June 30, 2007
 GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedRevenues:Systems
    
    $
    29,767
    
    
    $
    12,101
    
    
    $
    1,818
    
    
    $
    43,686Services
    
    
    35,591
    
    
    
    17,005
    
    
    
    3,967
    
    
    
    56,563Total revenues
    
    
    65,358
    
    
    
    29,106
    
    
    
    5,785
    
    
    
    100,249Cost of revenues (exclusive of
depreciation and amortization
shown separately below):Systems
    
    
    16,636
    
    
    
    4,982
    
    
    
    3,028
    
    
    
    24,646Services
    
    
    14,660
    
    
    
    4,205
    
    
    
    1,906
    
    
    
    20,771Total cost of revenues
    
    
    31,296
    
    
    
    9,187
    
    
    
    4,934
    
    
    
    45,417Gross profit
    
    
    34,062
    
    
    
    19,919
    
    
    
    851
    
    
    
    54,832Operating expenses:Sales and marketing
    
    
    9,997
    
    
    
    3,619
    
    
    
    1,323
    
    
    
    14,939Product development
    
    
    6,043
    
    
    
    4,068
    
    
    
    737
    
    
    
    10,848General and administrative
    
    
    5,621
    
    
    
    1,097
    
    
    
    955
    
    
    
    7,673Depreciation and amortization
    
    
    7,158
    
    
    
    202
    
    
    
    88
    
    
    
    7,448Acquisition-related costs
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    72Restructuring costs
    
    
    276
    
    
    
    
    
    
    
    
    
    
    
    276Total operating expenses
    
    
    29,167
    
    
    
    8,986
    
    
    
    3,103
    
    
    
    41,256Operating income (loss)
    
    
    4,895
    
    
    
    10,933
    
    
    
    (2,252
    )
    
    
    13,576Interest expense
    
    
    (11,771
    )
    
    
    
    
    
    
    (3
    )
    
    
    (11,774
    )Other income
    
    
    168
    
    
    
    4
    
    
    
    155
    
    
    
    327Income (loss) before income taxes
    
    
    (6,708
    )
    
    
    10,937
    
    
    
    (2,100
    )
    
    
    2,129Income tax expense
    
    
    781
    
    
    
    2
    
    
    
    
    
    
    
    783Net income (loss)
    
    $
    (7,489
    )
    
    $
    10,935
    
    
    $
    (2,100
    )
    
    $
    1,346
 18




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##### Table of Contents



Condensed Consolidating Statement of Operations for the Three Months Ended June 30, 2008.
 GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedRevenues:Systems
    
    $
    18,909
    
    
    $
    17,428
    
    
    $
    4,103
    
    
    $
    40,440Services
    
    
    34,828
    
    
    
    23,715
    
    
    
    4,740
    
    
    
    63,283Total revenues
    
    
    53,737
    
    
    
    41,143
    
    
    
    8,843
    
    
    
    103,723Cost of revenues (exclusive of
depreciation and amortization
shown separately below):Systems
    
    
    11,959
    
    
    
    7,575
    
    
    
    2,686
    
    
    
    22,220Services
    
    
    13,981
    
    
    
    6,405
    
    
    
    2,145
    
    
    
    22,531Total cost of revenues
    
    
    25,940
    
    
    
    13,980
    
    
    
    4,831
    
    
    
    44,751Gross profit
    
    
    27,797
    
    
    
    27,163
    
    
    
    4,012
    
    
    
    58,972Operating expenses:Sales and marketing
    
    
    8,277
    
    
    
    5,814
    
    
    
    1,265
    
    
    
    15,356Product development
    
    
    4,482
    
    
    
    5,377
    
    
    
    915
    
    
    
    10,774General and administrative
    
    
    7,433
    
    
    
    683
    
    
    
    790
    
    
    
    8,906Depreciation and amortization
    
    
    7,614
    
    
    
    1,854
    
    
    
    172
    
    
    
    9,640Acquisition related costs
    
    
    238
    
    
    
    26
    
    
    
    
    
    
    
    264Restructuring costs
    
    
    1,085
    
    
    
    
    
    
    
    551
    
    
    
    1,636Total operating expenses
    
    
    29,129
    
    
    
    13,754
    
    
    
    3,693
    
    
    
    46,576Operating income (loss)
    
    
    (1,332
    )
    
    
    13,409
    
    
    
    319
    
    
    
    12,396Interest expense
    
    
    (11,792
    )
    
    
    (5
    )
    
    
    (3
    )
    
    
    (11,800
    )Other income
    
    
    18
    
    
    
    45
    
    
    
    406
    
    
    
    469Income (loss) before income taxes
    
    
    (13,106
    )
    
    
    13,449
    
    
    
    722
    
    
    
    1,065Income tax expense
    
    
    232
    
    
    
    3
    
    
    
    1
    
    
    
    236Net income (loss)
    
    $
    (13,338
    )
    
    $
    13,446
    
    
    $
    721
    
    
    $
    829
 19




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##### Table of Contents



Condensed Consolidating Statement of Operations for the Nine Months Ended June 30, 2007
 GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedRevenues:Systems
    
    $
    88,990
    
    
    $
    39,212
    
    
    $
    4,768
    
    
    $
    132,970Services
    
    
    106,504
    
    
    
    50,603
    
    
    
    11,478
    
    
    
    168,585Total revenues
    
    
    195,494
    
    
    
    89,815
    
    
    
    16,246
    
    
    
    301,555Cost of revenues (exclusive of
depreciation and amortization
shown separately below):Systems
    
    
    50,083
    
    
    
    15,184
    
    
    
    6,661
    
    
    
    71,928Services
    
    
    42,294
    
    
    
    12,369
    
    
    
    6,086
    
    
    
    60,749Total cost of revenues
    
    
    92,377
    
    
    
    27,553
    
    
    
    12,747
    
    
    
    132,677Gross profit
    
    
    103,117
    
    
    
    62,262
    
    
    
    3,499
    
    
    
    168,878Operating expenses:Sales and marketing
    
    
    30,696
    
    
    
    13,546
    
    
    
    3,427
    
    
    
    47,669Product development
    
    
    17,595
    
    
    
    11,626
    
    
    
    1,962
    
    
    
    31,183General and administrative
    
    
    15,993
    
    
    
    3,303
    
    
    
    2,723
    
    
    
    22,019Depreciation and amortization
    
    
    20,928
    
    
    
    631
    
    
    
    226
    
    
    
    21,785Acquisition related costs
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    72Restructuring costs
    
    
    563
    
    
    
    
    
    
    
    
    
    
    
    563Total operating expenses
    
    
    85,847
    
    
    
    29,106
    
    
    
    8,338
    
    
    
    123,291Operating income (loss)
    
    
    17,270
    
    
    
    33,156
    
    
    
    (4,839
    )
    
    
    45,587Interest expense
    
    
    (35,634
    )
    
    
    (2
    )
    
    
    (8
    )
    
    
    (35,644
    )Other income (expense), net
    
    
    (157
    )
    
    
    216
    
    
    
    727
    
    
    
    786Income (loss) before income taxes
    
    
    (18,521
    )
    
    
    33,370
    
    
    
    (4,120
    )
    
    
    10,729Income tax expense
    
    
    4,407
    
    
    
    7
    
    
    
    
    
    
    
    4,414Net income (loss)
    
    $
    (22,928
    )
    
    $
    33,363
    
    
    $
    (4,120
    )
    
    $
    6,315
 20




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##### Table of Contents



Condensed Consolidating Statement of Operations for the Nine Months Ended June 30, 2008
 GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedRevenues:Systems
    
    $
    64,003
    
    
    $
    57,291
    
    
    $
    9,675
    
    
    $
    130,969Services
    
    
    105,815
    
    
    
    70,501
    
    
    
    13,440
    
    
    
    189,756Total revenues
    
    
    169,818
    
    
    
    127,792
    
    
    
    23,115
    
    
    
    320,725Cost of revenues (exclusive of
depreciation and amortization
shown separately below):Systems
    
    
    39,625
    
    
    
    24,285
    
    
    
    9,529
    
    
    
    73,439Services
    
    
    43,039
    
    
    
    19,260
    
    
    
    6,120
    
    
    
    68,419Total cost of revenues
    
    
    82,664
    
    
    
    43,545
    
    
    
    15,649
    
    
    
    141,858Gross profit
    
    
    87,154
    
    
    
    84,247
    
    
    
    7,466
    
    
    
    178,867Operating expenses:Sales and marketing
    
    
    27,028
    
    
    
    17,281
    
    
    
    3,574
    
    
    
    47,883Product development
    
    
    14,624
    
    
    
    16,516
    
    
    
    2,770
    
    
    
    33,910General and administrative
    
    
    21,774
    
    
    
    2,138
    
    
    
    2,268
    
    
    
    26,180Depreciation and amortization
    
    
    22,417
    
    
    
    4,607
    
    
    
    537
    
    
    
    27,561Acquisition related costs
    
    
    896
    
    
    
    26
    
    
    
    
    
    
    
    922Restructuring costs
    
    
    1,575
    
    
    
    
    
    
    
    551
    
    
    
    2,126Total operating expenses
    
    
    88,314
    
    
    
    40,568
    
    
    
    9,700
    
    
    
    138,582Operating income (loss)
    
    
    (1,160
    )
    
    
    43,679
    
    
    
    (2,234
    )
    
    
    40,285Interest expense
    
    
    (39,658
    )
    
    
    (5
    )
    
    
    (9
    )
    
    
    (39,672
    )Other income (expense), net
    
    
    1,024
    
    
    
    (575
    )
    
    
    1,093
    
    
    
    1,542Income (loss) before income taxes
    
    
    (39,794
    )
    
    
    43,099
    
    
    
    (1,150
    )
    
    
    2,155Income tax expense
    
    
    783
    
    
    
    5
    
    
    
    2
    
    
    
    790Net income (loss)
    
    $
    (40,577
    )
    
    $
    43,094
    
    
    $
    (1,152
    )
    
    $
    1,365
 21




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows for the Nine Months Ended June 30, 2007
 GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedNet cash provided by (used in) operating activities
    
    $
    27,801
    
    
    $
    (4,572
    )
    
    $
    8,808
    
    
    $
    32,037Investing activitiesBusiness acquisitions
    
    
    
    
    
    
    
    
    
    
    (6,502
    )
    
    
    (6,502
    )Purchase of property and equipment
    
    
    (4,463
    )
    
    
    (323
    )
    
    
    (203
    )
    
    
    (4,989
    )Capitalized computer software costs and databases
    
    
    (3,987
    )
    
    
    
    
    
    
    
    
    
    
    (3,987
    )Purchase price adjustments
    
    
    700
    
    
    
    
    
    
    
    
    
    
    
    700Net cash used in investing activities
    
    
    (7,750
    )
    
    
    (323
    )
    
    
    (6,705
    )
    
    
    (14,778
    )Financing activitiesPayment on long-term debt
    
    
    (27,000
    )
    
    
    
    
    
    
    
    
    
    
    (27,000
    )Debt issuance costs
    
    
    (1,077
    )
    
    
    
    
    
    
    
    
    
    
    (1,077
    )Net cash used in financing activities
    
    
    (28,077
    )
    
    
    
    
    
    
    
    
    
    
    (28,077
    )Net change in cash and cash equivalents
    
    
    (8,026
    )
    
    
    (4,895
    )
    
    
    2,103
    
    
    
    (10,818
    )Cash and cash equivalents, beginning of period
    
    
    26,498
    
    
    
    7,772
    
    
    
    2,113
    
    
    
    36,383Cash and cash equivalents, end of period
    
    $
    18,472
    
    
    $
    2,877
    
    
    $
    4,216
    
    
    $
    25,565
 Condensed Consolidating Statement of Cash Flows for the Nine Months Ended June 30, 2008
 GuarantorPrincipal
    
    
    Guarantor
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    30,988
    
    
    $
    2,091
    
    
    $
    2,486
    
    
    $
    35,565Investing activitiesPurchase of property and equipment
    
    
    (3,813
    )
    
    
    (150
    )
    
    
    (151
    )
    
    
    (4,114
    )Capitalized computer software costs and databases
    
    
    (4,912
    )
    
    
    
    
    
    
    
    
    
    
    (4,912
    )Net cash used in investing activities
    
    
    (8,725
    )
    
    
    (150
    )
    
    
    (151
    )
    
    
    (9,026
    )Financing activitiesRepurchase of common stock
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    (13
    )Payment on long-term debt
    
    
    (563
    )
    
    
    
    
    
    
    
    
    
    
    (563
    )Debt issuance costs
    
    
    (117
    )
    
    
    
    
    
    
    
    
    
    
    (117
    )Net cash used in financing activities
    
    
    (693
    )
    
    
    
    
    
    
    
    
    
    
    (693
    )Net change in cash and cash equivalents
    
    
    21,570
    
    
    
    1,941
    
    
    
    2,335
    
    
    
    25,846Cash and cash equivalents, beginning of period
    
    
    24,862
    
    
    
    4,154
    
    
    
    4,363
    
    
    
    33,379Cash and cash equivalents, end of period
    
    $
    46,432
    
    
    $
    6,095
    
    
    $
    6,698
    
    
    $
    59,225
 22




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 You should read the following discussion and analysis in conjunction with our financial statements
and related notes included above. This discussion contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a variety of factors listed below,
including those set forth under Risk Factors included in our Annual Report on Form 10-K for the
year ended September 30, 2007.
  Overview
 Disclosures about Segments of an Enterprise and Related
Information.
  §
    
    The Hardlines and Lumber vertical market consists of independent hardware retailers;
home improvement centers; paint, glass and wallpaper stores; farm supply stores; retail
nurseries and garden centers; and independent lumber and building material dealers,
primarily in the United States.§
    
    The Wholesale Distribution vertical market consists of distributors of a range of
products including electrical supply; plumbing; medical supply; heating and air
conditioning; brick, stone and related materials; roofing; siding; insulation; industrial
machinery and equipment; industrial supplies; fluid power; janitorial and sanitation
products; paper and packaging; and service establishment equipment vendors, primarily in
the United States.§
    
    The Automotive vertical market consists of customers involved in the manufacture,
distribution, sale and installation of new and remanufactured parts used in the maintenance
and repair of automobiles and light trucks, and includes manufacturers, warehouse
distributors, parts stores, professional installers and several chains in North America and
Europe.§
    
    Other primarily  consists of our Productivity Tools business,
which is involved with software migration services and
application development tools.
  §
    
    Systems, which is comprised primarily of proprietary software applications;
implementation services; training; forms and paper products; and third-party software,
hardware and peripherals.§
    
    Services, which is comprised primarily of product support, content, and supply chain
services. Product support services are comprised of customer support activities, including
hardware, software and network support through our advice line, software updates,
preventive and remedial on-site maintenance and depot repair services. Our content services
are comprised of proprietary database and data management products such as our
comprehensive electronic automotive parts
 23




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##### Table of Contents



and applications catalog and point-of-sale
business analysis data. Supply chain services are comprised of connectivity services,
e-commerce, networking and security monitoring management solutions. We generally provide
our services on a subscription basis, and accordingly, revenues are generally
recurring in nature.
 Historical Results of Operations
 Segment Information
   Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
 Revenues
  24




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##### Table of Contents



Three Months Ended June 30,(in thousands)
    
    2007
    
    
    2008
    
    
    Variance $
    
    
    Variance %Hardlines and Lumber revenues:Systems
    
    $
    23,226
    
    
    $
    16,162
    
    
    $
    (7,064
    )
    
    
    (30.4
    )%Services
    
    
    19,308
    
    
    
    20,181
    
    
    
    873
    
    
    
    4.5
    %Total Hardlines and Lumber revenues
    
    $
    42,534
    
    
    $
    36,343
    
    
    $
    (6,191
    )
    
    
    (14.6
    )%Wholesale Distribution revenues:Systems
    
    $
    12,101
    
    
    $
    17,425
    
    
    $
    5,324
    
    
    
    44.0
    %Services
    
    
    17,004
    
    
    
    23,747
    
    
    
    6,743
    
    
    
    39.7
    %Total Wholesale Distribution revenues
    
    $
    29,105
    
    
    $
    41,172
    
    
    $
    12,067
    
    
    
    41.5
    %Automotive revenues:Systems
    
    $
    3,783
    
    
    $
    2,964
    
    
    $
    (819
    )
    
    
    (21.6
    )%Services
    
    
    18,485
    
    
    
    17,831
    
    
    
    (654
    )
    
    
    (3.5
    )%Total Automotive revenues
    
    $
    22,268
    
    
    $
    20,795
    
    
    $
    (1,473
    )
    
    
    (6.6
    )%Other revenues:Systems
    
    $
    4,576
    
    
    $
    3,889
    
    
    $
    (687
    )
    
    
    (15.0
    )%Services
    
    
    1,766
    
    
    
    1,524
    
    
    
    (242
    )
    
    
    (13.7
    )%Total Other revenues
    
    $
    6,342
    
    
    $
    5,413
    
    
    $
    (929
    )
    
    
    (14.6
    )%Total revenues:Systems
    
    $
    43,686
    
    
    $
    40,440
    
    
    $
    (3,246
    )
    
    
    (7.4
    )%Services
    
    
    56,563
    
    
    
    63,283
    
    
    
    6,720
    
    
    
    11.9
    %Total revenues
    
    $
    100,249
    
    
    $
    103,723
    
    
    $
    3,474
    
    
    
    3.5
    %
  §
    
    Hardlines and Lumber revenues Hardlines and Lumber revenues decreased by $6.2
million, or 14.6%. The systems revenue decrease was attributed to a reduction in the
volume of new system sales and the decrease in the sale of additional products and modules,
primarily as a result of our co-op partners opening fewer new stores and exhibiting caution
on making capital expenditures both due to the weak economy and a slowing retail
environment. These decreases in
systems revenue were partially offset by systems revenue attributable to the acquisition of
Silk Systems. The services revenue increase relates primarily to the Silk Systems
acquisition as well as price increases for support services.§
    
    Wholesale Distribution revenues Wholesale Distribution revenues increased by $12.1
million, or 41.5%. The systems revenue increase was substantially attributable to the
Eclipse acquisition. The services revenue increase was attributable to services revenue
related to the Eclipse acquisition, as well as price increases for support services and a
net increase in the support customer base.§
    
    Automotive revenues Automotive revenues decreased by $1.5 million, or 6.6%. Systems
revenue decreased primarily as a result of fewer hardware upgrades this year versus last
year. Services revenue decreased primarily as a result of the
known attrition of a major
customer, General Parts Inc.§
    
    Other revenues Other revenues decreased $0.9 million, or 14.6%, driven by lower
systems sales primarily due to the extension of sales cycles as a
result of a slow down in planned migrations due to Hewlett-Packard Companys announcement to continue to
support one of its legacy systems through
2010.
 25




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##### Table of Contents



Total cost of revenues and gross margins as a percentage of revenues
  Three Months Ended June 30,(in thousands)
    
    2007
    
    2008
    
    VarianceCost of systems revenues
    
    $
    24,646
    
    
    $
    22,220
    
    
    $
    (2,426
    )Systems gross margins
    
    
    43.6
    %
    
    
    45.1
    %Cost of services revenues
    
    $
    20,771
    
    
    $
    22,531
    
    
    $
    1,760Services gross margins
    
    
    63.3
    %
    
    
    64.4
    %Total cost of revenues
    
    $
    45,417
    
    
    $
    44,751
    
    
    $
    (666
    )Total gross margins
    
    
    54.7
    %
    
    
    56.9
    %
 §
    
    Cost of systems revenues and systems gross margins Cost of systems revenues consists
primarily of direct costs of software duplication, our logistics organization, cost of
hardware, salary costs of professional services and installation headcount, royalty
payments, and allocations of overhead expenses, including facility and IT costs.Cost of systems revenues decreased by $2.4 million primarily as a result of lower direct
costs associated with lower systems revenues in Hardlines and Lumber, Automotive and Other
partially offset by $2.6 million in costs attributable to Eclipse and Silk Systems revenues.
System gross margins increased by 1.5 percentage points in the three months ended June 30,
2008 from the comparable period in 2007. The increase is primarily attributable to an
increase in Wholesale Distribution margins as a result of sales of
higher margin products in that segment constituting a greater
percentage of our overall systems revenues and in
Other (primarily Productivity Tools business) margins as a result of lower outside services costs,
partially offset by lower gross margins in Hardlines and Lumber and Automotive as a result
of the impact of relatively fixed costs on a lower revenue base, as well as reductions in
average selling prices in those segments.§
    
    Cost of services revenues and services gross margins Cost of services revenues
primarily consist of material and direct labor associated with our advice line, material, labor and
production costs associated with our automotive catalog, share-based payment expense and
allocations of overhead expenses, including facility and IT costs.
Generally, our services
revenues have a higher gross margin than our systems revenues.Cost of services revenues increased by $1.8 million primarily as a result of costs
associated with the acquisition of Eclipse and Silk Systems. Services gross margins
increased by 1.1 percentage points in the three months ended June 30, 2008 from the
comparable period in 2007, primarily as a result of higher services revenues due to
both increases in  the support customer base and price increases for
customer support on a
relatively fixed cost structure.
 Total operating expenses
  Three Months Ended June 30,(in thousands)
    
    2007
    
    
    2008
    
    
    Variance $
    
    
    Variance %Sales and marketing
    
    $
    14,939
    
    
    $
    15,356
    
    
    $
    417
    
    
    
    2.8
    %Product development
    
    
    10,848
    
    
    
    10,774
    
    
    
    (74
    )
    
    
    (0.7
    )%General and administrative
    
    
    7,673
    
    
    
    8,906
    
    
    
    1,233
    
    
    
    16.1
    %Depreciation and amortization
    
    
    7,448
    
    
    
    9,640
    
    
    
    2,192
    
    
    
    29.4
    %Acquisition related costs
    
    
    72
    
    
    
    264
    
    
    
    192
    
    
    
    266.7
    %Restructuring costs
    
    
    276
    
    
    
    1,636
    
    
    
    1,360
    
    
    
    492.8
    %Total operating expenses
    
    $
    41,256
    
    
    $
    46,576
    
    
    $
    5,320
    
    
    
    12.9
    %
  §
    
    Sales and marketing Sales and marketing expense consists primarily of salaries and
commissions for our sales forces, share-based payment expense, marketing expenses and an
allocation of overhead expenses including facilities and IT costs. Sales and marketing
expenses increased by $0.4 million, or 2.8%, for the three months ended June 30, 2008
compared to
 26




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the three months ended June 30, 2007. The increase was primarily a result of
$1.2 million of expenses associated with the acquisition of Eclipse and Silk Systems,
partially offset by $0.9 million of lower commission, salary and bad debt expense in our
pre-acquisition business.§
    
    Product development Product development expense consists primarily of salaries,
share-based payment expense, outside services and an allocation of overhead expenses,
including facilities and IT costs. Product development expense remained flat for the three
months ended June 30, 2008 compared to the three months ended June 30, 2007. This was because increased expenses of
$1.9 million related to the Silk Systems and Eclipse acquisitions were substantially offset
by lower software development expenses of $0.3 million, resulting from more of these costs being capitalized, $0.5 million lower
third-party service costs, and $1.0 million of lower compensation expense.§
    
    General and administrative General and administrative expense primarily consists of
salaries and bonuses; share-based payment expense; facility costs; finance, human resource
and legal services; IT support and telecommunication costs. General and administrative
expenses increased by $1.2 million, or 16.1%, for the three months ended June 30, 2008
compared to the three months ended June 30, 2007. The increase is primarily due to $1.9
million of costs related to strategic initiatives and $0.7 million of accounting and legal
costs partially offset by $0.7 million lower variable compensation expense and $0.4 million
lower share-based compensation expense.§
    
    Depreciation and amortization Depreciation and amortization expense consists of
depreciation of our fixed assets and amortization of our purchased intangible assets. We do
not allocate depreciation and amortization to our segments. Depreciation and amortization
expense was $9.6 million for the three months ended June 30, 2008 compared to $7.4 million
for the three months ended June 30, 2007. The increase resulted primarily from the
amortization of the additional $38.6 million of intangible assets associated with the
acquisitions of Silk Systems and Eclipse.§
    
    Acquisition related costs Acquisition related costs for the three months ended June
30, 2008 were $0.3 million, which primarily included consulting fees and other professional
services incurred in connection with systems integration activities
related to Eclipse compared to $0.1 million during the three months ended June 30, 2007.§
    
    Restructuring costs During the three months ended June 30, 2008, our management
approved additional restructuring actions primarily related to eliminating certain
additional employee positions with the intent to streamline and focus our operations and more
properly align our cost structure with our projected revenue streams. In accordance with
SFAS No. 146, we recorded a charge of approximately $1.6 million related to these actions.§
    
    Interest expense Interest expense for both the three months ended June 30, 2008 and
2007 was $11.8 million. Additional interest expense associated with incremental borrowings
to fund the acquisition of Eclipse in August 2007 was substantially offset by lower
interest rates on our unhedged floating rate debt.§
    
    Other income, net Other income primarily consists of interest income, foreign
currency gains or losses and gains or losses on marketable securities. Other income, net
increased during the three months ended June 30, 2008 over the comparable prior year
periods primarily due to interest income on higher average cash balances.§
    
    Income tax expense We recognized income tax expense of $0.2 million, or 22.2% of
pre-tax income, for the three months ended June 30, 2008 compared to an income tax expense
of $0.8 million, or 36.8% of pre-tax income, in the comparable period in 2007. The
decrease in income tax expense is due to a reduction in the estimated effective tax rate
for fiscal year 2008 resulting in the year-to-date impact being recognized entirely in the
quarter, as well as true-up differences between tax expense estimated in a prior period
compared to actual taxes from recently filed tax returns.
 27




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##### Table of Contents



Contribution margin
  Three Months Ended June 30,(in thousands)
    
    2007
    
    
    2008
    
    
    Variance $
    
    
    Variance %Hardlines and Lumber
    
    $
    10,931
    
    
    $
    9,621
    
    
    $
    (1,310
    )
    
    
    (12.0
    )%Wholesale Distribution
    
    
    10,551
    
    
    
    15,820
    
    
    
    5,269
    
    
    
    49.9
    %Automotive
    
    
    7,358
    
    
    
    6,610
    
    
    
    (748
    )
    
    
    (10.2
    )%Other
    
    
    877
    
    
    
    1,318
    
    
    
    441
    
    
    
    50.3
    %Total contribution margin
    
    $
    29,717
    
    
    $
    33,369
    
    
    $
    3,652
    
    
    
    12.3
    %
   §
    
    Hardlines and Lumber contribution margin The contribution margin for Hardlines and
Lumber decreased by $1.3 million, primarily as a result of $7.1 million in lower system
revenues which drove lower gross margins. Gross margin declines were partially offset by
lower sales and marketing and product development expenses. Sales and marketing expenses
decreased as a result of lower salary, commission and bonus expense, partially offset by
the increases in Silk Systems sales expenses. Product development expenses decreased
primarily as a result of lower salary and bonus expense and lower
software development expenses resulting from more of these costs being capitalized.§
    
    Wholesale Distribution contribution margin The $5.3 million increase in contribution
margin for Wholesale Distribution is primarily a result of revenues and gross margins
associated with the acquisition of Eclipse as well as customer support price increases and an
increase in the support customer base. These increases were partially offset by increases
in sales and marketing and product development expenses also associated with the
acquisition of Eclipse.§
    
    Automotive contribution margin The $0.7 million decrease in
contribution margin for
Automotive was primarily due to lower revenues and gross margin
associated with the known
attrition of a major customer, General Parts, Inc., and lower hardware sales partially
offset by lower product development expenses. Product development expenses decreased
primarily as a result of lower salary and bonus expense.§
    
    Other contribution margin The contribution margin for Other increased by $0.4
million, primarily due to lower outside services costs.
 28




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Nine Months Ended June 30, 2008 Compared to Nine Months Ended June 30, 2007
 Revenues
   Nine Months Ended June 30,(in thousands)
    
    2007
    
    
    2008
    
    
    Variance $
    
    
    Variance %Hardlines and Lumber revenues:Systems
    
    $
    71,733
    
    
    $
    53,009
    
    
    $
    (18,724
    )
    
    
    (26.1
    )%Services
    
    
    56,739
    
    
    
    60,234
    
    
    
    3,495
    
    
    
    6.2
    %Total Hardlines and Lumber revenues
    
    $
    128,472
    
    
    $
    113,243
    
    
    $
    (15,229
    )
    
    
    (11.9
    )%Wholesale Distribution revenues:Systems
    
    $
    39,213
    
    
    $
    56,459
    
    
    $
    17,246
    
    
    
    44.0
    %Services
    
    
    50,601
    
    
    
    70,597
    
    
    
    19,996
    
    
    
    39.5
    %Total Wholesale Distribution revenues
    
    $
    89,814
    
    
    $
    127,056
    
    
    $
    37,242
    
    
    
    41.5
    %Automotive revenues:Systems
    
    $
    11,439
    
    
    $
    10,713
    
    
    $
    (726
    )
    
    
    (6.3
    )%Services
    
    
    56,147
    
    
    
    54,304
    
    
    
    (1,843
    )
    
    
    (3.3
    )%Total Automotive revenues
    
    $
    67,586
    
    
    $
    65,017
    
    
    $
    (2,569
    )
    
    
    (3.8
    )%Other revenues:Systems
    
    $
    10,585
    
    
    $
    10,788
    
    
    $
    203
    
    
    
    1.9
    %Services
    
    
    5,098
    
    
    
    4,621
    
    
    
    (477
    )
    
    
    (9.4
    )%Total Other revenues
    
    $
    15,683
    
    
    $
    15,409
    
    
    $
    (274
    )
    
    
    (1.7
    )%Total revenues:Systems
    
    $
    132,970
    
    
    $
    130,969
    
    
    $
    (2,001
    )
    
    
    (1.5
    )%Services
    
    
    168,585
    
    
    
    189,756
    
    
    
    21,171
    
    
    
    12.6
    %Total revenues
    
    $
    301,555
    
    
    $
    320,725
    
    
    $
    19,170
    
    
    
    6.4
    %
  §
    
    Hardlines and Lumber revenues Hardlines and Lumber revenues decreased by $15.2
million, or 11.9%. The systems revenue decrease was attributed to a reduction in the
volume of new system sales and the decrease in the sale of additional products and modules,
primarily as a result of our co-op partners opening fewer new stores and exhibiting caution
on making capital expenditures both due to the weak economy and a slowing retail
environment. In addition, one of our co-op partners substantially
completed the migration
from their legacy systems to Activants solution in fiscal 2007. These decreases in
systems revenue were partially offset by systems revenue attributable to the acquisition of
Silk Systems. The services revenue increase relates primarily to the Silk Systems
acquisition as well as price increases for support services.§
    
    Wholesale Distribution revenues Wholesale Distribution revenues increased by $37.2
million, or 41.5%. The systems revenue increase was substantially attributable to the
Eclipse acquisition. The services revenue increase was related to
services revenue attributable to the Eclipse acquisition, as well as price increases for
support services and a net increase in the support customer base.
 29




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##### Table of Contents



§
    
    Automotive revenues Automotive revenues decreased by $2.6 million, or 3.8%. Systems
revenue decreased primarily as a result of fewer hardware upgrades this year versus last
year. Services revenue decreased primarily as a result of the
anticipated attrition of a major
customer, General Parts Inc.§
    
    Other revenues Other revenues decreased by
$0.3 million, or 1.7%, driven by lower systems sales primarily
due to the extension of sales cycles as a result of a slow down in
planned migrations due to Hewlett-Packard Company's
announcement to continue to support one of its legacy platforms through 2010.
 Total cost of revenues and gross margins as a percentage of revenues.
  Nine Months Ended June 30,(in thousands)
    
    2007
    
    2008
    
    VarianceCost of systems revenues
    
    $
    71,928
    
    
    $
    73,439
    
    
    $
    1,511Systems gross margins
    
    
    45.9
    %
    
    
    43.9
    %Cost of services revenues
    
    $
    60,749
    
    
    $
    68,419
    
    
    $
    7,670Services gross margins
    
    
    64.0
    %
    
    
    63.9
    %Total cost of revenues
    
    $
    132,677
    
    
    $
    141,858
    
    
    $
    9,181Total gross margins
    
    
    56.0
    %
    
    
    55.8
    %
 §
    
    Cost of systems revenues and systems gross margins Cost of systems revenues consists
primarily of direct costs of software duplication, our logistics organization, cost of
hardware, salary costs of professional services and installation headcount, royalty
payments, and allocations of overhead expenses, including facility and IT costs.Cost of systems revenues increased by $1.5 million primarily as a result of costs
attributable to the Eclipse and Silk Systems revenues, partially offset by lower direct
costs associated with lower systems revenues in Hardlines and Lumber and Automotive. System
gross margins decreased by 2.0 percentage points in the nine months ended June 30, 2008 from
the comparable period last year. The decrease is primarily attributable to the general
economic conditions in the Hardlines and Lumber market causing reductions in the
base-business system sales volume and the associated impact of fixed costs on the lower
revenue base, as well as reductions in average selling prices in
this segment. In addition, sales of our lower margin products in our Wholesale
Distribution segment constituted a greater percentage of our overall
systems revenues during the nine months ended June 30, 2008, which also adversely affected the systems gross margin.§
    
    Cost of services revenues and services gross margins Cost of services revenues primarily
consist of material and direct labor associated with our advice line, material, labor and
production costs associated with our automotive catalog, share-based payment expense and
allocations of overhead expenses, including facility and IT costs.
Generally, our services
revenues have a higher gross margin than our systems revenues.Cost of services revenues increased by $7.7 million primarily as a result of costs
associated with the acquisition of Eclipse and Silk Systems. Services gross margins
were essentially flat with the year-ago period.
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Total operating expenses
  Nine Months Ended June 30,(in thousands)
    
    2007
    
    
    2008
    
    
    Variance $
    
    
    Variance %Sales and marketing
    
    $
    47,669
    
    
    $
    47,883
    
    
    $
    214
    
    
    
    0.4
    %Product development
    
    
    31,183
    
    
    
    33,910
    
    
    
    2,727
    
    
    
    8.7
    %General and administrative expense
    
    
    22,019
    
    
    
    26,180
    
    
    
    4,161
    
    
    
    18.9
    %Depreciation and amortization
    
    
    21,785
    
    
    
    27,561
    
    
    
    5,776
    
    
    
    26.5
    %Acquisition related costs
    
    
    72
    
    
    
    922
    
    
    
    850
    
    
    
    1180.6
    %Restructuring costs
    
    
    563
    
    
    
    2,126
    
    
    
    1,563
    
    
    
    277.6
    %Total Operating expenses
    
    $
    123,291
    
    
    $
    138,582
    
    
    $
    15,291
    
    
    
    12.4
    %
  §
    
    Sales and marketing Sales and marketing expense consists primarily of salaries and
commissions for our sales forces, share-based payment expense, marketing expenses and an
allocation of overhead expenses including facilities and IT costs. Sales and marketing
expenses increased by $0.2 million, or 0.4%, for the nine months ended June 30, 2008
compared to the nine months ended June 30, 2007. The increase was primarily a result of
$3.2 million of expenses associated with the acquisition of Eclipse and Silk Systems
partially  offset by $1.6 million of lower salary, bonus and commission related expense of
our pre-acquisition business, $1.0 million lower bad debt expense and $0.6 million lower
travel expenses.§
    
    Product development Product development expense consists primarily of salaries,
share-based payment expense, outside services and an allocation of overhead expenses,
including facilities and IT costs. Product development expense increased by $2.7 million,
or 8.7%, for the nine months ended June 30, 2008 compared to the nine months ended June 30,
2007. The increase is primarily due to $5.7 million of expenses related to Silk Systems
and Eclipse, partially offset by lower software development
expenses of $0.8 million resulting from more of these costs being
capitalized, $0.6 million lower third-party service costs and $1.3 million of lower compensation
expense related to our pre-acquisition business.§
    
    General and administrative General and administrative expense primarily consists of
salaries and bonuses; share-based payment expense; facility costs; finance, human resource
and legal services; IT support and telecommunication costs. General and administrative
expenses increased by $4.2 million, or 18.9%, for the nine months ended June 30, 2008
compared to the nine months ended June 30, 2007. The increase is primarily due to $3.5
million of costs related to strategic initiatives and $1.7 million higher salary costs as
we continue to build our management team, partially offset by $1.5 million lower variable
compensation expense.§
    
    Depreciation and amortization Depreciation and amortization expense consists of
depreciation of our fixed assets and amortization of our purchased intangible assets.
Depreciation and amortization expense is not allocated to our segments. Depreciation and
amortization expense was $27.6 million for the nine months ended June 30, 2008 compared to
$21.8 million for the nine months ended June 30, 2007. The increase resulted primarily
from the amortization of the additional $38.6 million of intangible assets associated with
the acquisitions of Silk Systems and Eclipse.§
    
    Acquisition related costs Acquisition related costs for the nine months ended June
30, 2008 were $0.9 million, which primarily included consulting fees and other professional
services incurred in connection with systems integration activities
with respect to Eclipse compared to $0.1 million
during the nine months ended June 30, 2007.§
    
    Restructuring costs Restructuring costs for the nine months ended June 30, 2008 of
$2.1 million primarily related to closing costs of redundant facilities and severance costs
related to eliminating certain employee positions and consolidation of administrative functions.
Restructuring costs for the nine months ended June 30, 2007 of $0.6 million primarily
related to costs associated with our moving corporate headquarters to Livermore, California
in fiscal 2007.§
    
    Interest expense Interest expense for the nine months ended June 30, 2008 was $39.7
million compared to $35.6 million for the nine months ended June 30, 2007, an increase of
$4.1 million, or 11.5%. The increase is primarily a result of additional borrowings of
$95.0 million to fund the acquisition of Eclipse in August 2007, partially offset by a
third quarter decline in interest rates on our unhedged floating rate debt.
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##### Table of Contents



§
    
    Other income, net Other income primarily consists of interest income, foreign
currency gains or losses, and gains or losses on marketable securities. Other income, net
increased during the nine months ended June 30, 2008 over the comparable prior year period
primarily due to interest income on higher average cash balances.§
    
    Income tax expense We recognized an income tax expense of approximately $0.8 million,
or 36.7% of pre-tax income, for the nine months ended June 30, 2008 compared to an income
tax expense of $4.4 million, or 41.1% of pre-tax income, in the comparable period in 2007.
The decrease in income tax expense is due to a reduction in the estimated effective tax
rate for fiscal 2008 and due to true-up differences between tax expense estimated in a
prior period compared to actual taxes from recently filed tax returns.
 Contribution margin
  Nine Months Ended June 30,(in thousands)
    
    2007
    
    
    2008
    
    
    Variance $
    
    
    Variance %Hardlines and Lumber
    
    $
    34,091
    
    
    $
    26,754
    
    
    $
    (7,337
    )
    
    
    (21.5
    )%Wholesale Distribution
    
    
    31,779
    
    
    
    48,343
    
    
    
    16,564
    
    
    
    52.1
    %Automotive
    
    
    24,137
    
    
    
    22,029
    
    
    
    (2,108
    )
    
    
    (8.7
    )%Other
    
    
    2,168
    
    
    
    2,002
    
    
    
    (166
    )
    
    
    (7.6
    )%Total Contribution Margin
    
    $
    92,175
    
    
    $
    99,128
    
    
    $
    6,953
    
    
    
    7.5
    %
 §
    
    Hardlines and Lumber contribution margin The contribution margin for Hardlines and
Lumber decreased by $7.3 million, as a result of $18.7 million in lower system revenues
which drove lower gross margins. Gross margin declines were partially offset by lower sales
and marketing and product development expenses. Sales and marketing expenses decreased as a
result of lower salary, commission and bonus expense, partially offset by the increases in
Silk Systems sales expenses. Product development expenses decreased as a result of lower
salary and bonus expense and lower software development expenses
resulting from more of these costs being capitalized.§
    
    Wholesale Distribution contribution margin The $16.6 million increase in contribution
margin for Wholesale Distribution is primarily a result of the acquisition of Eclipse in
August 2007, customer support price increases and increases to the support customer base, as
well as lower sales and marketing costs, partially offset by lower gross margins in systems
revenues.§
    
    Automotive contribution margin The $2.1 million decrease in contribution margin for
Automotive was primarily due to lower revenues and gross margin
associated with the known
attrition of a major customer, General Parts, Inc., and lower hardware sales partially
offset by lower product development expenses. Product development expenses decreased
primarily as a result of lower salary and bonus expense.§
    
    Other contribution marginThe $0.2 million decrease in contribution margin for Other
was primarily a result of lower gross margins in systems revenues.
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##### Table of Contents



Liquidity and Capital Resources
 Overview
     
    
    under the revolving credit facility, 1.25% with respect to base rate borrowings and 2.25%
with respect to Eurodollar rate borrowings, which may be reduced subject to our attainment of
certain leverage ratios;
 
    
    under the term loan, 1.00% with respect to base rate borrowings and 2.00% with respect to
Eurodollar rate borrowings; and
 
    
    under the incremental term loan, 1.5% with respect to base rate borrowings and 2.50% with
respect to Eurodollar rate borrowings.
     33




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##### Table of Contents



Nine Months Ended June30, 2008 Compared to Nine Months Ended June 30, 2007
     34




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk.
 Interest Rate Risk
  Foreign Currency Risk
   
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Internal Controls Over Financial Reporting
  Limitations on Effectiveness of Controls
  35




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  If we do not develop new relationships and maintain our existing relationships with key customers
and/or well-known market participants, our revenues could decline significantly and our operating
results could be materially adversely affected.
  Our future success is substantially dependent on the continued service of our key management
personnel.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  36




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
  ExhibitNo.
    
    Description31.1*
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Pervez A. Qureshi31.2*
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Kathleen M. Crusco32.1**
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Pervez A. Qureshi32.2**
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Kathleen M. Crusco
 
 *
    
    Exhibit is filed herewith.**
    
    Exhibit is furnished herewith. This certification is not deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of
that section. Such certification will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that the registrant specifically incorporates it by reference. 37




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##### Table of Contents



SIGNATURE
 th
 ACTIVANT SOLUTIONS INC.By:
    
    /s/ KATHLEEN M. CRUSCOKathleen M. CruscoSenior Vice President and Chief Financial Officer(Principal Financial and Duly Authorized Officer)
 38