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SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission File Number 333-49389 Activant Solutions Inc.  Delaware
    
    94-2160013(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)804 Las Cimas ParkwayAustin, Texas
    
    78746(Address of principal executive offices)
    
    (Zip Code)
 (512) 328-2300
(Registrants telephone number,
including area code) Indicate by check 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 þ No o Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: Class
    
    Outstanding at May 17, 2004Common Stock
    
    1,000 shares
    1




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ACTIVANT SOLUTIONS INC.
INDEX  
 PAGEFORWARD-LOOKING STATEMENTS
    
    
    3PART I  FINANCIAL INFORMATION
    
    
    4ITEM 1.  FINANCIAL STATEMENTS
    
    
    4Consolidated Balance Sheets as of September 30, 2003 and March 31, 2004
    
    
    4Consolidated Statements of Operations for the three and six months
ended March 31, 2003 and March 31, 2004
    
    
    5Consolidated Statements of Cash Flows for the six months ended March
31, 2003 and March 31, 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
    
    
    19ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    30ITEM 4.  CONTROLS AND PROCEDURES
    
    
    30PART II  OTHER INFORMATIONITEM 1.  LEGAL PROCEEDINGS
    
    
    31ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    31ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
    
    
    31ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    31ITEM 5.  OTHER INFORMATION
    
    
    31ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
    
    
    31SIGNATURE
    
    
    32
  2




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FORWARD-LOOKING STATEMENTS INFORMATION SET FORTH IN THIS QUARTERLY REPORT ON FORM 10-Q REGARDING EXPECTED
OR POSSIBLE FUTURE EVENTS, INCLUDING STATEMENTS OF THE PLANS AND OBJECTIVES OF
MANAGEMENT FOR FUTURE GROWTH, OPERATIONS, PRODUCTS AND SERVICES AND STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE, IS FORWARD-LOOKING AND SUBJECT TO
RISKS AND UNCERTAINTIES. FOR THOSE STATEMENTS, THE COMPANY CLAIMS THE
PROTECTION OF THE SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS PROVIDED FOR BY
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY
MANAGEMENT OF THE COMPANY, WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE
INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH
ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES
OR STATEMENTS WILL BE REALIZED, AND IT IS LIKELY THAT ACTUAL RESULTS WILL
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE THE FOLLOWING (1) LOSS OR
OBSOLESCENCE OF THE PROPRIETARY TECHNOLOGY ON WHICH THE COMPANY DEPENDS; (2)
CHANGES IN THE MARKETS IN WHICH THE COMPANY COMPETES INCLUDING THE MANNER IN
WHICH AUTOPARTS OR HARDWARE AND LUMBER ARE SOURCED, SOLD, DISTRIBUTED OR
INVENTORIED, AND CHANGES IN ECONOMIC CONDITIONS IN THESE MARKETS GENERALLY; (3)
CLAIMS BY THIRD PARTIES THAT THE COMPANY IS INFRINGING ON THEIR INTELLECTUAL
PROPERTY RIGHTS; (4) LOSS OF THE COMPANYS EXECUTIVE OFFICERS AND OTHER KEY
PERSONNEL; (5) INCREASED COMPETITION OR FAILURE TO EFFECTIVELY COMPETE; (6)
LOSS OF KEY CUSTOMERS OR INCREASE IN ATTRITION RATES WITH RESPECT TO REVENUE
MANAGEMENT VIEWS AS RECURRING; (7) MANUFACTURING DEFECTS OR ERRORS IN THE
COMPANYS SOFTWARE; (8) PROLONGED UNFAVORABLE GENERAL ECONOMIC AND MARKET
CONDITIONS; (9) FAILURE TO RECOUP THE COST OF INVESTMENT IN NEW BUSINESSES INTO
WHICH THE COMPANY MAY EXPEND AND (10) INCREASES IN THE COMPANYS COST OF
BORROWINGS OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL. MANY OF SUCH
FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND ITS MANAGEMENT. IN
ADDITION, OTHER FACTORS THAT COULD AFFECT THE FUTURE RESULTS OF THE COMPANY AND
COULD CAUSE THOSE RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS ARE DISCUSSED AT GREATER LENGTH UNDER MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND
APPEAR ELSEWHERE IN THIS QUARTERLY REPORT. THESE RISKS, UNCERTAINTIES AND OTHER
FACTORS SHOULD NOT BE CONSTRUED AS EXHAUSTIVE, AND THE COMPANY DOES NOT
UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION TO UPDATE, ANY
FORWARD-LOOKING STATEMENTS TO REFLECT OCCURRENCES OR UNANTICIPATED EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS. 3




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PART 1. FINANCIAL INFORMATION 
 Item 1. Financial Statements ACTIVANT SOLUTIONS INC. 
   September 30,
    
    March 31,2003
    
    2004(Unaudited)ASSETS:Current assets:Cash and cash equivalents
    
    $
    10,215
    
    
    $
    32,832Trade accounts receivable, net of allowance for doubtful accounts of $7,748 and
$6,265 at September 30, 2003 and March 31, 2004, respectively
    
    
    40,152
    
    
    
    35,199Inventories, net
    
    
    3,546
    
    
    
    3,263Investment in leases, net
    
    
    2,115
    
    
    
    620Deferred income taxes
    
    
    10,527
    
    
    
    10,296Prepaid income taxes
    
    
    3,587
    
    
    
    Prepaid expenses and other current assets
    
    
    2,485
    
    
    
    2,695Total current assets
    
    
    72,627
    
    
    
    84,905Service parts, net
    
    
    1,520
    
    
    
    1,443Property and equipment, net
    
    
    5,748
    
    
    
    4,723Long-term investment in leases
    
    
    1,854
    
    
    
    733Capitalized computer software costs, net
    
    
    7,711
    
    
    
    6,716Databases, net
    
    
    7,672
    
    
    
    6,570Goodwill
    
    
    87,159
    
    
    
    87,159Other assets
    
    
    17,994
    
    
    
    16,539Total assets
    
    $
    202,285
    
    
    $
    208,788LIABILITIES AND STOCKHOLDERS DEFICIT:Current liabilities:Accounts payable
    
    $
    9,679
    
    
    $
    8,236Payroll related accruals
    
    
    14,860
    
    
    
    12,077Deferred revenue
    
    
    15,870
    
    
    
    16,116Current portion of long-term debt
    
    
    310
    
    
    
    295Accrued income taxes
    
    
    
    
    
    
    469Accrued expenses and other current liabilities
    
    
    10,694
    
    
    
    9,647Total current liabilities
    
    
    51,413
    
    
    
    46,840Long-term debt
    
    
    172,990
    
    
    
    172,934Deferred income taxes and other liabilities
    
    
    14,544
    
    
    
    13,316Total liabilities
    
    
    238,947
    
    
    
    233,090Stockholders deficit:Common Stock:Par value $0.01, authorized, issued and outstanding, 1,000 shares at
September 30, 2003 and March 31, 2004
    
    
    
    
    
    
    Additional paid-in capital
    
    
    83,155
    
    
    
    83,155Retained deficit
    
    
    (119,421
    )
    
    
    (106,809
    )Other accumulated comprehensive income:Cumulative translation adjustment
    
    
    (396
    )
    
    
    (648
    )Total stockholders deficit
    
    
    (36,662
    )
    
    
    (24,302
    )Total liabilities and stockholders deficit
    
    $
    202,285
    
    
    $
    208,788
 See accompanying notes 4




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ACTIVANT SOLUTIONS INC. 
  
 Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,2003
    
    2004
    
    2003
    
    2004Revenues:Systems
    
    $
    17,392
    
    
    $
    19,448
    
    
    $
    35,105
    
    
    $
    40,435Services
    
    
    38,668
    
    
    
    35,853
    
    
    
    78,607
    
    
    
    71,567Total revenues
    
    
    56,060
    
    
    
    55,301
    
    
    
    113,712
    
    
    
    112,002Cost of revenues:Systems
    
    
    9,859
    
    
    
    11,325
    
    
    
    19,884
    
    
    
    23,195Services
    
    
    17,911
    
    
    
    14,575
    
    
    
    35,456
    
    
    
    29,610Total cost of revenues
    
    
    27,770
    
    
    
    25,900
    
    
    
    55,340
    
    
    
    52,805Gross profit
    
    
    28,290
    
    
    
    29,401
    
    
    
    58,372
    
    
    
    59,197Operating expenses:Sales and marketing
    
    
    8,237
    
    
    
    6,917
    
    
    
    15,537
    
    
    
    15,344Product development
    
    
    4,090
    
    
    
    3,556
    
    
    
    7,816
    
    
    
    7,485General and administrative
    
    
    6,586
    
    
    
    5,553
    
    
    
    13,343
    
    
    
    12,340Total operating expenses
    
    
    18,913
    
    
    
    16,026
    
    
    
    36,696
    
    
    
    35,169Operating income
    
    
    9,377
    
    
    
    13,375
    
    
    
    21,676
    
    
    
    24,028Interest expense
    
    
    (3,339
    )
    
    
    (4,882
    )
    
    
    (6,798
    )
    
    
    (9,913
    )Equity gain in affiliate
    
    
    67
    
    
    
    
    
    
    
    59
    
    
    
    Foreign exchange gain (loss)
    
    
    12
    
    
    
    (40
    )
    
    
    13
    
    
    
    (107
    )Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,270Other income, net
    
    
    (19
    )
    
    
    202
    
    
    
    203
    
    
    
    294Income before income taxes
    
    
    6,098
    
    
    
    8,655
    
    
    
    15,153
    
    
    
    20,572Income tax expense
    
    
    2,392
    
    
    
    3,258
    
    
    
    5,955
    
    
    
    7,960Net income
    
    $
    3,706
    
    
    $
    5,397
    
    
    $
    9,198
    
    
    $
    12,612Comprehensive income:Net income
    
    $
    3,706
    
    
    $
    5,397
    
    
    $
    9,198
    
    
    $
    12,612Foreign currency translation adjustment
    
    
    183
    
    
    
    (94
    )
    
    
    226
    
    
    
    (252
    )Comprehensive income
    
    $
    3,889
    
    
    $
    5,303
    
    
    $
    9,424
    
    
    $
    12,360
 See accompanying notes 5




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ACTIVANT SOLUTIONS INC. 
  
 Six Months EndedMarch 31,2003
    
    2004OPERATING ACTIVITIESNet income
    
    $
    9,198
    
    
    $
    12,612Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    3,080
    
    
    
    2,751Amortization
    
    
    6,788
    
    
    
    5,473Deferred income taxes
    
    
    (23
    )
    
    
    781Equity gain from affiliate
    
    
    (59
    )
    
    
    Equity income from partnerships
    
    
    (156
    )
    
    
    (111
    )Lease loss provision
    
    
    
    
    
    
    (1,320
    )Provision for doubtful accounts
    
    
    2,803
    
    
    
    2,390Gain on sale of assets
    
    
    
    
    
    
    (6,270
    )Other, net
    
    
    211
    
    
    
    (65
    )Changes in assets and liabilities:Trade accounts receivable
    
    
    (1,863
    )
    
    
    1,249Inventories
    
    
    (263
    )
    
    
    283Investment in leases
    
    
    1,415
    
    
    
    3,936Prepaid expenses and other assets
    
    
    168
    
    
    
    4,076Accounts payable
    
    
    (274
    )
    
    
    (1,443
    )Deferred revenue
    
    
    382
    
    
    
    873Accrued expenses and other liabilities
    
    
    (3,518
    )
    
    
    (4,875
    )Net cash provided by operating activities
    
    
    17,889
    
    
    
    20,340INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (1,903
    )
    
    
    (1,080
    )Capitalized computer software costs and databases
    
    
    (3,902
    )
    
    
    (2,934
    )Purchase of service parts
    
    
    (838
    )
    
    
    (779
    )Proceeds from sale of assets
    
    
    
    
    
    
    7,212Equity distributions from partnerships
    
    
    82
    
    
    
    58Net cash provided by (used in) investing activities
    
    
    (6,561
    )
    
    
    2,477FINANCING ACTIVITIESProceeds from debt facility
    
    
    1,210
    
    
    
    Payment on long-term debt
    
    
    (5,203
    )
    
    
    (200
    )Net cash used in financing activities
    
    
    (3,993
    )
    
    
    (200
    )Net change in cash and cash equivalents
    
    
    7,335
    
    
    
    22,617Cash and cash equivalents, beginning of period
    
    
    398
    
    
    
    10,215Cash and cash equivalents, end of period
    
    $
    7,733
    
    
    $
    32,832Supplemental disclosures of cash flow informationCash paid during the period for:Interest
    
    $
    5,729
    
    
    $
    8,650Income taxes
    
    $
    9,066
    
    
    $
    4,069
 See accompanying notes 6




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ACTIVANT SOLUTIONS INC. 
  
 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Activant
Solutions Inc. (the Company) have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended March 31, 2004 may not be indicative
of the results for the full fiscal year ending September 30, 2004. 2. LEASE RECEIVABLES Activity in the following servicing and recourse obligation liability accounts
(recorded in other liabilities in the Companys balance sheet) was as follows
(in thousands): LEASE SERVICING
    
    RECOURSEOBLIGATION
    
    OBLIGATIONBalance at September 30, 2003
    
    $
    142
    
    
    $
    3,170Lease loss provision
    
    
    
    
    
    
    (1,320
    )Recoveries
    
    
    
    
    
    
    161Charges and write-offs
    
    
    (90
    )
    
    
    (684
    )Balance at March 31, 2004
    
    $
    52
    
    
    $
    1,327
 3. INCOME TAXES The Company recorded income tax expense for the six months ended March 31, 2004
at an effective rate of 38.7%, which is based on the Companys anticipated
results for the full fiscal year. The Companys income tax expense differs from
the amount computed by applying the statutory rate to income before income
taxes due to the impact of permanent differences, such as meals and
entertainment expense, and amortization of certain acquired intangibles. 4. COMMON STOCK OPTION PLAN The Company uses the intrinsic value method in accounting for employee stock
options. Because the exercise price of the employee stock options was greater
than or equal to the market price of the underlying stock, as determined by
Holdings Board of Directors, on the date of grant, no compensation expense was
recognized. The Companys pro forma information follows (amounts in thousands): Three months ended March 31,
    
    Six months ended March 31,2003
    
    2004
    
    2003
    
    2004Net income reported
    
    $
    3,706
    
    
    $
    5,397
    
    
    $
    9,198
    
    
    $
    12,612Pro forma
stock-based
compensation
expense, net of tax
    
    
    81
    
    
    
    54
    
    
    
    187
    
    
    
    122Pro forma net income
    
    $
    3,625
    
    
    $
    5,343
    
    
    $
    9,011
    
    
    $
    12,490
 7




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5. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46), which clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN 46
requires variable interest entities (VIE) to be consolidated by a company if
that company is subject to a majority of the risk of loss from the VIE
activities or entitled to receive a majority of the entitys residual returns
or both. A company that consolidates a VIE is called the primary beneficiary of
that entity. FIN 46 also requires disclosures about VIE that a company is not
required to consolidate but in which it has a significant variable interest. In
December 2003, the FASB completed its deliberations regarding the proposed
modification to FIN 46 and issued Interpretation No. 46R, Consolidation of
Variable Interest Entities  an Interpretation of ARB No. 51(FIN 46R). The
decisions reached included a deferral of the effective date and provisions for
additional scope exceptions for certain types of variable interests.
Application of FIN 46R is required in financial statements of public entities
that have interests in VIE or potential VIE commonly referred to as
special-purpose entities for periods ending after December 15, 2003.
Application by public entities (other than small business issuers) for all
other types of entities is required in financial statements for periods ending
after March 15, 2004. There was no material impact from the application of FIN 46R on the Companys
financial position or results of operations. 8




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6. SEGMENT REPORTING Operating Segments The Companys business operations are organized into the Industry Solutions
Group and the Automotive Group, as shown below. Both groups provide management
solutions consisting of:  
    
    Business management systems comprised of proprietary
software applications, implementation and training, and third-party
hardware and peripherals.
    
    Subscription-based services, including software and hardware
support, maintenance, an electronic automotive parts catalog and other
services. The Industry Solutions Group serves a variety of retailers and wholesale
distributors in the retail hardware, lumber, home improvement, lawn
and garden, farm supply, electrical supply and other industries in
the United States. The Automotive Group serves the automotive parts
aftermarket, which includes manufacturers, warehouse
distributors, parts stores and professional installers in North
America and Europe. Corporate services
primarily represent administrative functions including information
technology, finance, human resources, legal and executive costs. Total assets are not allocated by segment. Three Months Ended March 31, 2003
    
    Three Months Ended March 31, 2004Industry
    
    
    
    
    
    
    
    
    
    
    
    
    
    IndustrySolutions
    
    Automotive
    
    
    
    
    
    
    
    
    
    Solutions
    
    AutomotiveGroup
    
    Group
    
    Corporate
    
    Total
    
    Group
    
    Group
    
    Corporate
    
    Total(in thousands)
    
    (in thousands)Revenues:Systems
    
    $
    13,499
    
    
    $
    3,893
    
    
    $
    
    
    
    $
    17,392
    
    
    $
    14,705
    
    
    $
    4,743
    
    
    $
    
    
    
    $
    19,448Services
    
    
    14,219
    
    
    
    24,449
    
    
    
    
    
    
    
    38,668
    
    
    
    13,699
    
    
    
    22,154
    
    
    
    
    
    
    
    35,853Total Revenues
    
    
    27,718
    
    
    
    28,342
    
    
    
    
    
    
    
    56,060
    
    
    
    28,404
    
    
    
    26,897
    
    
    
    
    
    
    
    55,301Operating expenses
    
    
    5,581
    
    
    
    6,710
    
    
    
    6,622
    
    
    
    18,913
    
    
    
    5,797
    
    
    
    5,838
    
    
    
    4,391
    
    
    
    16,026Income before
income taxes
    
    
    7,607
    
    
    
    8,158
    
    
    
    (9,667
    )
    
    
    6,098
    
    
    
    8,091
    
    
    
    9,199
    
    
    
    (8,635
    )
    
    
    8,655Depreciation and
amortization
    
    
    1,328
    
    
    
    2,090
    
    
    
    1,675
    
    
    
    5,093
    
    
    
    548
    
    
    
    2,752
    
    
    
    768
    
    
    
    4,068Capital expenditures
    
    
    474
    
    
    
    1,516
    
    
    
    925
    
    
    
    2,915
    
    
    
    595
    
    
    
    930
    
    
    
    753
    
    
    
    2,278
 Six Months Ended March 31, 2003
    
    Six Months Ended March 31, 2004Industry
    
    
    
    
    
    
    
    
    
    
    
    
    
    IndustrySolutions
    
    Automotive
    
    
    
    
    
    
    
    
    
    Solutions
    
    AutomotiveGroup
    
    Group
    
    Corporate
    
    Total
    
    Group
    
    Group
    
    Corporate
    
    Total(in thousands)
    
    (in thousands)Revenues:Systems
    
    $
    26,196
    
    
    $
    8,909
    
    
    $
    
    
    
    $
    35,105
    
    
    $
    31,420
    
    
    $
    9,015
    
    
    $
    
    
    
    $
    40,435Services
    
    
    29,363
    
    
    
    49,244
    
    
    
    
    
    
    
    78,607
    
    
    
    26,697
    
    
    
    44,870
    
    
    
    
    
    
    
    71,567Total revenues
    
    
    55,559
    
    
    
    58,153
    
    
    
    
    
    
    
    113,712
    
    
    
    58,117
    
    
    
    53,885
    
    
    
    
    
    
    
    112,002Operating expenses
    
    
    10,627
    
    
    
    12,654
    
    
    
    13,415
    
    
    
    36,696
    
    
    
    12,063
    
    
    
    12,085
    
    
    
    11,021
    
    
    
    35,169Income before
income taxes
    
    
    16,319
    
    
    
    18,155
    
    
    
    (19,321
    )
    
    
    15,153
    
    
    
    17,037
    
    
    
    17,274
    
    
    
    (13,739
    )
    
    
    20,572Depreciation and
amortization
    
    
    2,621
    
    
    
    5,803
    
    
    
    1,444
    
    
    
    9,868
    
    
    
    1,166
    
    
    
    5,496
    
    
    
    1,562
    
    
    
    8,224Capital expenditures
    
    
    1,335
    
    
    
    3,207
    
    
    
    2,101
    
    
    
    6,643
    
    
    
    1,166
    
    
    
    2,099
    
    
    
    1,528
    
    
    
    4,793
 9




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##### Table of Contents



Geographic Segments A breakdown by geographic area of total revenues and total assets is shown
below. The Americas geographic area covers the United States and Canada. The
Europe geographic area covers the United Kingdom, Ireland and France. Three Months Ended March 31, 2003
    
    Three Months Ended March 31, 2004Americas
    
    Europe
    
    Total
    
    Americas
    
    Europe
    
    Total(in thousands)
    
    
    
    
    
    (in thousands)Revenues
    
    $
    54,441
    
    
    $
    1,619
    
    
    $
    56,060
    
    
    $
    53,607
    
    
    $
    1,694
    
    
    $
    55,301Total Assets
    
    
    184,327
    
    
    
    4,158
    
    
    
    188,485
    
    
    
    205,324
    
    
    
    3,464
    
    
    
    208,788
 Six Months Ended March 31, 2003
    
    Six Months Ended March 31, 2004Americas
    
    Europe
    
    Total
    
    Americas
    
    Europe
    
    Total(in thousands)
    
    
    
    
    
    (in thousands)Revenues
    
    $
    110,802
    
    
    $
    2,910
    
    
    $
    113,712
    
    
    $
    108,808
    
    
    $
    3,194
    
    
    $
    112,002Total Assets
    
    
    184,327
    
    
    
    4,158
    
    
    
    188,485
    
    
    
    205,324
    
    
    
    3,464
    
    
    
    208,788
 10




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##### Table of Contents



7. GUARANTOR CONSOLIDATION The Companys 10 1⁄2%
senior notes due 2011 (the Senior Notes) are
guaranteed by the Companys existing, wholly-owned domestic
subsidiaries Triad Systems Financial Corporation, Triad Data
Corporation, CCI/TRIAD Gem, Inc., Triad Systems Corporation and
CCI/ARD, Inc. The Companys other subsidiaries, (the
Non-Guarantors), are not guaranteeing the Senior Notes.
The following tables set forth consolidating financial information of
Activant Solutions Inc., the Guarantors and Non-Guarantors for the
balance sheets as of March 31, 2004 and September 30, 2003,
the statement of operations for the three and six months ended
March 31, 2004 and 2003, and the statements of cash flows for the
six months ended March 31, 2004 and 2003. Consolidating Balance Sheet as of March 31, 2004(in thousands) GuarantorPrincipal
    
    Guarantor
    
    Non-GuarantorOperations
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    29,434
    
    
    $
    33
    
    
    $
    3,365
    
    
    $
    
    
    
    $
    32,832Trade accounts receivable, net of allowance
for doubtful accounts
    
    
    31,990
    
    
    
    
    
    
    
    3,209
    
    
    
    
    
    
    
    35,199Intercompany receivable
    
    
    
    
    
    
    45,352
    
    
    
    
    
    
    
    (45,352
    )
    
    
    Inventories, net
    
    
    3,239
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    3,263Investment in leases, net
    
    
    
    
    
    
    528
    
    
    
    92
    
    
    
    
    
    
    
    620Deferred income taxes
    
    
    10,296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,296Prepaid income taxes
    
    
    (938
    )
    
    
    
    
    
    
    938
    
    
    
    
    
    
    
    Prepaid expenses and other current assets
    
    
    1,366
    
    
    
    1,230
    
    
    
    99
    
    
    
    
    
    
    
    2,695Total current assets
    
    
    75,387
    
    
    
    47,143
    
    
    
    7,727
    
    
    
    (45,352
    )
    
    
    84,905Service parts, net
    
    
    1,415
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    1,443Property and equipment, net
    
    
    4,557
    
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    4,723Long-term investment in leases
    
    
    
    
    
    
    337
    
    
    
    396
    
    
    
    
    
    
    
    733Capitalized computer software costs, net
    
    
    6,716
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,716Databases, net
    
    
    6,570
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,570Goodwill
    
    
    87,159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,159Intercompany non-trade
    
    
    
    
    
    
    
    
    
    
    166
    
    
    
    (166
    )
    
    
    Investments in subs
    
    
    45,362
    
    
    
    
    
    
    
    828
    
    
    
    (46,190
    )
    
    
    Other assets
    
    
    16,421
    
    
    
    114
    
    
    
    4
    
    
    
    
    
    
    
    16,539Total assets
    
    $
    243,587
    
    
    $
    47,594
    
    
    $
    9,315
    
    
    $
    (91,708
    )
    
    $
    208,788Liabilities and stockholders equity (deficit)Current liabilities:Accounts payable
    
    $
    7,888
    
    
    $
    41
    
    
    $
    307
    
    
    $
    
    
    
    $
    8,236Intercompany payables
    
    
    73,259
    
    
    
    
    
    
    
    5,159
    
    
    
    (78,418
    )
    
    
    Payroll related accruals
    
    
    11,961
    
    
    
    
    
    
    
    116
    
    
    
    
    
    
    
    12,077Deferred revenue
    
    
    15,171
    
    
    
    106
    
    
    
    839
    
    
    
    
    
    
    
    16,116Current portion of long-term debt
    
    
    
    
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    295Accrued income taxes
    
    
    469
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    469Accrued expenses and other current liabilities
    
    
    9,306
    
    
    
    219
    
    
    
    122
    
    
    
    
    
    
    
    9,647Total current liabilities
    
    
    118,054
    
    
    
    661
    
    
    
    6,543
    
    
    
    (78,418
    )
    
    
    46,840Long-term debt, net of discount
    
    
    172,618
    
    
    
    316
    
    
    
    
    
    
    
    
    
    
    
    172,934Deferred tax liabilities and other liabilities
    
    
    12,425
    
    
    
    1,157
    
    
    
    (266
    )
    
    
    
    
    
    
    13,316Total liabilities
    
    
    303,097
    
    
    
    2,134
    
    
    
    6,277
    
    
    
    (78,418
    )
    
    
    233,090Stockholders equity (deficit):Common stock:
    
    
    
    
    
    
    104
    
    
    
    5,495
    
    
    
    (5,599
    )
    
    
    Additional paid-in capital
    
    
    83,155
    
    
    
    6,300
    
    
    
    3
    
    
    
    (6,303
    )
    
    
    83,155Retained earnings (deficit)
    
    
    (142,626
    )
    
    
    39,056
    
    
    
    (2,973
    )
    
    
    (266
    )
    
    
    (106,809
    )Other accumulated comprehensive income (loss):Cumulative translation adjustment
    
    
    (39
    )
    
    
    
    
    
    
    513
    
    
    
    (1,122
    )
    
    
    (648
    )Total stockholders equity (deficit)
    
    
    (59,510
    )
    
    
    45,460
    
    
    
    3,038
    
    
    
    (13,290
    )
    
    
    (24,302
    )Total liabilities and stockholders equity (deficit)
    
    $
    243,587
    
    
    $
    47,594
    
    
    $
    9,315
    
    
    $
    (91,708
    )
    
    $
    208,788
 11




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##### Table of Contents



Consolidating Balance Sheet as of September 30, 2003(in thousands) GuarantorPrincipal
    
    Guarantor
    
    Non-GuarantorOperations
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    8,400
    
    
    $
    (169
    )
    
    $
    1,984
    
    
    $
    
    
    
    $
    10,215Trade accounts receivable, net of allowance
for doubtful accounts
    
    
    36,413
    
    
    
    
    
    
    
    3,739
    
    
    
    
    
    
    
    40,152Intercompany receivable
    
    
    
    
    
    
    45,977
    
    
    
    
    
    
    
    (45,977
    )
    
    
    Inventories, net
    
    
    3,432
    
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    3,546Investment in leases, net
    
    
    
    
    
    
    1,934
    
    
    
    181
    
    
    
    
    
    
    
    2,115Deferred income taxes
    
    
    10,527
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,527Prepaid income taxes
    
    
    2,775
    
    
    
    
    
    
    
    812
    
    
    
    
    
    
    
    3,587Prepaid expenses and other current assets
    
    
    982
    
    
    
    1,450
    
    
    
    53
    
    
    
    
    
    
    
    2,485Total current assets
    
    
    62,529
    
    
    
    49,192
    
    
    
    6,883
    
    
    
    (45,977
    )
    
    
    72,627Service parts, net
    
    
    1,412
    
    
    
    
    
    
    
    108
    
    
    
    
    
    
    
    1,520Property and equipment, net
    
    
    5,567
    
    
    
    
    
    
    
    181
    
    
    
    
    
    
    
    5,748Long-term investment in leases
    
    
    
    
    
    
    1,292
    
    
    
    562
    
    
    
    
    
    
    
    1,854Capitalized computer software costs, net
    
    
    7,711
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,711Databases, net
    
    
    7,672
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,672Goodwill
    
    
    87,159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,159Investments in subs
    
    
    45,362
    
    
    
    
    
    
    
    759
    
    
    
    (46,121
    )
    
    
    Other assets
    
    
    17,620
    
    
    
    348
    
    
    
    26
    
    
    
    
    
    
    
    17,994Total assets
    
    $
    235,032
    
    
    $
    50,832
    
    
    $
    8,519
    
    
    $
    (92,098
    )
    
    $
    202,285Liabilities and stockholders equity (deficit)Current liabilities:Accounts payable
    
    $
    9,470
    
    
    $
    15
    
    
    $
    194
    
    
    $
    
    
    
    $
    9,679Intercompany payables
    
    
    74,657
    
    
    
    
    
    
    
    4,767
    
    
    
    (79,424
    )
    
    
    Payroll related accruals
    
    
    14,702
    
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    14,860Deferred revenue
    
    
    15,273
    
    
    
    148
    
    
    
    449
    
    
    
    
    
    
    
    15,870Current portion of long-term debt
    
    
    
    
    
    
    310
    
    
    
    
    
    
    
    
    
    
    
    310Accrued expenses and other current liabilities
    
    
    10,127
    
    
    
    359
    
    
    
    208
    
    
    
    
    
    
    
    10,694Total current liabilities
    
    
    124,229
    
    
    
    832
    
    
    
    5,776
    
    
    
    (79,424
    )
    
    
    51,413Long-term debt, net of discount
    
    
    172,489
    
    
    
    501
    
    
    
    
    
    
    
    
    
    
    
    172,990Deferred tax liabilities and other liabilities
    
    
    12,691
    
    
    
    2,323
    
    
    
    (470
    )
    
    
    
    
    
    
    14,544Total liabilities
    
    
    309,409
    
    
    
    3,656
    
    
    
    5,306
    
    
    
    (79,424
    )
    
    
    238,947Stockholders equity (deficit):Common stock:
    
    
    
    
    
    
    104
    
    
    
    5,495
    
    
    
    (5,599
    )
    
    
    Additional paid-in capital
    
    
    83,155
    
    
    
    6,300
    
    
    
    3
    
    
    
    (6,303
    )
    
    
    83,155Retained earnings (deficit)
    
    
    (157,192
    )
    
    
    40,772
    
    
    
    (2,735
    )
    
    
    (266
    )
    
    
    (119,421
    )Other accumulated comprehensive income (loss):Cumulative translation adjustment
    
    
    (340
    )
    
    
    
    
    
    
    450
    
    
    
    (506
    )
    
    
    (396
    )Total stockholders equity (deficit)
    
    
    (74,377
    )
    
    
    47,176
    
    
    
    3,213
    
    
    
    (12,674
    )
    
    
    (36,662
    )Total liabilities and stockholders equity (deficit)
    
    $
    235,032
    
    
    $
    50,832
    
    
    $
    8,519
    
    
    $
    (92,098
    )
    
    $
    202,285
 12




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##### Table of Contents



Consolidating Statement of Operations for the Three Months Ended March 31, 2004(in thousands) GuarantorPrincipal
    
    Guarantor
    
    Non-GuarantorOperations
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Systems
    
    $
    18,979
    
    
    $
    
    
    
    $
    514
    
    
    $
    (45
    )
    
    $
    19,448Services
    
    
    32,941
    
    
    
    208
    
    
    
    2,704
    
    
    
    
    
    
    
    35,853Total revenues
    
    
    51,920
    
    
    
    208
    
    
    
    3,218
    
    
    
    (45
    )
    
    
    55,301Cost of revenues:Systems
    
    
    11,059
    
    
    
    
    
    
    
    309
    
    
    
    (43
    )
    
    
    11,325Services
    
    
    12,874
    
    
    
    (15
    )
    
    
    1,718
    
    
    
    (2
    )
    
    
    14,575Total cost of revenues
    
    
    23,933
    
    
    
    (15
    )
    
    
    2,027
    
    
    
    (45
    )
    
    
    25,900Gross margin
    
    
    27,987
    
    
    
    223
    
    
    
    1,191
    
    
    
    
    
    
    
    29,401Operating expenses:Sales and marketing
    
    
    7,528
    
    
    
    (1,117
    )
    
    
    506
    
    
    
    
    
    
    
    6,917Product development
    
    
    3,460
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    3,556General and administrative
    
    
    3,170
    
    
    
    1,745
    
    
    
    638
    
    
    
    
    
    
    
    5,553Total operating expenses
    
    
    14,158
    
    
    
    628
    
    
    
    1,240
    
    
    
    
    
    
    
    16,026Operating income (loss)
    
    
    13,829
    
    
    
    (405
    )
    
    
    (49
    )
    
    
    
    
    
    
    13,375Interest expense
    
    
    (4,874
    )
    
    
    (17
    )
    
    
    9
    
    
    
    
    
    
    
    (4,882
    )Equity gain in affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange gain (loss)
    
    
    (42
    )
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (40
    )Gain on disposal of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    217
    
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    202Income (loss) before income taxes
    
    
    9,130
    
    
    
    (422
    )
    
    
    (53
    )
    
    
    
    
    
    
    8,655Income tax expense
    
    
    3,208
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    3,258Net income (loss)
    
    $
    5,922
    
    
    $
    (422
    )
    
    $
    (103
    )
    
    $
    
    
    
    $
    5,397
 13




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##### Table of Contents



Consolidating Statement of Operations for the Three Months Ended March 31, 2003(in thousands) GuarantorPrincipal
    
    Guarantor
    
    Non-GuarantorOperations
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Systems
    
    $
    16,995
    
    
    $
    
    
    
    $
    397
    
    
    $
    
    
    
    $
    17,392Services
    
    
    35,749
    
    
    
    346
    
    
    
    2,573
    
    
    
    
    
    
    
    38,668Total revenues
    
    
    52,744
    
    
    
    346
    
    
    
    2,970
    
    
    
    
    
    
    
    56,060Cost of revenues:Systems
    
    
    9,578
    
    
    
    
    
    
    
    281
    
    
    
    
    
    
    
    9,859Services
    
    
    16,301
    
    
    
    
    
    
    
    1,610
    
    
    
    
    
    
    
    17,911Total cost of revenues
    
    
    25,879
    
    
    
    
    
    
    
    1,891
    
    
    
    
    
    
    
    27,770Gross margin
    
    
    26,865
    
    
    
    346
    
    
    
    1,079
    
    
    
    
    
    
    
    28,290Operating expenses:Sales and marketing
    
    
    7,832
    
    
    
    36
    
    
    
    369
    
    
    
    
    
    
    
    8,237Product development
    
    
    3,985
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    4,090General and administrative
    
    
    4,407
    
    
    
    1,708
    
    
    
    471
    
    
    
    
    
    
    
    6,586Total operating expenses
    
    
    16,224
    
    
    
    1,744
    
    
    
    945
    
    
    
    
    
    
    
    18,913Operating income (loss)
    
    
    10,641
    
    
    
    (1,398
    )
    
    
    134
    
    
    
    
    
    
    
    9,377Interest expense
    
    
    (3,320
    )
    
    
    (26
    )
    
    
    7
    
    
    
    
    
    
    
    (3,339
    )Equity gain in affiliate
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67Foreign exchange gain (loss)
    
    
    16
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    12Other income, net
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )Income (loss) before income taxes
    
    
    7,385
    
    
    
    (1,424
    )
    
    
    137
    
    
    
    
    
    
    
    6,098Income tax expense
    
    
    2,220
    
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    2,392Net income (loss)
    
    $
    5,165
    
    
    $
    (1,424
    )
    
    $
    (35
    )
    
    $
    
    
    
    $
    3,706
 14




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##### Table of Contents



Consolidating Statement of Operations for the Six Months Ended March 31, 2004(in thousands) GuarantorPrincipal
    
    Guarantor
    
    Non-GuarantorOperations
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Systems
    
    $
    39,654
    
    
    $
    
    
    
    $
    826
    
    
    $
    (45
    )
    
    $
    40,435Services
    
    
    65,711
    
    
    
    498
    
    
    
    5,360
    
    
    
    (2
    )
    
    
    71,567Total revenues
    
    
    105,365
    
    
    
    498
    
    
    
    6,186
    
    
    
    (47
    )
    
    
    112,002Cost of revenues:Systems
    
    
    22,702
    
    
    
    
    
    
    
    536
    
    
    
    (43
    )
    
    
    23,195Services
    
    
    26,317
    
    
    
    (19
    )
    
    
    3,316
    
    
    
    (4
    )
    
    
    29,610Total cost of revenues
    
    
    49,019
    
    
    
    (19
    )
    
    
    3,852
    
    
    
    (47
    )
    
    
    52,805Gross margin
    
    
    56,346
    
    
    
    517
    
    
    
    2,334
    
    
    
    
    
    
    
    59,197Operating expenses:Sales and marketing
    
    
    15,656
    
    
    
    (1,277
    )
    
    
    965
    
    
    
    
    
    
    
    15,344Product development
    
    
    7,337
    
    
    
    
    
    
    
    148
    
    
    
    
    
    
    
    7,485General and administrative
    
    
    7,618
    
    
    
    3,474
    
    
    
    1,248
    
    
    
    
    
    
    
    12,340Total operating expenses
    
    
    30,611
    
    
    
    2,197
    
    
    
    2,361
    
    
    
    
    
    
    
    35,169Operating income (loss)
    
    
    25,735
    
    
    
    (1,680
    )
    
    
    (27
    )
    
    
    
    
    
    
    24,028Interest expense
    
    
    (9,802
    )
    
    
    (36
    )
    
    
    (75
    )
    
    
    
    
    
    
    (9,913
    )Equity gain in affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange gain (loss)
    
    
    (49
    )
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    (107
    )Gain on disposal of assets
    
    
    6,270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,270Other income, net
    
    
    272
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    294Income (loss) before income taxes
    
    
    22,426
    
    
    
    (1,716
    )
    
    
    (138
    )
    
    
    
    
    
    
    20,572Income tax expense
    
    
    7,860
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    7,960Net income (loss)
    
    $
    14,566
    
    
    $
    (1,716
    )
    
    $
    (238
    )
    
    $
    
    
    
    $
    12,612
 15




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##### Table of Contents



Consolidating Statement of Operations for the Six Months Ended March 31, 2003(in thousands) GuarantorPrincipal
    
    Guarantor
    
    Non-GuarantorOperations
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Systems
    
    $
    34,347
    
    
    $
    
    
    
    $
    758
    
    
    $
    
    
    
    $
    35,105Services
    
    
    72,882
    
    
    
    876
    
    
    
    4,849
    
    
    
    
    
    
    
    78,607Total revenues
    
    
    107,229
    
    
    
    876
    
    
    
    5,607
    
    
    
    
    
    
    
    113,712Cost of revenues:Systems
    
    
    19,400
    
    
    
    
    
    
    
    484
    
    
    
    
    
    
    
    19,884Services
    
    
    32,365
    
    
    
    
    
    
    
    3,091
    
    
    
    
    
    
    
    35,456Total cost of revenues
    
    
    51,765
    
    
    
    
    
    
    
    3,575
    
    
    
    
    
    
    
    55,340Gross margin
    
    
    55,464
    
    
    
    876
    
    
    
    2,032
    
    
    
    
    
    
    
    58,372Operating expenses:Sales and marketing
    
    
    14,815
    
    
    
    72
    
    
    
    650
    
    
    
    
    
    
    
    15,537Product development
    
    
    7,643
    
    
    
    
    
    
    
    173
    
    
    
    
    
    
    
    7,816General and administrative
    
    
    9,201
    
    
    
    3,412
    
    
    
    730
    
    
    
    
    
    
    
    13,343Total operating expenses
    
    
    31,659
    
    
    
    3,484
    
    
    
    1,553
    
    
    
    
    
    
    
    36,696Operating income (loss)
    
    
    23,805
    
    
    
    (2,608
    )
    
    
    479
    
    
    
    
    
    
    
    21,676Interest expense
    
    
    (6,737
    )
    
    
    (55
    )
    
    
    (6
    )
    
    
    
    
    
    
    (6,798
    )Equity gain in affiliate
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59Foreign exchange gain (loss)
    
    
    18
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    13Other income, net
    
    
    182
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    203Income (loss) before income taxes
    
    
    17,327
    
    
    
    (2,663
    )
    
    
    489
    
    
    
    
    
    
    
    15,153Income tax expense
    
    
    5,498
    
    
    
    
    
    
    
    457
    
    
    
    
    
    
    
    5,955Net income (loss)
    
    $
    11,829
    
    
    $
    (2,663
    )
    
    $
    32
    
    
    $
    
    
    
    $
    9,198
 16




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##### Table of Contents



Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2004(In thousands) GuarantorPrincipal
    
    Guarantor
    
    Non-GuarantorOperations
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activitiesNet income (loss)
    
    $
    14,448
    
    
    $
    (1,716
    )
    
    $
    (120
    )
    
    $
    
    
    
    $
    12,612Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:Depreciation
    
    
    2,660
    
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    2,751Amortization
    
    
    5,473
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,473Deferred income taxes
    
    
    781
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    781Equity gain from affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity gain from partnerships
    
    
    (102
    )
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (111
    )Lease loss provision
    
    
    
    
    
    
    (1,277
    )
    
    
    (43
    )
    
    
    
    
    
    
    (1,320
    )Provision
for doubtful accounts
    
    
    2,161
    
    
    
    
    
    
    
    229
    
    
    
    
    
    
    
    2,390Gain on sale of assets
    
    
    (6,270
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,270
    )Other, net
    
    
    (65
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65
    )Changes in assets and liabilities:Trade accounts receivable
    
    
    948
    
    
    
    
    
    
    
    301
    
    
    
    
    
    
    
    1,249Inventories
    
    
    193
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    283Investment in leases
    
    
    
    
    
    
    3,638
    
    
    
    298
    
    
    
    
    
    
    
    3,936Prepaid expenses and other
assets
    
    
    3,766
    
    
    
    454
    
    
    
    (144
    )
    
    
    
    
    
    
    4,076Intercompany transactions
    
    
    (738
    )
    
    
    625
    
    
    
    113
    
    
    
    
    
    
    
    Accounts payable
    
    
    (1,582
    )
    
    
    26
    
    
    
    113
    
    
    
    
    
    
    
    (1,443
    )Deferred revenue
    
    
    525
    
    
    
    (42
    )
    
    
    390
    
    
    
    
    
    
    
    873Accrued expenses and other
liabilities
    
    
    (3,640
    )
    
    
    (1,306
    )
    
    
    71
    
    
    
    
    
    
    
    (4,875
    )Net cash provided by operating
activities
    
    
    18,558
    
    
    
    402
    
    
    
    1,380
    
    
    
    
    
    
    
    20,340Investing activitiesPurchase of property and equipment
    
    
    (1,053
    )
    
    
    
    
    
    
    (27
    )
    
    
    
    
    
    
    (1,080
    )Capitalized computer software costs and databases
    
    
    (2,934
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,934
    )Purchase of service parts
    
    
    (804
    )
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    (779
    )Proceeds from the sales of assets
    
    
    7,212
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,212Equity distributions from
partnerships
    
    
    55
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    58Net cash provided by investing
activities
    
    
    2,476
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    2,477Financing activitiesProceeds from debt facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payment on long-term debt
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    
    
    
    
    (200
    )Net cash used in financing activities
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    
    
    
    
    (200
    )Change in cash and cash equivalents
    
    
    21,034
    
    
    
    202
    
    
    
    1,381
    
    
    
    
    
    
    
    22,617Cash and cash equivalents, beginning
    
    
    8,400
    
    
    
    (169
    )
    
    
    1,984
    
    
    
    
    
    
    
    10,215Cash and cash equivalents, ending
    
    $
    29,434
    
    
    $
    33
    
    
    $
    3,365
    
    
    $
    
    
    
    $
    32,832
 17




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##### Table of Contents



Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2003(In thousands) GuarantorPrincipal
    
    Guarantor
    
    Non-GuarantorOperations
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activitiesNet income (loss)
    
    $
    11,829
    
    
    $
    (2,663
    )
    
    $
    32
    
    
    $
    
    
    
    $
    9,198Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:Depreciation
    
    
    3,036
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    3,080Amortization
    
    
    6,788
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,788Deferred income taxes
    
    
    31
    
    
    
    
    
    
    
    (54
    )
    
    
    
    
    
    
    (23
    )Equity gain from affiliate
    
    
    (59
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )Equity gain from partnerships
    
    
    (142
    )
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (156
    )Provision for
doubtful accounts
    
    
    2,651
    
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    2,803Other, net
    
    
    1,085
    
    
    
    
    
    
    
    (874
    )
    
    
    
    
    
    
    211Changes in assets and liabilities:Trade accounts receivable
    
    
    (1,183
    )
    
    
    
    
    
    
    (680
    )
    
    
    
    
    
    
    (1,863
    )Inventories
    
    
    (272
    )
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    (263
    )Investment in leases
    
    
    
    
    
    
    1,164
    
    
    
    251
    
    
    
    
    
    
    
    1,415Prepaid expenses and other
assets
    
    
    (512
    )
    
    
    601
    
    
    
    53
    
    
    
    26
    
    
    
    168Intercompany transactions
    
    
    (4,577
    )
    
    
    1,738
    
    
    
    2,865
    
    
    
    (26
    )
    
    
    Accounts payable
    
    
    (214
    )
    
    
    3
    
    
    
    (63
    )
    
    
    
    
    
    
    (274
    )Deferred revenue
    
    
    332
    
    
    
    (61
    )
    
    
    111
    
    
    
    
    
    
    
    382Accrued expenses and other
liabilities
    
    
    (2,278
    )
    
    
    (579
    )
    
    
    (661
    )
    
    
    
    
    
    
    (3,518
    )Net cash provided by operating
activities
    
    
    16,515
    
    
    
    203
    
    
    
    1,171
    
    
    
    
    
    
    
    17,889Investing activitiesPurchase of property and equipment
    
    
    (1,903
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,903
    )Capitalized computer software costs and databases
    
    
    (3,902
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,902
    )Purchase of service parts
    
    
    (858
    )
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    (838
    )Equity distributions from
partnerships
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82Net cash provided by (used in)
investing activities
    
    
    (6,581
    )
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    (6,561
    )Financing activitiesProceeds from debt facility
    
    
    1,210
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,210Payment on long-term debt
    
    
    (5,000
    )
    
    
    (203
    )
    
    
    
    
    
    
    
    
    
    
    (5,203
    )Net cash used in financing activities
    
    
    (3,790
    )
    
    
    (203
    )
    
    
    
    
    
    
    
    
    
    
    (3,993
    )Change in cash and cash equivalents
    
    
    6,144
    
    
    
    
    
    
    
    1,191
    
    
    
    
    
    
    
    7,335Cash and cash equivalents, beginning
    
    
    (157
    )
    
    
    
    
    
    
    555
    
    
    
    
    
    
    
    398Cash and cash equivalents, ending
    
    $
    5,987
    
    
    $
    
    
    
    $
    1,746
    
    
    $
    
    
    
    $
    7,733
 18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations. The following discussion of the Companys financial condition and results of
operations should be read in conjunction with the Companys unaudited
consolidated interim financial statements and the notes accompanying those
statements, which are included elsewhere herein. The results
described below are not necessarily indicative of the results to be expected in
any future periods. This discussion contains forward-looking statements based
on managements current expectations, which are inherently subject to risks and
uncertainties. Actual results and the timing of certain events may differ
significantly from those projected in such forward-looking statements due to a
number of factors. The Company undertakes no obligation beyond what is required
under applicable securities law to publicly update or revise any
forward-looking statement to reflect current or future events or circumstances,
including those set forth herein. Overview The Company is a leading provider of business
management solutions primarily to retailers and wholesale
distributors in the retail hardware market, the lumber and building
materials market and the automotive parts aftermarket. The
Companys business management solutions include systems,
customer support and information services that its
customers use to manage their critical day-to-day business operations through
automated point-of-sale, inventory management, general
accounting and enhanced data collection. The Companys
revenues are derived from the following:  
    Business management systems comprised of
    proprietary software applications, implementation and training
    and third-party hardware and peripherals.
    Subscription-based services, which are generally
    recurring in nature, including software and hardware support,
    maintenance, an electronic automotive parts catalog and other services. The Companys operations are organized into
two principal business unitsthe Industry Solutions Group
and the Automotive Group. The Industry Solutions Group serves a
variety of retailers and wholesale distributors in the retail hardware,
lumber, home improvement, lawn and garden, farm
supply, electrical supply and
other industries in the United States.
 For the six months ended March 31, 2004, the
Industry Solutions Group generated approximately 52% of the Company's total
revenues. The Automotive Group serves the automotive parts
aftermarket, which includes manufacturers, warehouse distributors, parts
stores and professional
installers in North
America and Europe. For the six months ended March 31,
2004, the Automotive Group generated approximately 48% of the
Company's total
revenues. Key Trends Since 2001, the Company has noted several trends
that it believes are integral to understanding its financial
results and condition:  
    Growth in Systems Revenues in the Industry
    Solutions Group.The
    Industry Solutions Groups systems revenues have grown at
    an annual rate of approximately 22%. This growth has been a
    result of stronger relationships and licensing agreements with
    two of the three primary cooperatives in the retail hardware
    market, increased sales of upgraded software applications to
    customers and increased acceptance of the Companys Falcon product in the
    lumber and building materials market. The Company expects that
    these increased systems revenues will also result in increased
    support revenues in future years as the Company adds new
    customers and new products.
    Increased Profit
    Margins.The Company has improved its
    gross profit margin and operating profit margin every year through disciplined operating processes, selling higher
    margin systems and a more efficient sales and marketing
    strategy. The Company continues to apply improved operating
    processes each year and maintains a strong focus on improving
    its profit margins. 19




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##### Table of Contents




    Lower Customer Retention on the Companys
    Older Products.As the Company stops
    actively developing and selling several of its older systems,
    especially in the Automotive Group, the Company experiences
    reduced rates of customer retention. The Company has developed
    various upgrade paths for these customers and has begun a
    specific customer services campaign to increase retention rates
    for customers who elect to continue to operate with the older
    systems. Despite our efforts, we have experienced year-over-year
    decreases in the Automotive Groups services revenues.
However, we expect some lower-level of customer retention to continue.
    Loss of Certain Critical Point-of-Sale
    Data.In the Industry Solutions Group,
    the Company collected specific point-of-sale data from its
    customer base and enhanced it by acquiring point-of-sale data
    from the mass merchandisers available in the public market. The
    Company then organized all of this data and sold it to various manufacturers. In 2001 and 2002, certain mass merchandisers
    stopped making their point-of-sale data available which
    materially reduced the value of this data to the Companys manufacturer
    customers. During the fiscal year ended September 30, 2003,
    the Company experienced a decline in services revenues related
    to the loss of this point-of-sale data. The Company also reduced
    many of the expenses associated with producing and selling this
    data. The Company does not expect to generate this point-of-sale
revenue at those historic levels going forward.
    Consolidation of the Companys Customers,
    Especially in the Automotive Parts
    Aftermarket.As in most industries,
    the Companys customers are undergoing consolidation. When
    one of the Companys customers acquires a company that does
    not currently use the Companys systems, the Company
    typically benefits in the form of new systems sales and
    increased services revenues associated with that customer. When
    a company not currently using the Companys systems
    acquires one of the Companys customers, the Company
    typically loses services revenues. The Company believes
    that consolidation has been neither a material benefit nor a
    material detriment to its operating results over the past three
years. Sale of Assets On October 1, 2003, the Company sold certain
non-core assets consisting of its Automotive Recycling Division.
The total sales price was $6.7 million plus net working
capital of $0.5 million, which resulted in a gain of
$6.3 million. The total revenues generated by these assets
for the fiscal years ended September 30, 2003, 2002 and
2001 were $8.2 million, $9.0 million and
$9.8 million, respectively. The total revenues generated by
these assets for the sixth months ended March 31, 2004 and
2003 were $0.1 million and $4.2 million, respectively. On January 30, 2004, the Company sold certain lease
receivables to its third-party lease financing provider for
approximately
$1.8 million. These lease receivables
were direct financing leases due from customers for the sale of
software and hardware systems and other products. The Company has not
originated any direct financing leases since 2001. Key Components of Results of
Operations Revenues.The
Company derives revenues primarily from two sources: systems
revenues and services revenues. Systems revenues include the
sale of software applications, implementation, training and
third-party computer hardware equipment and associated
peripherals. Systems revenues are generally non-recurring in
nature. Services revenues generally consist of revenues
associated with software and hardware support and systems maintenance, as well as revenues from the sale of information
databases, data warehouses, system connectivity services and
business product sales. Services revenues are generally
recurring in nature. 20




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##### Table of Contents



Cost of Revenues.Cost of systems revenues primarily include computer hardware and
peripherals purchased from third parties, the labor and overhead
associated with integrating, shipping, installing and training
customers on systems and the amortization of capitalized
software costs. Cost of services revenues primarily include
personnel costs associated with software and hardware
support and systems maintenance, personnel costs associated with
data entry into information databases, bad debt expense, the
amortization of capitalized databases and telecommunications and
facility costs. Sales and Marketing
Expense.Sales and marketing expense
primarily consists of personnel costs associated with sales and
marketing efforts, commissions and bad debt expense related to
accounts receivable. A portion of depreciation, amortization,
telecommunications and facility costs are allocated to sales and
marketing expense based on estimated usage. Sales and marketing expense
also includes the lease loss provision related to the
Companys remaining historical lease portfolio. See Notes to Consolidated Financial
Statements. Product Development
Expense.Product development expense
primarily consists of personnel costs and contract services
associated with the development and maintenance of software
and databases. A portion of depreciation, amortization,
telecommunications and facility costs are allocated to product
development expense based on estimated usage. General and Administrative
Expense.These costs include
departmental costs for executive, legal, administrative
services, finance, telecommunications, facilities and
information technology. A portion of depreciation, amortization,
telecommunications and facility costs are allocated to general
and administrative expense based on estimated usage. Amortization of
Goodwill.Goodwill represents the
excess of cost over the fair value of assets acquired. The
Company adopted SFAS 142 as of October 1, 2001 and no
longer amortizes goodwill. Other Income
(Expense).Other income
(expense) includes income from partnerships, which are
being accounted for under the equity method, and the
Companys 401(e) deferred compensation plan. 21




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Historical Results of Operations Three Months Ended March 31, 2004 compared to Three Months Ended March 31, 2003 Revenues.The following table sets forth, for the periods indicated, the
Companys systems revenues, services revenues and total revenues
and the variance thereof. Three Months Ended March 31,2003
    
    2004
    
    Variance $
    
    Variance %(in thousands)Systems Revenues:Industry Solutions Group
    
    $
    13,499
    
    
    $
    14,705
    
    
    $
    1,206
    
    
    
    8.9
    %Automotive Group
    
    
    3,893
    
    
    
    4,743
    
    
    
    850
    
    
    
    21.8
    %Total
Systems Revenues
    
    $
    17,392
    
    
    $
    19,448
    
    
    $
    2,056
    
    
    
    11.8
    %Services
Revenues:Industry Solutions Group
    
    $
    14,219
    
    
    $
    13,699
    
    
    $
    (520
    )
    
    
    (3.7
    )%Automotive Group
    
    
    24,449
    
    
    
    22,154
    
    
    
    (2,295
    )
    
    
    (9.4
    )%Total
Services Revenues
    
    $
    38,668
    
    
    $
    35,853
    
    
    $
    (2,815
    )
    
    
    (7.3
    )%Total
Revenues:Industry Solutions Group
    
    $
    27,718
    
    
    $
    28,404
    
    
    $
    686
    
    
    
    2.5
    %Automotive Group
    
    
    28,342
    
    
    
    26,897
    
    
    
    (1,445
    )
    
    
    (5.1
    )%Total
Revenues
    
    $
    56,060
    
    
    $
    55,301
    
    
    $
    (759
    )
    
    
    (1.4
    )%
 Total Revenues.Total revenues for the three months ended March 31, 2004 were
down approximately 1.4%, compared to the three months ended
March 31, 2003. The increase in systems revenues was more than offset by a decline in
total services revenues and the impact of the sale of the Companys Automotive Recycling
Division in 2004, which was sold on October 1, 2003. Excluding the fiscal year
2003 revenues of the Companys Automotive Recycling Division which was
sold on October 1, 2003,
total revenues increased by $1.3 million, or 2.3%, from
$54.0 million to $55.3 million
for the three months ended March 31, 2003 and 2004, respectively. Systems Revenues. Factors affecting systems revenues for the three months
ended March 31, 2004 include:  
    
    The increase in systems revenues for the Industry Solutions
Group is principally due to an increase in add-on sales to existing customers and additional
sales to new customers primarily in the retail hardware and lumber and
building materials markets.
    
    The increase in systems revenues for the Automotive Group is primarily due to
the sale of more warehouse and store management systems to the existing
customer base. Excluding the fiscal year 2003 revenues of the Companys Automotive
Recycling Division which was sold on October 1, 2003, systems revenues of the
Automotive Group increased by $1.0 million, or 27.4%, from
$3.7 million to $4.7 million for the three months ended
March 31, 2003 and 2004, respectively. Services Revenues. Factors affecting services revenues for the three months
ended March 31, 2004 include:  
    
    The decline in services revenues in the Industry Solutions
Group was chiefly due to a reduction in information database sales to manufacturers as a
result of the decision by two large mass merchandisers to no longer provide point-of-sale data to the
market. The Company does not expect to recapture the sources of this point-of-sale data
and, therefore, does not expect to recover this lost revenue. The reduction in
information database sales to manufacturers was partially offset by
an increase in software and hardware support and maintenance revenue from new and existing customers.
    
    The decline in services revenues for the Automotive Group was
largely due to the sale of the Companys Automotive Recycling Division
on October 1, 2003. The Automated Recycling Division accounted for $1.9
million of the Automotive Groups services revenues for the three months ended
March 31, 2003. The Automotive Group also continued to experience
decline in services revenues associated with customer attrition from
older systems. The Company expects that revenues from these older systems will continue to
decline. Excluding the fiscal year 2003 revenues of the
Companys Automotive Recycling Division which was sold on October 1, 2003, services
revenues of the Automotive Group decreased by $0.4 million
or 1.9%, from $22.6 million to $22.2 million for the three
months ended March 31, 2003 and 2004, respectively. 22




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##### Table of Contents



Cost of Revenues.The following table sets forth, for the periods indicated,
the Companys cost of revenues and the variance thereof. Three Months Ended March 31,2003
    
    2004
    
    Variance $
    
    Variance %(in thousands)Cost of Systems Revenues:Industry Solutions Group
    
    $
    7,260
    
    
    $
    8,306
    
    
    $
    1,046
    
    
    
    14.4
    %Automotive Group
    
    
    2,599
    
    
    
    3,019
    
    
    
    420
    
    
    
    16.2
    %Total Cost of Systems Revenues
    
    $
    9,859
    
    
    $
    11,325
    
    
    $
    1,466
    
    
    
    14.9
    %Cost of
Services Revenues:Industry Solutions Group
    
    $
    7,013
    
    
    $
    5,996
    
    
    $
    (1,017
    )
    
    
    (14.5
    )%Automotive Group
    
    
    10,898
    
    
    
    8,579
    
    
    
    (2,319
    )
    
    
    (21.3
    )%Total Cost of Services Revenues
    
    $
    17,911
    
    
    $
    14,575
    
    
    $
    (3,336
    )
    
    
    (18.6
    )%Total Cost of Revenues:Industry Solutions Group
    
    $
    14,273
    
    
    $
    14,302
    
    
    $
    29
    
    
    
    0.2
    %Automotive Group
    
    
    13,497
    
    
    
    11,598
    
    
    
    (1,899
    )
    
    
    (14.1
    )%Total Cost of Revenues
    
    $
    27,770
    
    
    $
    25,900
    
    
    $
    (1,870
    )
    
    
    (6.7
    )%
 The following table sets forth, for the periods indicated, the cost of revenues
as a percentage of revenues. Three Months Ended March 31,2003
    
    2004Systems:Industry Solutions Group
    
    
    53.8
    %
    
    
    56.5
    %Automotive Group
    
    
    66.8
    %
    
    
    63.7
    %Total Cost
of Systems Revenues as a Percentage of Total Systems Revenues
    
    
    56.7
    %
    
    
    58.2
    %Services:Industry Solutions Group
    
    
    49.3
    %
    
    
    43.8
    %Automotive Group
    
    
    44.6
    %
    
    
    38.7
    %Total Cost of Services Revenues as a Percentage of Total Services Revenues
    
    
    46.3
    %
    
    
    40.7
    %Total Cost of Revenues:Industry Solutions Group
    
    
    51.5
    %
    
    
    50.4
    %Automotive Group
    
    
    47.6
    %
    
    
    43.1
    %Total Cost of Revenues as a Percentage of Total Revenues
    
    
    49.5
    %
    
    
    46.8
    %
 Total Cost of Revenues.Total cost of revenues for the three months ended March 31,
2004 decreased by approximately $1.9 million, or 6.7%, compared
to the three months ended March 31, 2003. Cost of Systems Revenues.The increase in cost of systems revenues is
primarily due to the increased sales of systems during the three
months ended March
31, 2004. The increase in cost of systems revenues as a percentage of systems
revenues is a result of higher installation costs.  
    
    The increase in cost of systems revenues for the Industry Solutions Group is a
result of its increased sales of systems. The Industry Solutions Groups
cost of systems revenues as a percentage of systems revenues increased primarily
due to the price and volume mix of software and hardware products sold.
    
    The increase in cost of systems revenues for the Automotive
Group is primarily a
result of its increased sales of systems. The Automotive Groups
systems cost of revenues as a percentage of systems revenues decreased
primarily due to the price and volume mix of software and hardware
products sold. 23




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##### Table of Contents



Cost of Services Revenues.Cost of services revenues declined to 40.7% of total
services revenues for the three months ended March 31, 2004 compared to 46.3% for the three
months ended March 31, 2003, due to a decline in cost of
services revenues in both the Industry Solutions Group and the
Automotive Group. These declines for the three months ended March
31, 2004 are a result of the following:  
    

    Cost of services revenues for the Industry Solutions Group does not
include any information product database amortization compared to the
previous period, which included $0.4 million of database amortization costs.
The information product database was fully amortized during the
fiscal year ended September 30, 2003, due to the loss of critical sources of point of sale data
available in the market and due to the reduced information product
services revenues obtained from the database. The Industry Solutions Group also
had lower information product data acquisition and processing costs.
    
    Cost of services revenues for the Automotive Group declined due to
lower personnel and consulting service expenses. Information process
improvement projects were completed during the
fiscal year 2003. The
Automotive Group also benefited from lower corporate expense allocations for the three months ended March 31, 2004, due
to reduced facility and telecommunication costs primarily related to
the sale of the Companys Automotive Recycling
Division. Gross Profit. The following table sets forth, for the periods indicated, the Companys gross
profit and the variance thereof. Three Months Ended March 31,2003
    
    2004
    
    Variance $
    
    Variance %(in thousands)Systems Gross Profit:Industry Solutions Group
    
    $
    6,239
    
    
    $
    6,399
    
    
    $
    160
    
    
    
    2.6
    %Automotive Group
    
    
    1,294
    
    
    
    1,724
    
    
    
    430
    
    
    
    33.2
    %Total Systems Gross Profit
    
    $
    7,533
    
    
    $
    8,123
    
    
    $
    590
    
    
    
    7.8
    %Services
Gross Profit:Industry Solutions Group
    
    $
    7,206
    
    
    $
    7,703
    
    
    $
    497
    
    
    
    6.9
    %Automotive Group
    
    
    13,551
    
    
    
    13,575
    
    
    
    24
    
    
    
    0.2
    %Total Services Gross Profit
    
    $
    20,757
    
    
    $
    21,278
    
    
    $
    521
    
    
    
    2.5
    %Total Gross
Profit:Industry Solutions Group
    
    $
    13,445
    
    
    $
    14,102
    
    
    $
    657
    
    
    
    4.9
    %Automotive Group
    
    
    14,845
    
    
    
    15,299
    
    
    
    454
    
    
    
    3.1
    %Total Gross Profit
    
    $
    28,290
    
    
    $
    29,401
    
    
    $
    1,111
    
    
    
    3.9
    %
 The following table sets forth, for the periods indicated, the Companys gross
profit as a percentage of revenues. Three Months Ended March 31,2003
    
    2004Systems:Industry Solutions Group
    
    
    46.2
    %
    
    
    43.5
    %Automotive Group
    
    
    33.2
    %
    
    
    36.3
    %Total
Systems Gross Profit as a
Percentage of Systems Revenues
    
    
    43.3
    %
    
    
    41.8
    %Services:Industry Solutions Group
    
    
    50.7
    %
    
    
    56.2
    %Automotive Group
    
    
    55.4
    %
    
    
    61.3
    %Total
Services Gross Profit as a
Percentage of Services
Revenues
    
    
    53.7
    %
    
    
    59.3
    %Total Gross
Profit:Industry Solutions Group
    
    
    48.5
    %
    
    
    49.6
    %Automotive Group
    
    
    52.4
    %
    
    
    56.9
    %Total Gross
Profit as a Percentage of Revenues
    
    
    50.5
    %
    
    
    53.2
    %
 24




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##### Table of Contents



For the reasons described
above, the total gross profit increased by $1.1 million, or 3.9%,
for the three months ended March 31, 2004 compared to the three
months ended March 31, 2003. Operating Expenses.The following table sets forth, for the periods indicated,
the Companys operating expenses and the variance thereof. Three Months Ended March 31,2003
    
    2004
    
    Variance $
    
    Variance %(in thousands)Sales and
Marketing Expense
    
    $
    8,237
    
    
    $
    6,917
    
    
    $
    (1,320
    )
    
    
    (16.0
    )%Product
Development Expense
    
    
    4,090
    
    
    
    3,556
    
    
    
    (534
    )
    
    
    (13.1
    )%General and
Administrative Expense
    
    
    6,586
    
    
    
    5,553
    
    
    
    (1,033
    )
    
    
    (15.7
    )%Total Operating Expenses
    
    $
    18,913
    
    
    $
    16,026
    
    
    $
    (2,887
    )
    
    
    (15.3
    )%
 Operating expenses declined $2.9 million,
or 15.3%, for the three months ended
March 31, 2004, compared to the three months ended March 31, 2003. These
declines are the result of the following:  
    
    Sales and Marketing Expense.Sales and marketing expense
declined as a result of a reduction in the Companys lease loss reserve. During January 2004,
the Company sold over 55%, or approximately $1.8 million, of its owned leases to its third-party lease
financing provider. The lease portfolio sale did not provide for any
recourse to the Company. The Company also experienced more favorable
lease portfolio performance during the three months ended March 31, 2004
compared to the three months ended March 31, 2003.
    
    Product Development Expense.The decline in product
development expense resulted from
the Automotive Group's focus on new products and the sale of the Companys Automotive Recycling Division
which combined to reduce personnel, resources and expenditures with respect to the
Companys older products. This decline was somewhat offset by
the increased product development spending by the Industry Solutions
Group.
    
    General and Administrative Expense. General and administrative
expense for the three months ended March 31, 2004 declined as a result of reduced telecommunication costs, lower
consulting expenses, and lower legal expenditures compared to the three
months ended March 31, 2004. Interest Expense.Interest expense for the three months ended March
31, 2004 was $4.9 million, compared to $3.3 million for the three months
ended March 31, 2003, an increase of $1.5 million, or 46.2%. During
June 2003, the Company completed a debt refinancing resulting in higher
average debt balances for the three months ended March 31, 2004 causing
higher interest expense. See Liquidity and Capital Resources. Net Income.As a result of the above factors, the Company realized
net income of $5.4 million for the three months ended March 31, 2004,
compared to net income of $3.7 million for the three months ended March
31, 2003, an improvement of $1.7 million, or 46%. 25




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##### Table of Contents



Six Months Ended March 31, 2004 compared to Six Months Ended March 31, 2003 Revenues.The
following table sets forth, for the periods indicated, the
Companys systems revenues, services revenues and total
revenues and the variance thereof. Six Months Ended March 31,2003
    
    2004
    
    Variance $
    
    Variance %(in thousands)Systems Revenues:Industry Solutions Group
    
    $
    26,196
    
    
    $
    31,420
    
    
    $
    5,224
    
    
    
    19.9
    %Automotive Group
    
    
    8,909
    
    
    
    9,015
    
    
    
    106
    
    
    
    1.2
    %Total Systems Revenues
    
    $
    35,105
    
    
    $
    40,435
    
    
    $
    5,330
    
    
    
    15.2
    %Services Revenues:Industry Solutions Group
    
    $
    29,363
    
    
    $
    26,697
    
    
    $
    (2,666
    )
    
    
    (9.1
    )%Automotive Group
    
    
    49,244
    
    
    
    44,870
    
    
    
    (4,374
    )
    
    
    (8.9
    )%Total Services Revenues
    
    $
    78,607
    
    
    $
    71,567
    
    
    $
    (7,040
    )
    
    
    (9.0
    )%Total Revenues:Industry Solutions Group
    
    $
    55,559
    
    
    $
    58,117
    
    
    $
    2,558
    
    
    
    4.6
    %Automotive Group
    
    
    58,153
    
    
    
    53,885
    
    
    
    (4,268
    )
    
    
    (7.3
    )%Total Revenues
    
    $
    113,712
    
    
    $
    112,002
    
    
    $
    (1,710
    )
    
    
    (1.5
    )% Total Revenues.Total revenues for the six months ended March 31, 2004
decreased by approximately $1.7 million, or 1.5%, compared
to the six months ended March 31, 2003. The
$5.3 million increase in total systems revenues for the six
months ended March 31, 2004 was more than offset by a
decline in total services revenues and the impact of the sale of
the Automotive Recycling Division, which was sold on
October 1, 2003. Excluding the fiscal year 2003 revenues of the
Automotive Recycling Division, total revenues increased by
$2.5 million, or 2.2%, from $109.5 million to
$112.0 million for the six months ended 2003 and 2004,
respectively. Systems Revenues.Factors affecting systems revenues for the six months ended
March 31, 2004 include:  
    The increase in systems revenues for the Industry
    Solutions Group is principally due to an increase in add-on
    sales to existing customers and additional sales to new
    customers primarily in the retail hardware and lumber and
    building materials markets.
    The increase in systems revenues for the
    Automotive Group is primarily due to the sale of more warehouse
    and store management systems to the existing customer base.
    Excluding the fiscal year 2003 revenues of the Automotive
    Recycling Division which was sold on October 1, 2003,
    systems revenues for the Automotive Group increased by
    $0.4 million, or 4.7%, from $8.6 million to
    $9.0 million for the six months ended March 31, 2003
    and 2004, respectively. Services Revenues.Factors affecting services revenues for the six months ended
March 31, 2004 include:  
    The decline in services revenues for the Industry
    Solutions Group was primarily due to a reduction in information
    database sales to manufacturers as a result of the decision by
    two large mass merchandisers to no longer provide point-of-sale
    data to the market. The Company does not expect to recapture the
    sources of this point-of-sale data and, therefore, does not
    expect to recover this lost revenue. The reduction in
    information database sales to manufacturers was partially offset
    by an increase in software and hardware support and maintenance
    revenue from new and existing customers.
    The decline in services revenues for the
    Automotive Group was largely due to the sale of the Automotive
    Recycling Division on October 1, 2003. The Automotive
    Recycling Division accounted for $3.8 million of the
    Automotive Groups services revenues for the six months
    ended March 31, 2003. The Automotive Group also continued
    to experience a decline in services revenues associated with
    customer 26




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##### Table of Contents



attrition from the Companys older systems.
    The Company expects that revenues from these older systems will
    continue to decline. Excluding the fiscal year 2003 revenues of
    the Automotive Recycling Division which was sold on
    October 1, 2003, services revenues of the Automotive Group
    decreased by $0.7 million, or 1.5%, from
    $45.5 million to $44.8 million for the six months
    ended March 31, 2003 and 2004, respectively. Cost of Revenues.The following table sets forth, for the periods indicated, the
Companys cost of revenues and the variance thereof. Six Months Ended March 31,2003
    
    2004
    
    Variance $
    
    Variance %(in thousands)Cost of Systems Revenues:Industry Solutions Group
    
    $
    14,158
    
    
    $
    16,887
    
    
    $
    2,729
    
    
    
    19.3
    %Automotive Group
    
    
    5,726
    
    
    
    6,308
    
    
    
    582
    
    
    
    10.2
    %Total Cost of Systems Revenues
    
    $
    19,884
    
    
    $
    23,195
    
    
    $
    3,311
    
    
    
    16.7
    %Cost of Services Revenues:Industry Solutions Group
    
    $
    13,941
    
    
    $
    11,918
    
    
    $
    (2,023
    )
    
    
    (14.5
    )%Automotive Group
    
    
    21,515
    
    
    
    17,692
    
    
    
    (3,823
    )
    
    
    (17.8
    )%Total Cost of Services Revenues
    
    $
    35,456
    
    
    $
    29,610
    
    
    $
    (5,846
    )
    
    
    (16.5
    )%Total Cost of Revenues:Industry Solutions Group
    
    $
    28,099
    
    
    $
    28,805
    
    
    $
    706
    
    
    
    2.5
    %Automotive Group
    
    
    27,241
    
    
    
    24,000
    
    
    
    (3,241
    )
    
    
    (11.9
    )%Total Cost of Revenues
    
    $
    55,340
    
    
    $
    52,805
    
    
    $
    (2,535
    )
    
    
    (4.6
    )% The following table sets forth, for the periods
indicated, the cost of revenues as a percentage of revenues. Six Months Ended March 31,2003
    
    2004Systems:Industry Solutions Group
    
    
    54.1%
    
    
    
    53.8%Automotive Group
    
    
    64.3%
    
    
    
    70.0%Total Cost of Systems Revenues as a Percentage of
    Total Systems Revenues
    
    
    56.6%
    
    
    
    57.4%Services:Industry Solutions Group
    
    
    47.5%
    
    
    
    44.6%Automotive Group
    
    
    43.7%
    
    
    
    39.4%Total Cost of Services Revenues as a Percentage
    of Total Services Revenues
    
    
    45.1%
    
    
    
    41.4%Total Cost of Revenues:Industry Solutions Group
    
    
    50.6%
    
    
    
    49.6%Automotive Group
    
    
    46.8%
    
    
    
    44.5%Total Cost of Revenues as a Percentage of Total
    Revenues
    
    
    48.7%
    
    
    
    47.2% Total Cost of
Revenues.Total cost of revenues for
the six months ended March 31, 2004, decreased by
approximately $2.5 million, or 4.6%, compared to the six
months ended March 31, 2003. Cost of Systems
Revenues.The increase in cost of
systems revenues is predominantly due to increased sales of
systems during the six months ended March 31, 2004. The
increase in cost of systems revenues as a percentage of systems
revenues is a result of higher installation costs.  
    The increase in cost of systems revenues for the
    Industry Solutions Group is a result of its increased sales of
    systems. The Industry Solutions Groups cost of systems
    revenues as a percentage of systems revenues 27




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##### Table of Contents



remained relatively flat at 54.1% and 53.8% for
    the six months ended March 31, 2003 and 2004, respectively.
    The Automotive Group experienced an increase in
    cost of systems revenues in excess of its increase in systems
    revenues primarily due to higher systems installation costs. Cost of Services
Revenues.Cost of services revenues
declined to 41.4% of total services revenues for the six months ended
March 31, 2004 compared to 45.1% for the six months ended
March 31, 2003 due to a decline in cost of services
revenues as a percentage of services revenues in both the
Industry Solutions Group and the Automotive Group. These
declines for the six months ended March 31, 2004, are the
result of the following:  
    Cost of services revenues for the Industry
    Solutions Group does not include any information product
    database amortization compared to the previous period, which
    included $0.7 million of database amortization costs. The
    information product database was fully amortized during the fiscal
    year 2003, due to the loss of critical sources of point-of-sale
    data available in the market and due to the reduced information
    product services revenues obtained from the database. The
    Industry Solutions Group also had lower information product data
    acquisition and processing costs.
    Cost of services revenues for the Automotive
    Group declined due to lower personnel and consulting service
    expenses. Information process improvement projects were
    completed during the fiscal year ended September 30, 2003. The Automotive Group also
    benefited from lower corporate expense allocations for the six
    months ended March 31, 2004, due to reduced facility and
    telecommunications costs primarily related to the sale of the Automotive Recycling Division. Gross Profit.The
following table sets forth, for the periods indicated, the
Companys gross profit and the variance thereof. Six Months Ended March 31,2003
    
    2004
    
    Variance $
    
    Variance %(in thousands)Systems Gross Profit:Industry Solution Group
    
    $
    12,038
    
    
    $
    14,533
    
    
    $
    2,495
    
    
    
    20.7
    %Automotive Group
    
    
    3,183
    
    
    
    2,707
    
    
    
    (476
    )
    
    
    (15.0
    )%Total Systems Gross Profit
    
    $
    15,221
    
    
    $
    17,240
    
    
    $
    2,019
    
    
    
    13.3
    %Services Gross Profit:Industry Solutions Group
    
    $
    15,422
    
    
    $
    14,779
    
    
    $
    (643
    )
    
    
    (4.2
    )%Automotive Group
    
    
    27,729
    
    
    
    27,178
    
    
    
    (551
    )
    
    
    (2.0
    )%Total Services Gross Profit
    
    $
    43,151
    
    
    $
    41,957
    
    
    $
    (1,194
    )
    
    
    (2.8
    )%Total Gross Profit:Industry Solutions Group
    
    $
    27,460
    
    
    $
    29,312
    
    
    $
    1,852
    
    
    
    6.7
    %Automotive Group
    
    
    30,912
    
    
    
    29,885
    
    
    
    (1,027
    )
    
    
    (3.3
    )%Total Gross Profit
    
    $
    58,372
    
    
    $
    59,197
    
    
    $
    825
    
    
    
    1.4
    % 28




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##### Table of Contents



The following table sets forth, for the periods
indicated, the Companys gross profit as a percentage of
revenues. Six
Months EndedMarch 31,2003
    
    2004Systems:Industry Solutions Group
    
    
    46.0%
    
    
    
    46.3%Automotive Group
    
    
    35.7%
    
    
    
    30.0%Total Systems Gross Profit as a Percentage of
    Systems Revenues
    
    
    43.4%
    
    
    
    42.6%Services:Industry Solutions Group
    
    
    52.5%
    
    
    
    55.4%Automotive Group
    
    
    56.3%
    
    
    
    60.6%Total Services Gross Profit as a Percentage of
    Services Revenues
    
    
    54.9%
    
    
    
    58.6%Total Gross Profit:Industry Solutions Group
    
    
    49.4%
    
    
    
    50.4%Automotive Group
    
    
    53.2%
    
    
    
    55.5%Total Gross Profit as a Percentage of Revenues
    
    
    51.3%
    
    
    
    52.9% For the reasons described above, total gross
profit increased by $0.8 million, or 1.4%, for the six
months ended March 31, 2004 compared to the six months
ended March 31, 2003. Operating Expenses.The following table sets forth, for the periods indicated, the
Companys operating expenses and the variance thereof. Six Months Ended March 31,2003
    
    2004
    
    Variance $
    
    Variance %(in thousands)Sales and Marketing Expense
    
    $
    15,537
    
    
    $
    15,344
    
    
    $
    (193
    )
    
    
    (1.2
    )%Product Development Expense
    
    
    7,816
    
    
    
    7,485
    
    
    
    (331
    )
    
    
    (4.2
    )%General and Administrative Expense
    
    
    13,343
    
    
    
    12,340
    
    
    
    (1,003
    )
    
    
    (7.5
    )%Total Operating Expenses
    
    $
    36,696
    
    
    $
    35,169
    
    
    $
    (1,527
    )
    
    
    (4.2
    )% Operating expenses declined $1.5 million, or
4.2%, for the six months ended March 31, 2004, compared to
the six months ended March 31, 2003. These declines are the
result of the following:  
    Sales and Marketing
    Expense.Sales and marketing expense
    declined as a result of a reduction in the Companys lease loss reserve.
    During January 2004, the Company sold over 55.0%, or
approximately $1.8 million, of
    its owned lease portfolio to a third-party lease financing
    provider. The lease portfolio sale did not provide for any
    recourse to the Company. The Company also experienced improved
    lease portfolio performance during the six months ended
    March 31, 2004 compared to the six months ended
    March 31, 2003. Offsetting this performance were increases
    in the Industry Solutions Groups and the Automotive
Groups sales and marketing
    expenses, related to increased sales personnel and higher
    commissions based on increased sales activity.
    Product Development
    Expense.The decline in product
    development expense resulted from the Automotive Groups
    focus on new products and the sale of the Automotive Recycling
Division which combined to reduce personnel, resources and
    expenditures with respect to the Companys older products. This decline
    was somewhat offset by the increased product development
    spending by the Industry Solutions Group.
    General and Administrative
    Expense.General and administrative
    expense for the six months ended March 31, 2004 declined as
    a result of reduced telecommunications costs, lower legal
    expenses and lower consulting expenses compared to the six
    months ended March 31, 2003, which included the costs of
    implementing a new enterprise resource planning system. Interest
Expense.Interest expense for the six months ended
March 31, 2004 was $9.9 million, compared to
$6.8 million for the six months ended March 31, 2003,
an increase of $3.1 million, or 45.8%. During June 2003,
the Company completed a debt refinancing resulting in higher
average debt balances for the six months ended March 31,
2004 and causing higher interest expense. See Liquidity
and Capital Resources. Net Income.As a
result of the above factors, the Company realized net income of
$12.6 million for the six months ended March 31, 2004,
compared to net income of $9.2 million for the six months
ended March 31, 2003, an improvement of $3.4 million,
or 37.1%. Liquidity and Capital
Resources As of March 31, 2004, the Company had $173.2 million in outstanding
indebtedness comprised of $155.1 million of Senior Notes due 2011, net of a
$1.9 million discount, $17.5 million of Senior Subordinated Notes due 2008 and
$0.6 million of debt related to lease financing that matures in varying amounts
over the next three years. The Companys Amended and Restated Credit Agreement
provides for maximum borrowings of up to $15.0 million including a maximum $5.0
million of letters of credit. As of March 31, 2004, there were no borrowings
under the Amended and Restated Credit Agreement; however, the Company
had $0.5 million of letters of credit outstanding. The Amended and Restated Credit Agreement
bears interest at floating rates; therefore, the Companys financial condition
is and will be affected by changes in prevailing rates. 29




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##### Table of Contents



The Companys Amended and Restated Credit Agreement imposes certain
restrictions on the Company, the most significant of which include limitations
on additional indebtedness, liens, guarantees, payment or declaration of
dividends, sale of assets, investments, capital expenditures, and transactions
with affiliates. Under the Amended and Restated Credit Agreement, the Company
is obligated to meet certain tests relating to certain financial amounts and
ratios as defined in the Amended and Restated Credit Agreement. At March 31,
2004, the Company was in compliance with these covenants. In addition to servicing its debt obligations, the Company requires substantial
liquidity for capital expenditures and working capital needs. At March 31,
2004, working capital was $38.1 million compared to $21.2 million at September
30, 2003. The increase in working capital principally relates to an increase in
cash, primarily from strong operational results, the $7.2 million in
proceeds relating to the sale of the Company's Automotive
Recycling Division, which was sold on October 1, 2003 and the
$1.8 million in proceeds from the sale of a portion of the Company's
lease portfolio in January 2004. For the
six months ended March 31, 2004
and March 31, 2003, the Companys capital expenditures were $4.8 million and
$6.6 million, respectively, which included $2.9 million and $3.9 million,
respectively, for capitalized computer software and databases costs. From time to time, the Company intends to pursue acquisition candidates, but
the timing, size or success of any acquisition effort and the related potential
capital commitments cannot be predicted. The Company expects to fund future
cash acquisitions primarily with cash flow from operations and borrowing,
including the unborrowed portion of the credit facility or new debt issuances,
but may also issue additional equity either directly or in connection with
acquisitions. There can be no assurance that acquisition funds will be
available at terms acceptable to the Company. The Company believes that cash flows from operations, together with the amounts
available under its Amended and Restated Credit Agreement, will be sufficient
to fund its working capital and debt service requirements. The Companys
ability to meet its 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 the Companys control. If the Company is not
able to meet such requirements, it may be required to seek additional
financing. There can be no assurance that the Company will be able to obtain
financing from other sources on terms acceptable to the Company, if at all. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk. Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk in the Companys Annual Report on Form 10-K for
the fiscal year ended September 30, 2003. There have been no material changes
in the quarter ended March 31, 2004. 
 Item 4. Controls and Procedures. An evaluation was performed under the supervision and with the participation of
the Companys management, including the Chief Executive Officer (CEO) and
Principal Financial Officer (CFO), of the effectiveness of the design and
operation of the Companys disclosure controls and procedures within 90 days of
the filing date of this quarterly report on Form 10-Q. Based on those
evaluations, the Companys management, including the CEO and CFO, concluded
that the Companys disclosure controls and procedures were
effective. There has been no change in the Company's internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) that occurred during the Company's fiscal
quarter ended March 31, 2004, that has materially affected, or is
reasonably likely to materially affect, the Company's internal
control over financial reporting. 30




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings. The Company is a party to various legal proceedings and administrative actions,
which arise in the ordinary course of business, except as noted below. In the
opinion of the Companys management, such proceedings and actions should not,
individually or in the aggregate, have a material adverse effect on the
Companys results of operations, financial conditions or cash flows. 
 Item 2. Changes in Securities and Use of Proceeds. None 
 Item 3. Defaults Upon Senior Securities. None 
 Item 4. Submission of Matters to a Vote of Security Holders. None 
 Item 5. Other Information. None 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits  10.01
    
    Second Amended and Restated Stock Option Bonus Plan*  10.02
    
    First Amendment to Second Amended and Restated Stock Option Bonus Plan*10.03
    
    First Amendment to Cooperative Computing Holding Company, Inc. 1998 Stock Option
Plan*10.04
    
    First Amendment to Cooperative Computing Holding Company,
Inc. Amended and Restated
2000 Stock Option Plan for Key Employees*10.05
    
    First Amendment to Cooperative Computing Holding Company, Inc. 2001 Broad-Based Stock Option Plan*31.1
    
    Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Michael A. Aviles.*31.2
    
    Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Greg Petersen.*32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 by Michael A. Aviles.*32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 by Greg Petersen.*  (b)
    
    Reports on Form 8-KNo reports on Form 8-K have been filed during the three months
ended March 31, 2004.    31




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##### Table of Contents



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, on the 17th day of May 2004. ACTIVANT SOLUTIONS INC.By:
    /s/ GREG PETERSENGreg PetersenSenior Vice President and Chief Financial Officer 32