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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2009
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 333-49389
 Activant Solutions Inc.
  Delaware
    
    94-2160013(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)7683 Southfront RoadLivermore, CA
    
    94551(Address of principal executive offices)
    
    (Zip Code)
 (925) 449-0606
 o þ
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding at February 9, 2010Common Stock, par value $0.01 per share
    
    10 shares




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##### 



ACTIVANT SOLUTIONS INC.
 REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2009
 INDEX
 PageForward-Looking Statements
    
    
    2PART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2009 and September 30, 2009
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three
Months Ended December 31, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2009
and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    33PART II  OTHER INFORMATION
    
    
    34Item 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    35SIGNATURE
    
    
    36EXHIBIT INDEX
    
    
    37EX-10.1EX-10.2EX-10.3EX-31.1EX-31.2EX-32.1EX-32.2




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
    
    the negative effect of the current credit crisis and unfavorable market conditions on
our customers and on our business;
    
    the financial crisis in the U.S. and global capital and credit markets;
    
    our substantial indebtedness and our ability to incur additional indebtedness;
    
    certain covenants in our debt documents, including covenants that require us to satisfy
a maximum total leverage ratio and a minimum interest coverage ratio;
    
    failure to anticipate or respond to our customers needs and requirements;
    
    failure of our proprietary technology to support our customers future needs or it
becoming obsolete;
    
    failure to develop new relationships and maintain existing relationships with well-known
market participants and/or key customers and/or loss of significant customer revenues;
    
    shortage or delays in the receipt of equipment or hardware necessary to develop our
business management solutions and systems;
    
    failure to maintain adequate financial and management processes and controls;
    
    loss of recurring subscription service revenues;
    
    failure to integrate and retain our senior management personnel;
    
    failure of our Activant Eagle and Vision products to gain acceptance within the
automotive parts aftermarket;
    
    costs and difficulties of integrating current and future acquisitions;
    
    the amount of any additional impairment charges, including to goodwill, due to the
continuing global economic uncertainty and credit crisis;
    
    changes in the manner or basis on which we receive third-party information used to
maintain our electronic automotive parts and applications catalog;
    
    failure by certain of our existing customers to upgrade to our current generation of
systems;
    
    failure to effectively compete;
    
    substantial fluctuations in our sales cycles applicable to our systems sales;
    
    consolidation trends, attrition, migration to competitors products and reductions in
support levels among our customers and in the market segments in which we operate;
    
    failure to adequately protect our proprietary rights and intellectual property or
limitations on the availability of legal or technical means of effecting such protection;
    
    claims by third parties that we are infringing on their proprietary rights or other
adverse claims;
    
    defects or errors in our software or information services;
    
    failure to obtain software and information we license from third parties;
    
    interruptions of our connectivity applications and our systems;
    
    claims for damages against us in the event of a failure of our customers systems;
    
    fluctuations in the value of foreign currencies;
    
    natural disasters, terrorist attacks or other catastrophic events;
    
    differing interests of debt security holders and our controlling stockholders or
investors; and
    
    the other factors described under the heading Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2009.
  2




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PART I  FINANCIAL INFORMATION
 
 Item 1  Financial Statements
 ACTIVANT SOLUTIONS INC.


CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 December 31,
    
    
    September 30,(in thousands, except share data)
    
    2009
    
    
    2009ASSETS:Current assets:Cash and cash equivalents
    
    $
    32,317
    
    
    $
    44,573Trade accounts receivable, net of allowance
for doubtful accounts of $4,505 at December
31, 2009 and $4,621 at September 30, 2009
    
    
    34,112
    
    
    
    34,412Inventories
    
    
    6,198
    
    
    
    4,985Deferred income taxes
    
    
    2,653
    
    
    
    4,285Prepaid expenses and other current assets
    
    
    6,838
    
    
    
    5,524Total current assets
    
    
    82,118
    
    
    
    93,779Property and equipment, net
    
    
    5,790
    
    
    
    6,073Intangible assets, net
    
    
    186,579
    
    
    
    192,394Goodwill
    
    
    543,718
    
    
    
    543,718Deferred financing costs
    
    
    8,351
    
    
    
    8,903Other assets
    
    
    3,905
    
    
    
    3,217Total assets
    
    $
    830,461
    
    
    $
    848,084LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Accounts payable
    
    $
    19,700
    
    
    $
    18,030Payroll related accruals
    
    
    15,349
    
    
    
    17,787Deferred revenue
    
    
    33,157
    
    
    
    31,654Current portion of long-term debt
    
    
    
    
    
    
    5,886Accrued expenses and other current liabilities
    
    
    12,079
    
    
    
    18,162Total current liabilities
    
    
    80,285
    
    
    
    91,519Long-term debt, net of discount
    
    
    506,895
    
    
    
    517,009Deferred tax liabilities
    
    
    51,896
    
    
    
    53,837Other liabilities
    
    
    18,131
    
    
    
    19,189Total liabilities
    
    
    657,207
    
    
    
    681,554Commitments and contingencies
    
    
    
    
    
    
    Common Stock:Par value $0.01, authorized 1,000 shares, 10
shares issued and outstanding at December
31, 2009 and September 30, 2009
    
    
    
    
    
    
    Additional paid-in capital
    
    
    258,568
    
    
    
    257,570Accumulated deficit
    
    
    (76,158
    )
    
    
    (80,680
    )Other accumulated comprehensive loss:Unrealized loss on cash flow hedges
    
    
    (7,407
    )
    
    
    (8,593
    )Cumulative translation adjustment
    
    
    (1,749
    )
    
    
    (1,767
    )Total stockholders equity
    
    
    173,254
    
    
    
    166,530Total liabilities and stockholders equity
    
    $
    830,461
    
    
    $
    848,084
  3




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ACTIVANT SOLUTIONS INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 Three Months EndedDecember 31,(in thousands)
    
    2009
    
    
    2008Revenues:Systems
    
    $
    28,752
    
    
    $
    33,532Services
    
    
    62,847
    
    
    
    62,734Total revenues
    
    
    91,599
    
    
    
    96,266Cost of revenues (exclusive of depreciation
and amortization of $4.4 million and $4.5
million for the three months ended December
31, 2009 and 2008, respectively, included in
amounts shown separately below):Systems (Note 7)
    
    
    15,516
    
    
    
    17,822Services (Note 7)
    
    
    19,992
    
    
    
    22,005Total cost of revenues
    
    
    35,508
    
    
    
    39,827Gross profit
    
    
    56,091
    
    
    
    56,439Operating expenses:Sales and marketing (Note 7)
    
    
    14,794
    
    
    
    15,319Product development (Note 7)
    
    
    9,084
    
    
    
    9,999General and administrative (Note 7)
    
    
    6,218
    
    
    
    5,730Depreciation and amortization
    
    
    9,562
    
    
    
    9,705Impairment of goodwill
    
    
    
    
    
    
    25,000Acquisition related costs
    
    
    
    
    
    
    176Restructuring costs
    
    
    910
    
    
    
    1,758Total operating expenses
    
    
    40,568
    
    
    
    67,687Operating income (loss)
    
    
    15,523
    
    
    
    (11,248
    )Interest expense
    
    
    (7,919
    )
    
    
    (12,988
    )Other income (expense), net
    
    
    289
    
    
    
    (329
    )Income (loss) before income taxes
    
    
    7,893
    
    
    
    (24,565
    )Income tax expense
    
    
    3,371
    
    
    
    236Net income (loss)
    
    $
    4,522
    
    
    $
    (24,801
    )Comprehensive income (loss):Net income (loss)
    
    $
    4,522
    
    
    $
    (24,801
    )Unrealized gain (loss) on cash flow hedges
    
    
    1,186
    
    
    
    (4,709
    )Foreign currency translation adjustment
    
    
    18
    
    
    
    (1,665
    )Comprehensive income (loss)
    
    $
    5,726
    
    
    $
    (31,175
    )
  4




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ACTIVANT SOLUTIONS INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three Months EndedDecember 31,(in thousands)
    
    2009
    
    
    2008Operating activities:Net income (loss)
    
    $
    4,522
    
    
    $
    (24,801
    )Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Impairment of goodwill
    
    
    
    
    
    
    25,000Stock-based compensation expense
    
    
    998
    
    
    
    1,063Depreciation
    
    
    1,151
    
    
    
    1,445Amortization of intangible assets
    
    
    8,411
    
    
    
    8,260Amortization of deferred financing costs
    
    
    552
    
    
    
    618Provision for doubtful accounts
    
    
    325
    
    
    
    193Deferred income taxes
    
    
    (309
    )
    
    
    (5,631
    )Changes in assets and liabilities:Trade accounts receivable
    
    
    (25
    )
    
    
    (1,245
    )Inventories
    
    
    (1,213
    )
    
    
    212Prepaid expenses and other assets
    
    
    (2,002
    )
    
    
    2,018Accounts payable
    
    
    1,670
    
    
    
    (587
    )Deferred revenue
    
    
    1,503
    
    
    
    775Accrued expenses and other
    
    
    (8,392
    )
    
    
    1,289Net cash provided by operating activities
    
    
    7,191
    
    
    
    8,609Investing activities:Purchases of property and equipment
    
    
    (853
    )
    
    
    (488
    )Capitalized computer software and database costs
    
    
    (2,594
    )
    
    
    (1,905
    )Net cash used in investing activities
    
    
    (3,447
    )
    
    
    (2,393
    )Financing activities:Repurchases of common stock
    
    
    
    
    
    
    (14
    )Payments on long-term debt
    
    
    (16,000
    )
    
    
    (3,512
    )Net cash used in financing activities
    
    
    (16,000
    )
    
    
    (3,526
    )Net change in cash and cash equivalents
    
    
    (12,256
    )
    
    
    2,690Cash and cash equivalents, beginning of period
    
    
    44,573
    
    
    
    64,789Cash and cash equivalents, end of period
    
    $
    32,317
    
    
    $
    67,479Supplemental disclosures of cash flow informationCash paid during the period for interest
    
    $
    9,679
    
    
    $
    14,901Cash paid during the period for income taxes
    
    $
    6,562
    
    
    $
    620Cash received during the period for income taxes
    
    $
    (127
    )
    
    $
    (14
    )
  5




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ACTIVANT SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
(UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION
     NOTE 2  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
     6




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NOTE 3  GOODWILL
 (in thousands)
 Retail Distribution Group
    
    $
    207,166Wholesale Distribution
    
    
    334,288Other
    
    
    2,264Total
    
    $
    543,718
   NOTE 4  DEBT
 (in thousands)
 December 31,
    
    
    September 30,2009
    
    
    2009Senior secured credit facility due 2013
    
    $
    326,241
    
    
    $
    331,227Senior secured credit facility
(incremental term loan) due 2013
    
    
    66,359
    
    
    
    67,373Senior subordinated notes due 2016
    
    
    114,295
    
    
    
    114,295Revolving credit facility due 2011
    
    
    
    
    
    
    10,000Total debt
    
    
    506,895
    
    
    
    522,895Current portion
    
    
    
    
    
    
    (5,886
    )Total long-term debt, net of discount
    
    $
    506,895
    
    
    $
    517,009
 Senior Secured Credit Agreement
  7




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
    
    under the term loan, 1.00% with respect to base rate borrowings and 2.00% with respect to
Eurodollar rate borrowings;
 
    
    under the incremental term loan, 1.50% with respect to base rate borrowings and 2.50% with
respect to Eurodollar rate borrowings; and
 
    
    under the revolving credit facility, 1.00% with respect to base rate borrowings and 2.00%
with respect to Eurodollar rate borrowings, which may be reduced subject to our attainment of
certain leverage ratios.
   Derivative Instruments and Hedging Activities
  8




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(in thousands)
 Unrealized loss in OCI at September 30, 2009
    
    $
    (13,723
    )Net increase in fair value
    
    
    1,825Unrealized loss in OCI at December 31, 2009
    
    $
    (11,898
    )
 (in thousands)
 Fair Value of Derivative InstrumentsDerivative Assets
    
    Derivative LiabilitiesLocation in the
    
    
    
    
    
    Location in theCondensed
    
    
    
    
    
    CondensedConsolidated
    
    
    
    
    
    ConsolidatedNotional Amount
    
    Balance Sheet
    
    Fair Value
    
    Balance Sheet
    
    Fair ValueInterest rate swaps due November 2011
    
    $
    140,000
    
    
    Other assets
    
    $
    
    
    
    Other liabilities
    
    $
    (11,898
    )
 Effect of Derivative Instruments on Condensed Consolidated Statements of Operations and OCIGain recognized
    
    Gain/(Loss) reclassified from OCI intoLoss recognized in earnings (1)
    
    in OCI
    
    earnings (2)Location
    
    Amount
    
    Amount
    
    Location
    
    AmountInterest rate swaps
    
    Interest expense
    
    $
    (2,029
    )
    
    $
    1,825
    
    
    Interest expense
    
    $
    
 
 (1)
    
    Includes amounts related to periodic settlements required under our derivative
contracts.(2)
    
    Represents ineffectiveness related to the interest rate swaps. Senior Subordinated Notes due 2016
    9




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NOTE 5  FAIR VALUE
   
    
    Level 1  uses quoted prices in active markets for identical assets or liabilities we
have the ability to access.
    
    Level 2  uses observable inputs other than quoted prices in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data.
    
    Level 3  uses one or more significant inputs that are unobservable and supported by
little or no market activity, and that reflect the use of significant management judgment
   10




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(in
thousands)
 Quoted Prices in Active
    
    
    Significant Other
    
    
    SignificantMarkets for Identical
    
    
    Observable
    
    
    UnobservableAssets and Liabilities
    
    
    Inputs
    
    
    Inputs
    
    
    Total(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Fair ValueAssets:Cash equivalents (1)
    
    $
    15,658
    
    
    $
    
    
    
    $
    
    
    
    $
    15,658Deferred compensation plan assets (2)
    
    
    2,472
    
    
    
    
    
    
    
    
    
    
    
    2,472Liabilities:Interest rate swap due 2011(3)
    
    
    
    
    
    
    (11,898
    )
    
    
    
    
    
    
    (11,898
    )Deferred compensation plan liabilities(3)
    
    
    (1,926
    )
    
    
    
    
    
    
    
    
    
    
    (1,926
    )Total
    
    $
    16,204
    
    
    $
    (11,898
    )
    
    $
    
    
    
    $
    4,306
 
 (1)
    
    Included in cash and cash equivalents in our condensed consolidated balance sheet.(2)
    
    Included in other assets in our condensed consolidated balance sheet.(3)
    
    Included in other liabilities in our condensed consolidated balance sheet. Other Financial Assets and Liabilities
   NOTE 6  INCOME TAXES
    11




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NOTE 7  EMPLOYEE STOCK PLANS
 Stock-based Compensation Expense
 (in thousands)
 Three Months EndedDecember 31,2009
    
    
    2008Cost of revenuesSystems
    
    $
    8
    
    
    $
    10Services
    
    
    61
    
    
    
    49Operating expensesSales and marketing
    
    
    366
    
    
    
    228Product development
    
    
    77
    
    
    
    76General and administrative
    
    
    486
    
    
    
    700Total
    
    $
    998
    
    
    $
    1,063
  Valuation Assumptions
   Three Months Ended December 31,2009
    
    2008Expected term
    
    
    6.66
    years
    
    
    6.66
    yearsExpected volatility
    
    
    55.00
    %
    
    
    72.00
    %Expected dividends
    
    
    0.00
    %
    
    
    0.00
    %Risk-free rate
    
    
    2.69
    %
    
    
    1.55
    %
  NOTE 8  RESTRUCTURING COSTS
  12




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(in thousands)
 Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atSeptember 30,
    
    
    Restructuring
    
    
    
    
    
    
    December 31,2009
    
    
    Charges
    
    
    Payments
    
    
    20092010 Actions  Severance and Related Benefits
    
    $
    
    
    
    $
    721
    
    
    $
    (231
    )
    
    $
    4902010 Actions  Facility Closings
    
    
    
    
    
    
    168
    
    
    
    (11
    )
    
    
    1572009 Actions  Severance and Related Benefits
    
    
    30
    
    
    
    
    
    
    
    (15
    )
    
    
    152009 Actions  Facility Closings
    
    
    812
    
    
    
    21
    
    
    
    (167
    )
    
    
    6662008 Actions  Severance and Related Benefits
    
    
    45
    
    
    
    
    
    
    
    (17
    )
    
    
    28$
    887
    
    
    $
    910
    
    
    $
    (441
    )
    
    $
    1,356
 NOTE 9  SEGMENT REPORTING
    
    
    Retail Distribution Group segment The retail distribution
vertical market consists of independent hardware retailers; home improvement centers;
paint, glass and wallpaper stores; farm supply stores; retail nurseries and garden centers;
independent lumber and building material dealers; pharmacies; and other specialty
retailers, primarily in the United States, as well as customers involved in the
manufacture, distribution, sale and installation of new and remanufactured parts used in
the maintenance and repair of automobiles and light trucks; and includes manufacturers,
warehouse distributors, parts stores, professional installers in North America, the United
Kingdom and Ireland, as well as several chains in North America.
    
    Wholesale Distribution segment The wholesale distribution
vertical market consists of distributors of a range of products including electrical
supply; plumbing; medical supply; heating and air conditioning; tile; industrial machinery
and equipment; industrial supplies; fluid power; janitorial and sanitation products; paper
and packaging; and service establishment equipment vendors, primarily in the United States.
    
    Other Other primarily consists of our productivity tools
business, which is involved with software migration services and application development
tools.
 13




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Segment Revenue and Contribution Margin
   (in thousands)
 Three Months Ended December 31, 2009
    
    Three Months Ended December 31, 2008Retail
    
    
    
    
    
    
    
    
    
    
    
    
    
    RetailDistribution
    
    Wholesale
    
    
    
    
    
    
    
    
    
    Distribution
    
    WholesaleGroup
    
    Distribution
    
    Other
    
    Total
    
    Group
    
    Distribution
    
    Other
    
    TotalRevenues
    
    $
    52,075
    
    
    $
    36,049
    
    
    $
    3,475
    
    
    $
    91,599
    
    
    $
    53,912
    
    
    $
    38,399
    
    
    $
    3,955
    
    
    $
    96,266Contribution margin
    
    $
    16,309
    
    
    $
    15,123
    
    
    $
    1,525
    
    
    $
    32,957
    
    
    $
    15,687
    
    
    $
    14,408
    
    
    $
    1,921
    
    
    $
    32,016
    (in thousands)
 Three Months Ended December 31,2009
    
    
    2008Segment contribution margin
    
    $
    32,957
    
    
    $
    32,016Corporate and unallocated costs
    
    
    (5,964
    )
    
    
    (5,562
    )Stock-based compensation expense
    
    
    (998
    )
    
    
    (1,063
    )Depreciation and amortization
    
    
    (9,562
    )
    
    
    (9,705
    )Impairment of goodwill
    
    
    
    
    
    
    (25,000
    )Acquisition related costs
    
    
    
    
    
    
    (176
    )Restructuring costs
    
    
    (910
    )
    
    
    (1,758
    )Interest expense
    
    
    (7,919
    )
    
    
    (12,988
    )Other income (expense), net
    
    
    289
    
    
    
    (329
    )Income (loss) before income taxes
    
    $
    7,893
    
    
    $
    (24,565
    )
 14




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NOTE 10  GUARANTOR CONSOLIDATION
  Condensed Consolidating Balance Sheet as of December 31, 2009
 GuarantorPrincipal
    
    
    
    
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETS:Current assets:Cash and cash equivalents
    
    $
    28,625
    
    
    $
    365
    
    
    $
    3,327
    
    
    $
    
    
    
    $
    32,317Trade accounts receivable, net of allowance for
doubtful accounts
    
    
    16,803
    
    
    
    14,023
    
    
    
    3,286
    
    
    
    
    
    
    
    34,112Inventories
    
    
    4,764
    
    
    
    1,168
    
    
    
    266
    
    
    
    
    
    
    
    6,198Deferred income taxes
    
    
    1,779
    
    
    
    845
    
    
    
    29
    
    
    
    
    
    
    
    2,653Prepaid expenses and other current assets
    
    
    5,915
    
    
    
    650
    
    
    
    273
    
    
    
    
    
    
    
    6,838Total current assets
    
    
    57,886
    
    
    
    17,051
    
    
    
    7,181
    
    
    
    
    
    
    
    82,118Property and equipment, net
    
    
    5,087
    
    
    
    519
    
    
    
    184
    
    
    
    
    
    
    
    5,790Intangible assets, net
    
    
    163,662
    
    
    
    21,440
    
    
    
    1,477
    
    
    
    
    
    
    
    186,579Goodwill
    
    
    448,840
    
    
    
    91,956
    
    
    
    (3,115
    )
    
    
    6,037
    
    
    
    543,718Investments in subsidiaries
    
    
    16,769
    
    
    
    
    
    
    
    
    
    
    
    (16,769
    )
    
    
    Intercompany receivables (payables)
    
    
    (88,338
    )
    
    
    93,239
    
    
    
    (4,901
    )
    
    
    
    
    
    
    Deferred financing costs
    
    
    8,351
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,351Other assets
    
    
    3,706
    
    
    
    181
    
    
    
    18
    
    
    
    
    
    
    
    3,905Total assets
    
    $
    615,963
    
    
    $
    224,386
    
    
    $
    844
    
    
    $
    (10,732
    )
    
    $
    830,461LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    18,320
    
    
    $
    1,492
    
    
    $
    (112
    )
    
    $
    
    
    
    $
    19,700Payroll related accruals
    
    
    2,829
    
    
    
    10,941
    
    
    
    1,579
    
    
    
    
    
    
    
    15,349Deferred revenue
    
    
    10,520
    
    
    
    19,712
    
    
    
    2,925
    
    
    
    
    
    
    
    33,157Accrued expenses and other current liabilities
    
    
    11,977
    
    
    
    974
    
    
    
    (872
    )
    
    
    
    
    
    
    12,079Total current liabilities
    
    
    43,646
    
    
    
    33,119
    
    
    
    3,520
    
    
    
    
    
    
    
    80,285Long-term debt
    
    
    506,895
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    506,895Deferred tax and other liabilities
    
    
    75,920
    
    
    
    (3,055
    )
    
    
    (2,838
    )
    
    
    
    
    
    
    70,027Total liabilities
    
    
    626,461
    
    
    
    30,064
    
    
    
    682
    
    
    
    
    
    
    
    657,207Total stockholders equity (deficit)
    
    
    (10,498
    )
    
    
    194,322
    
    
    
    162
    
    
    
    (10,732
    )
    
    
    173,254Total liabilities and stockholders equity
(deficit)
    
    $
    615,963
    
    
    $
    224,386
    
    
    $
    844
    
    
    $
    (10,732
    )
    
    $
    830,461
 15




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##### Table of Contents



Condensed Consolidating Balance Sheet as of September 30, 2009
 GuarantorPrincipal
    
    
    
    
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETS:Current assets:Cash and cash equivalents
    
    $
    42,001
    
    
    $
    215
    
    
    $
    2,357
    
    
    $
    
    
    
    $
    44,573Trade accounts receivable, net of allowance for
doubtful accounts
    
    
    16,811
    
    
    
    14,383
    
    
    
    3,218
    
    
    
    
    
    
    
    34,412Inventories
    
    
    3,576
    
    
    
    1,185
    
    
    
    224
    
    
    
    
    
    
    
    4,985Deferred income taxes
    
    
    3,057
    
    
    
    1,217
    
    
    
    11
    
    
    
    
    
    
    
    4,285Prepaid expenses and other current assets
    
    
    4,935
    
    
    
    454
    
    
    
    135
    
    
    
    
    
    
    
    5,524Total current assets
    
    
    70,380
    
    
    
    17,454
    
    
    
    5,945
    
    
    
    
    
    
    
    93,779Property and equipment, net
    
    
    5,347
    
    
    
    518
    
    
    
    208
    
    
    
    
    
    
    
    6,073Intangible assets, net
    
    
    167,675
    
    
    
    23,134
    
    
    
    1,585
    
    
    
    
    
    
    
    192,394Goodwill
    
    
    448,840
    
    
    
    91,956
    
    
    
    (3,115
    )
    
    
    6,037
    
    
    
    543,718Investments in subsidiaries
    
    
    16,769
    
    
    
    
    
    
    
    
    
    
    
    (16,769
    )
    
    
    Intercompany receivables (payables)
    
    
    (89,248
    )
    
    
    99,035
    
    
    
    (9,787
    )
    
    
    
    
    
    
    Deferred financing costs
    
    
    8,903
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,903Other assets
    
    
    3,036
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    3,217Total assets
    
    $
    631,702
    
    
    $
    232,278
    
    
    $
    (5,164
    )
    
    $
    (10,732
    )
    
    $
    848,084LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    16,456
    
    
    $
    1,635
    
    
    $
    (61
    )
    
    $
    
    
    
    $
    18,030Payroll related accruals
    
    
    (13,401
    )
    
    
    29,850
    
    
    
    1,338
    
    
    
    
    
    
    
    17,787Deferred revenue
    
    
    9,142
    
    
    
    20,021
    
    
    
    2,491
    
    
    
    
    
    
    
    31,654Current portion of long-term debt
    
    
    5,886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,886Accrued expenses and other current liabilities
    
    
    18,650
    
    
    
    1,177
    
    
    
    (1,665
    )
    
    
    
    
    
    
    18,162Total current liabilities
    
    
    36,733
    
    
    
    52,683
    
    
    
    2,103
    
    
    
    
    
    
    
    91,519Long-term debt
    
    
    517,009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    517,009Deferred tax and other liabilities
    
    
    78,895
    
    
    
    (2,723
    )
    
    
    (3,146
    )
    
    
    
    
    
    
    73,026Total liabilities
    
    
    632,637
    
    
    
    49,960
    
    
    
    (1,043
    )
    
    
    
    
    
    
    681,554Total stockholders equity (deficit)
    
    
    (935
    )
    
    
    182,318
    
    
    
    (4,121
    )
    
    
    (10,732
    )
    
    
    166,530Total liabilities and stockholders equity
(deficit)
    
    $
    631,702
    
    
    $
    232,278
    
    
    $
    (5,164
    )
    
    $
    (10,732
    )
    
    $
    848,084
 16




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##### Table of Contents



Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2009
 GuarantorPrincipal
    
    
    
    
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Systems
    
    $
    17,017
    
    
    $
    10,605
    
    
    $
    1,130
    
    
    $
    
    
    
    $
    28,752Services
    
    
    34,358
    
    
    
    24,611
    
    
    
    3,878
    
    
    
    
    
    
    
    62,847Total revenues
    
    
    51,375
    
    
    
    35,216
    
    
    
    5,008
    
    
    
    
    
    
    
    91,599Cost of revenues:Systems
    
    
    9,121
    
    
    
    5,170
    
    
    
    1,225
    
    
    
    
    
    
    
    15,516Services
    
    
    12,537
    
    
    
    5,602
    
    
    
    1,853
    
    
    
    
    
    
    
    19,992Total cost of revenues
    
    
    21,658
    
    
    
    10,772
    
    
    
    3,078
    
    
    
    
    
    
    
    35,508Gross profit
    
    
    29,717
    
    
    
    24,444
    
    
    
    1,930
    
    
    
    
    
    
    
    56,091Operating expenses:Sales and marketing
    
    
    8,392
    
    
    
    5,111
    
    
    
    1,291
    
    
    
    
    
    
    
    14,794Product development
    
    
    3,695
    
    
    
    4,664
    
    
    
    725
    
    
    
    
    
    
    
    9,084General and administrative
    
    
    5,693
    
    
    
    352
    
    
    
    173
    
    
    
    
    
    
    
    6,218Depreciation and amortization
    
    
    7,659
    
    
    
    1,752
    
    
    
    151
    
    
    
    
    
    
    
    9,562Restructuring costs
    
    
    277
    
    
    
    89
    
    
    
    544
    
    
    
    
    
    
    
    910Total operating expenses
    
    
    25,716
    
    
    
    11,968
    
    
    
    2,884
    
    
    
    
    
    
    
    40,568Operating income (loss)
    
    
    4,001
    
    
    
    12,476
    
    
    
    (954
    )
    
    
    
    
    
    
    15,523Interest expense
    
    
    (7,915
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (7,919
    )Other income (expense), net
    
    
    (5,655
    )
    
    
    83
    
    
    
    5,861
    
    
    
    
    
    
    
    289Income (loss) before income taxes
    
    
    (9,569
    )
    
    
    12,555
    
    
    
    4,907
    
    
    
    
    
    
    
    7,893Income tax expense
    
    
    2,202
    
    
    
    551
    
    
    
    618
    
    
    
    
    
    
    
    3,371Net income (loss)
    
    $
    (11,771
    )
    
    $
    12,004
    
    
    $
    4,289
    
    
    $
    
    
    
    $
    4,522
 17




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##### Table of Contents



Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2008
 GuarantorPrincipal
    
    
    
    
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Systems
    
    $
    18,012
    
    
    $
    13,740
    
    
    $
    1,780
    
    
    $
    
    
    
    $
    33,532Services
    
    
    34,766
    
    
    
    23,999
    
    
    
    3,969
    
    
    
    
    
    
    
    62,734Total revenues
    
    
    52,778
    
    
    
    37,739
    
    
    
    5,749
    
    
    
    
    
    
    
    96,266Cost of revenues:Systems
    
    
    10,093
    
    
    
    6,420
    
    
    
    1,309
    
    
    
    
    
    
    
    17,822Services
    
    
    13,828
    
    
    
    6,642
    
    
    
    1,535
    
    
    
    
    
    
    
    22,005Total cost of revenues
    
    
    23,921
    
    
    
    13,062
    
    
    
    2,844
    
    
    
    
    
    
    
    39,827Gross profit
    
    
    28,857
    
    
    
    24,677
    
    
    
    2,905
    
    
    
    
    
    
    
    56,439Operating expenses:Sales and marketing
    
    
    8,737
    
    
    
    5,578
    
    
    
    1,004
    
    
    
    
    
    
    
    15,319Product development
    
    
    4,121
    
    
    
    5,204
    
    
    
    674
    
    
    
    
    
    
    
    9,999General and administrative
    
    
    5,058
    
    
    
    390
    
    
    
    282
    
    
    
    
    
    
    
    5,730Depreciation and amortization
    
    
    7,708
    
    
    
    1,821
    
    
    
    176
    
    
    
    
    
    
    
    9,705Impairment of goodwill
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000Acquisition related costs
    
    
    41
    
    
    
    33
    
    
    
    102
    
    
    
    
    
    
    
    176Restructuring costs
    
    
    923
    
    
    
    53
    
    
    
    782
    
    
    
    
    
    
    
    1,758Total operating expenses
    
    
    51,588
    
    
    
    13,079
    
    
    
    3,020
    
    
    
    
    
    
    
    67,687Operating income (loss)
    
    
    (22,731
    )
    
    
    11,598
    
    
    
    (115
    )
    
    
    
    
    
    
    (11,248
    )Interest expense
    
    
    (12,983
    )
    
    
    (4
    )
    
    
    (1
    )
    
    
    
    
    
    
    (12,988
    )Other expense, net
    
    
    (217
    )
    
    
    (46
    )
    
    
    (66
    )
    
    
    
    
    
    
    (329
    )Income (loss) before income taxes
    
    
    (35,931
    )
    
    
    11,548
    
    
    
    (182
    )
    
    
    
    
    
    
    (24,565
    )Income tax expense
    
    
    230
    
    
    
    1
    
    
    
    5
    
    
    
    
    
    
    
    236Net income (loss)
    
    $
    (36,161
    )
    
    $
    11,547
    
    
    $
    (187
    )
    
    $
    
    
    
    $
    (24,801
    )
 18




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2009
 GuarantorPrincipal
    
    
    
    
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    6,003
    
    
    $
    211
    
    
    $
    977
    
    
    $
    
    
    
    $
    7,191Investing activities:Purchase of property and equipment
    
    
    (785
    )
    
    
    (61
    )
    
    
    (7
    )
    
    
    
    
    
    
    (853
    )Capitalized computer software costs and
databases
    
    
    (2,594
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,594
    )Net cash used in investing activities
    
    
    (3,379
    )
    
    
    (61
    )
    
    
    (7
    )
    
    
    
    
    
    
    (3,447
    )Financing activities:Payment on long-term debt
    
    
    (16,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,000
    )Net cash used in financing activities
    
    
    (16,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,000
    )Net change in cash and cash equivalents
    
    
    (13,376
    )
    
    
    150
    
    
    
    970
    
    
    
    
    
    
    
    (12,256
    )Cash and cash equivalents, beginning of
period
    
    
    42,001
    
    
    
    215
    
    
    
    2,357
    
    
    
    
    
    
    
    44,573Cash and cash equivalents, end of
period
    
    $
    28,625
    
    
    $
    365
    
    
    $
    3,327
    
    
    $
    
    
    
    $
    32,317
 Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2008
 GuarantorPrincipal
    
    
    
    
    
    
    Non-Guarantor(in thousands)
    
    Operations
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in) operating
activities
    
    $
    10,063
    
    
    $
    (2,149
    )
    
    $
    695
    
    
    $
    
    
    
    $
    8,609Investing activities:Purchase of property and equipment
    
    
    (488
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (488
    )Capitalized computer software costs and
databases
    
    
    (1,905
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,905
    )Net cash used in investing activities
    
    
    (2,393
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,393
    )Financing activities:Payment on long-term debt
    
    
    (3,512
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,512
    )Repurchase of Activant Group common stock
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )Net cash used in financing activities
    
    
    (3,526
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,526
    )Net change in cash and cash equivalents
    
    
    4,144
    
    
    
    (2,149
    )
    
    
    695
    
    
    
    
    
    
    
    2,690Cash and cash equivalents, beginning of
period
    
    
    55,926
    
    
    
    2,931
    
    
    
    5,932
    
    
    
    
    
    
    
    64,789Cash and cash equivalents, end of
period
    
    $
    60,070
    
    
    $
    782
    
    
    $
    6,627
    
    
    $
    
    
    
    $
    67,479
 19




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##### Table of Contents



Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 You should read the following discussion and analysis in conjunction with our financial
statements and related notes included above. This discussion contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of a variety of factors,
including those set forth under Part I, Item 1A  Risk Factors included in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2009.
 Overview
    §
    
    The retail distribution market consists of a range of specialty retail and distribution
vertical markets, primarily in the United States, including independent hardware retailers;
home improvement centers; paint, glass and wallpaper stores; farm supply stores; retail
nurseries and garden centers; independent lumber and building material dealers; pharmacies;
and other specialty retailers, and includes manufacturers, warehouse distributors, parts
stores, professional installers in North America, the United Kingdom and Ireland, as well
as several chains in North America. For the three months ended December 31, 2009, we
generated approximately 56.9% of our total revenues from the retail distribution vertical
market.§
    
    The wholesale distribution market consists of a range of distributors including
electrical supply; plumbing; medical supply; heating and air conditioning; tile; industrial
machinery and equipment; industrial supplies; fluid power; janitorial and sanitation
products; paper and packaging; and service establishment equipment vendors, primarily in
the United States. For the three months ended December 31, 2009, we generated
approximately 39.3% of our total revenues from the wholesale distribution vertical market.§
    
    Other primarily consists of our productivity tools business, which is involved with
software migration services and application development tools. For the three months ended
December 31, 2009, we generated approximately 3.8% of our total revenues from other.
  
    
    Systems, which is comprised primarily of proprietary software applications, professional
services, training, and third-party software and which may include hardware and peripherals
and forms.
    
    Services, which is comprised primarily of product support, content, and supply chain
services. Product support services are comprised of customer support activities, including
software, hardware and network support through our help desk, software updates, preventive
and remedial on-site maintenance and depot repair services. Our content services are
comprised of proprietary database and data management products such as our comprehensive
electronic automotive parts and applications catalog and point-of-sale business analysis
data. Supply chain services are comprised of connectivity
services, e-commerce, networking and security monitoring management solutions. We generally
provide our services on a subscription basis, and accordingly, revenues are generally
recurring in nature.
 20




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##### Table of Contents



Cost of Revenues
  §
    
    Cost of systems revenues and systems gross margins Cost of systems revenues
consists primarily of direct costs of software duplication, our logistics organization,
cost of hardware where applicable, salary related costs of professional services and
installation personnel, royalty payments, and allocated overhead expenses.§
    
    Cost of services revenues and services gross margins Cost of services
revenues primarily consist of material and direct labor associated with our help desk,
material and labor and production costs associated with our automotive catalog and
allocated overhead expenses. Generally, our services revenues have a higher gross margin
than our systems revenues.
  Operating Expenses
  §
    
    Sales and marketing Sales and marketing expense consists primarily of
salaries and bonuses, commissions for our sales force, stock-based compensation expense,
marketing expenses and allocated overhead expenses. Our marketing approach is to develop
strategic relationships, as well as endorsement and alliance agreements, with many of the
well-known market participants in the vertical markets that we serve. The goal of these
programs is to enhance the productivity of our sales teams and to create leveraged selling
opportunities for system sales and content and supply chain offerings.§
    
    Product development Product development expense consists primarily of
salaries and bonuses, stock-based compensation expense, outside services and allocated
overhead expenses. Our product development strategy includes development of additional
functionality for our existing products as well as developing new products for our existing
customer base and prospective new customers.§
    
    General and administrative General and administrative expense primarily
consists of salaries and bonuses, stock-based compensation expense, telecommunication
costs, facility and information technology allocations, finance, human resource and legal
services.§
    
    Depreciation and amortization Depreciation and amortization expense consists of
depreciation of our fixed assets and amortization of our intangible assets. Depreciation
and amortization are not allocated to our segments.§
    
    Impairment of Goodwill We account for goodwill and other intangibles in accordance
with the relevant authoritative principles. Business acquisitions typically result in
goodwill and other intangible assets, and the recorded values of those assets may become
impaired. The determination of the value of these intangible assets requires management to
make estimates and assumptions that affect our consolidated financial statements. Goodwill
and other intangibles are tested for impairment on an annual basis as of July 1, and
between annual tests if indicators of potential impairment exist, using a fair-value-based
approach.§
    
    Acquisition related costs Acquisition related costs primarily consist of
consulting fees and other professional services incurred in connection with systems
integration activities related to prior acquisitions. Acquisition related costs are not
allocated to our segments.§
    
    Restructuring costs Restructuring costs relate to management approved
restructuring actions to eliminate certain employee positions and to consolidate certain
excess facilities with the intent to streamline and focus our operations and more properly
align our cost structure with our projected revenue streams. Restructuring costs are not
allocated to our segments.
 21




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##### Table of Contents



Non-Operating Expenses
  §
    
    Interest expense Interest expense represents interest on our outstanding
debt as a result of our 2006 merger with Activant Solutions Holdings Inc. and prior
acquisitions.§
    
    Other income (expense), net Other income (expense), net primarily consist of interest
income, other non-income based taxes, foreign currency gains or losses and gains or losses
on marketable securities.§
    
    Income tax expense Income tax expense is based on state, federal and
foreign taxable income determined in accordance with current enacted laws and tax rates.
 General Business Conditions and Trends
    .
  Historical Results of Operations
 Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008
 Total revenues
  22




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##### Table of Contents



(in thousands)
 Three Months Ended December 31,2009
    
    
    2008
    
    
    Variance $
    
    
    Variance %Retail Distribution Group revenues:Systems
    
    $
    15,979
    
    
    $
    17,372
    
    
    $
    (1,393
    )
    
    
    (8.0
    )%Services
    
    
    36,096
    
    
    
    36,540
    
    
    
    (444
    )
    
    
    (1.2
    )%Total Retail Distribution Group revenues
    
    $
    52,075
    
    
    $
    53,912
    
    
    $
    (1,837
    )
    
    
    (3.4
    )%Wholesale Distribution revenues:Systems
    
    $
    10,661
    
    
    $
    13,740
    
    
    $
    (3,079
    )
    
    
    (22.4
    )%Services
    
    
    25,388
    
    
    
    24,659
    
    
    
    729
    
    
    
    3.0
    %Total Wholesale Distribution revenues
    
    $
    36,049
    
    
    $
    38,399
    
    
    $
    (2,350
    )
    
    
    (6.1
    )%Other revenues:Systems
    
    $
    2,112
    
    
    $
    2,420
    
    
    $
    (308
    )
    
    
    (12.7
    )%Services
    
    
    1,363
    
    
    
    1,535
    
    
    
    (172
    )
    
    
    (11.2
    )%Total Other revenues
    
    $
    3,475
    
    
    $
    3,955
    
    
    $
    (480
    )
    
    
    (12.1
    )%Total revenues:Systems
    
    $
    28,752
    
    
    $
    33,532
    
    
    $
    (4,780
    )
    
    
    (14.3
    )%Services
    
    
    62,847
    
    
    
    62,734
    
    
    
    113
    
    
    
    0.2
    %Total revenues
    
    $
    91,599
    
    
    $
    96,266
    
    
    $
    (4,667
    )
    
    
    (4.8
    )%
  §
    
    Retail Distribution Group revenues Retail Distribution Group revenues
decreased by $1.8 million, or 3.4%. The systems revenue decrease was attributed to delayed
revenue recognition on certain system sales made during the quarter, a reduction in the
volume of new system sales primarily in the automotive market as a result of our customers
exercising caution on making capital expenditures, extended customer sales cycles, and
access to credit due to the weak economy, partially offset by stronger sales of additional
products and modules. Services revenue experienced a decrease primarily as a result of
contractual price reductions, lower customer retention rates due to the global economic
downturn and known attrition of a major customer, General Parts, Inc.
 §
    
    Wholesale Distribution revenues Wholesale Distribution revenues decreased
by $2.4 million, or 6.1%. The systems revenue decrease was substantially attributable to
a reduction in the volume and lower average selling price of new system sales,
primarily due to a lagging decline due to the ongoing slowdown in the commercial,
construction and other sectors as well as extended customer sales cycles partially offset
by the sale of additional products and modules. Services revenues increased primarily as a
result of our price increases for support services partially offset by lower customer
retention rates due to the global economic downturn.
 §
    
    Other revenues Other revenues decreased $0.5 million, or 12.1%, driven
primarily by prospective customers slowing down planned system migrations due to
Hewlett-Packards continued support of one of its legacy systems.
 23




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##### Table of Contents



Total cost of revenues and gross margins as a percentage of revenues
 (in thousands)
 Three Months Ended December 31,2009
    
    2008
    
    VarianceCost of systems revenues
    
    $
    15,516
    
    
    $
    17,822
    
    
    $
    (2,306
    )Systems gross margins
    
    
    46.0
    %
    
    
    46.9
    %Cost of services revenues
    
    $
    19,992
    
    
    $
    22,005
    
    
    $
    (2,013
    )Services gross margins
    
    
    68.2
    %
    
    
    64.9
    %Total cost of revenues
    
    $
    35,508
    
    
    $
    39,827
    
    
    $
    (4,319
    )Total gross margins
    
    
    61.2
    %
    
    
    58.6
    %
 §
    
    Cost of systems revenues and systems gross margins Cost of systems
revenues decreased by $2.3 million primarily a result of lower direct costs associated with
lower overall systems revenues. System gross margins decreased by 0.9 percentage points in
the three months ended December 31, 2009 from the comparable period a year ago. The
decrease is primarily attributable to a higher mix of hardware equipment sales with lower
gross margins than our license sales.
 §
    
    Cost of services revenues and services gross margins Cost of services
revenues decreased by $2.0 million primarily a result of labor related cost reductions on
legacy platforms and reductions in third party maintenance and support costs. Services
gross margins increased by 3.3 percentage points in the three months ended December 31,
2009 from the comparable period a year ago as a result of service price increases and
reductions in labor related costs in legacy products and third party maintenance and
support costs.
 Total operating expenses
 (in thousands)
 Three Months Ended December 31,2009
    
    
    2008
    
    
    Variance $
    
    
    Variance %Sales and marketing
    
    $
    14,794
    
    
    $
    15,319
    
    
    $
    (525
    )
    
    
    (3.4
    )%Product development
    
    
    9,084
    
    
    
    9,999
    
    
    
    (915
    )
    
    
    (9.1
    )%General and administrative
    
    
    6,218
    
    
    
    5,730
    
    
    
    488
    
    
    
    8.5
    %Depreciation and amortization
    
    
    9,562
    
    
    
    9,705
    
    
    
    (143
    )
    
    
    (1.5
    )%Impairment of goodwill
    
    
    
    
    
    
    25,000
    
    
    
    (25,000
    )
    
    
    (100.0
    )%Acquisition related costs
    
    
    
    
    
    
    176
    
    
    
    (176
    )
    
    
    (100.0
    )%Restructuring costs
    
    
    910
    
    
    
    1,758
    
    
    
    (848
    )
    
    
    (48.2
    )%Total operating expenses
    
    $
    40,568
    
    
    $
    67,687
    
    
    $
    (27,119
    )
    
    
    (40.1
    )%
  §
    
    Sales and marketingSales and marketing expenses decreased by $0.5 million,
or 3.4%, for the three months ended December 31, 2009 compared to the three months ended
December 31, 2008. The decrease was primarily the result of a $0.7 million reduction in
salary related expenses and a $0.2 million reduction in travel expenses, partially offset by
a $0.5 million increase in commissions.
 §
    
    Product developmentProduct development expenses decreased $0.9 million, or
9.1%, for the three months ended December 31, 2009 compared to the three months ended
December 31, 2008. The decrease was primarily the result of a $0.4 million reduction in
salary related costs and lower software development expenses of $0.6 million as a result of
more of these costs being capitalized.
 §
    
    General and administrativeGeneral and administrative expenses increased by
$0.5 million, or 8.5%, for the three months ended December 31, 2009 compared to the three
months ended December 31, 2008. The increase is primarily the result of $0.3 million in a
one-time insurance cost reduction in the prior year, $0.3 million in bonus expense and $0.2
million in legal fees and outsourced services partially offset by $0.2 million in stock
compensation expenses and $0.1 million in relocation expenses.
 24




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##### Table of Contents



§
    
    Depreciation and amortizationDepreciation and amortization is not allocated
to our segments. Depreciation and amortization expense was $9.6 million for the three
months ended December 31, 2009 compared to $9.7 million for the three months ended December
31, 2008.
 §
    
    Acquisition related costs There were no acquisition related costs for the
three months ended December 31, 2009 compared to $0.2 million in the three months ended
December 31, 2008. The prior year costs primarily included consulting fees and other
professional services incurred in connection with systems integration activities related to
Eclipse.
 §
    
    Impairment of goodwill Due to the continuing global economic uncertainty
and credit crisis and the significant decrease in the level of overall spending, including
spending in the vertical markets that we serve, we determined it necessary to evaluate
goodwill for impairment as of December 31, 2008. We recorded a goodwill impairment charge
of $25.0 million in the Retail Distribution Group during the three months ended December
31, 2008. See Note 3 to our unaudited condensed consolidated financial statements. We had
no similar charges in the three months ended December 31, 2009.
 §
    
    Restructuring costs During fiscal years 2010 and 2009, our management
approved restructuring actions primarily related to eliminating certain employee positions
and consolidating certain excess facilities with the intent to streamline and focus our
operations and more properly align our cost structure with our projected revenue streams.
During the three months ended December 31, 2009 and 2008, we recorded restructuring charges
of approximately $0.9 million and $1.8 million, respectively. See Note 8 to our unaudited
condensed consolidated financial statements.
 Interest expense
  Other income (expense), net
  Income tax expense
  Contribution margin
   25




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(in
thousands)
 Three Months Ended December 31,2009
    
    
    2008
    
    
    Variance $
    
    
    Variance %Retail Distribution Group
    
    $
    16,309
    
    
    $
    15,687
    
    
    $
    622
    
    
    
    4.0
    %Wholesale Distribution
    
    
    15,123
    
    
    
    14,408
    
    
    
    715
    
    
    
    5.0
    %Other
    
    
    1,525
    
    
    
    1,921
    
    
    
    (396
    )
    
    
    (20.6
    )%Total contribution margin
    
    $
    32,957
    
    
    $
    32,016
    
    
    $
    941
    
    
    
    2.9
    %
 §
    
    Retail Distribution Group contribution margin The contribution margin
for Retail Distribution Group increased by $0.6 million primarily as a result of support
price increases, lower headcount related expenses and increased software and database
capitalization. Gross margins dollars declined as a result of lower systems revenues and
higher mix of hardware equipment sales, however gross margin percentage increased due to
reduced salary related expenses, improved hardware equipment and installation margins and
support price increases as well as additional database capitalization. Sales and marketing
expenses decreased primarily as a result of lower salary related, travel and marketing
expenses as well as lower bad debt expenses, partially offset by higher commission
expenses. Product development expenses decreased primarily as a result of increased
software and database capitalization costs.
 §
    
    Wholesale Distribution contribution margin The contribution margin for Wholesale
Distribution increased by $0.7 million primarily as the result of support price increases,
lower headcount related expenses and third party maintenance and support costs. Gross
margins dollars declined as a result of lower systems revenues, however gross margin
percentage increased due to reduced salary related expense and support price increases.
Sales and marketing and product development expenses decreased primarily as a result of
lower salary related expenses.
 §
    
    Other contribution margin The contribution margin for other decreased by $0.4 million,
primarily due to $0.5 million in lower revenues, partially offset by reduced outside
service costs as a result of prospective customers slowing down planned system migrations
due to Hewlett-Packards continued support of one of its legacy systems.
 26




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##### Table of Contents



(in thousands)
 Three Months Ended December 31,2009
    
    
    2008Segment contribution margin
    
    $
    32,957
    
    
    $
    32,016Corporate and unallocated costs
    
    
    (5,964
    )
    
    
    (5,562
    )Stock-based compensation expense
    
    
    (998
    )
    
    
    (1,063
    )Depreciation and amortization
    
    
    (9,562
    )
    
    
    (9,705
    )Impairment of goodwill
    
    
    
    
    
    
    (25,000
    )Acquisition related costs
    
    
    
    
    
    
    (176
    )Restructuring costs
    
    
    (910
    )
    
    
    (1,758
    )Interest expense
    
    
    (7,919
    )
    
    
    (12,988
    )Other income (expense), net
    
    
    289
    
    
    
    (329
    )Income (loss) before income taxes
    
    $
    7,893
    
    
    $
    (24,565
    )
 Liquidity and Capital Resources
 Overview
   Senior Secured Credit Agreement
     27




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##### Table of Contents




    
    under the term loan, 1.00% with respect to base rate borrowings and 2.00% with respect to
Eurodollar rate borrowings;
    
    under the incremental term loan, 1.50% with respect to base rate borrowings and 2.50% with
respect to Eurodollar rate borrowings; and
    
    under the revolving credit facility, 1.00% with respect to base rate borrowings and 2.00%
with respect to Eurodollar rate borrowings, which may be reduced subject to our attainment of
certain leverage ratios.
    
    
    incur additional indebtedness (including contingent liabilities);
 
    
    create liens on assets;
 
    
    enter into sale-leaseback transactions;
 
    
    engage in mergers or acquisitions;
 
    
    dispose of assets;
 
    
    pay dividends and restricted payments;
 
    
    make investments (including joint ventures);
 
    
    make capital expenditures;
 
    
    prepay other indebtedness (including the notes);
 
    
    engage in certain transactions with affiliates;
 
    
    amend agreements governing our subordinated indebtedness (including the notes);
 
    
    amend organizational documents and other material agreements; and
 
    
    materially change the nature of our business.
  
    
    a maximum total leverage ratio; and
 
    
    a minimum interest coverage ratio.
  Derivative Instruments and Hedging Activities
  28




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Senior Subordinated Notes due 2016
        Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008
  29




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Covenant Compliance
     30




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##### Table of Contents



(in thousands)
 Twelve Months EndedDecember 31,2009
    
    
    2008Net loss
    
    $
    (62,712
    )
    
    $
    (21,773
    )Acquisition costs
    
    
    95
    
    
    
    854Deferred revenue purchase accounting adjustment
    
    
    
    
    
    
    1,437Adjusted net loss
    
    
    (62,617
    )
    
    
    (19,482
    )Interest expense
    
    
    35,908
    
    
    
    50,494Income tax expense and other income-based taxes
    
    
    22,629
    
    
    
    4,665Depreciation and amortization
    
    
    38,774
    
    
    
    38,365Gain on retirement of debt
    
    
    (18,958
    )
    
    
    Non-cash charges (impairment charges and
stock-based compensation expense)
    
    
    93,063
    
    
    
    28,449Non-recurring cash charges and restructuring charges
    
    
    5,084
    
    
    
    6,985Deferred compensation payments
    
    
    294
    
    
    
    258Sponsor payments
    
    
    162
    
    
    
    109Foreign exchange gain
    
    
    (161
    )
    
    
    (257
    )Pro- forma adjustments
    
    
    
    
    
    
    886Adjusted EBITDA
    
    $
    114,178
    
    
    $
    110,472
  CovenantRequirements
    
    Our RatioSenior Secured Credit Agreement (1)Maximum consolidated total debt to adjusted EBITDA ratio
    
    
    4.50x
    
    
    
    4.22Minimum adjusted EBITDA to consolidated interest expense
    
    
    2.25x
    
    
    
    3.41Senior Subordinated Notes (2)Minimum adjusted EBITDA to fixed charges ratio required
to incur additional
indebtedness pursuant to ratio provisions
    
    
    2.00x
    
    
    
    3.41
 
 (1)
    
    Our senior secured credit agreement requires us to maintain a consolidated total debt to
adjusted EBITDA ratio of a maximum of 3.75x by the end of the quarter ending December 31,
2010. Consolidated total debt is defined in the senior secured credit agreement as total debt
other than certain indebtedness and is reduced by the amount of cash and cash equivalents on
our consolidated balance sheet in excess of $7.5 million. As of
December 31, 2009, our consolidated total debt was $482.1 million, consisting of total debt
other than certain indebtedness totaling $506.9 million, net of cash and cash equivalents in
excess of $7.5 million totaling $24.8 million. We are also required to maintain an adjusted
EBITDA to consolidated interest expense ratio of a minimum of 2.50x by the end of the quarter
ending March 31, 2010 and 2.75x by the end of the quarter 31




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##### Table of Contents



ending December 31, 2010.
Consolidated interest expense is defined in the senior secured credit agreement as
consolidated cash interest expense less cash interest income and is further adjusted for
certain non-cash interest expenses and other items. Failure to satisfy these ratio
requirements would constitute a default under the senior secured credit agreement. If our
lenders failed to waive any such default, our repayment obligations under the senior secured
credit agreement could be accelerated. This would also constitute a default under the
indenture governing the senior subordinated notes.(2)
    
    Our ability to incur additional indebtedness and make certain restricted payments under the
indenture governing the senior subordinated notes, subject to specified exceptions, is tied
to adjusted EBITDA to fixed charges ratio of at least 2.00x, except that we may incur certain
indebtedness and make certain restricted payments and certain permitted investments without
regard to the ratio. Fixed charges is defined in the indenture governing the senior
subordinated notes as consolidated interest expense less interest income, adjusted for
acquisitions, and further adjusted for non-cash interest expense. Recently Issued Accounting Pronouncements
     
 Item 3 Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk
  Foreign Currency Risk
   32




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##### Table of Contents



Item 4 Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  Limitations on Effectiveness of Controls
  33




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1 Legal Proceedings
  
 Item 1A Risk Factors
  
 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3 Defaults Upon Senior Securities
  
 Item 4 Submission of Matters to a Vote of Security Holders
  
 Item 5 Other Information
 Amendment to Incentive Bonus Plan
   Amendment to Executive Severance Plan
  34




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##### Table of Contents



Amendment to Offer Letter of Kevin V. Roach
   
 Item 6 Exhibits
  35




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SIGNATURE
 th
 ACTIVANT SOLUTIONS INC.By:
    /s/ KATHLEEN M. CRUSCOKathleen M. CruscoSenior Vice President and Chief Financial Officer

(Principal Financial and Duly Authorized Officer) 36




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##### Table of Contents



EXHIBIT INDEX
 Incorporated by ReferenceDate ofExhibit
    
    
    
    
    
    
    
    File
    
    First
    
    Exhibit
    
    ProvidedNumber
    
    Exhibit Description
    
    Form
    
    Number
    
    Filing
    
    Number
    
    Herewith10.1
    *
    
    Amended and Restated Incentive Bonus Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    X10.2
    *
    
    Activant Executive Severance Plan, as
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Xamended and restated, effective January
1, 201010.3
    *
    
    Amendment to Offer Letter, dated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    XFebruary 8, 2010, by and between
Activant Solutions Inc. and Kevin V.
Roach31.1
    
    
    Certification pursuant to Section 302 of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Xthe Sarbanes-Oxley Act of 2002 by Pervez
A. Qureshi31.2
    
    
    Certification pursuant to Section 302 of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Xthe Sarbanes-Oxley Act of 2002 by
Kathleen M. Crusco32.1
    **
    
    Certification pursuant to Section 906 of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Xthe Sarbanes-Oxley Act of 2002 by Pervez
A. Qureshi32.2
    **
    
    Certification pursuant to Section 906 of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Xthe Sarbanes-Oxley Act of 2002 by
Kathleen M. Crusco
 
 *
    
    Represents a management contract or compensatory plan or arrangement.**
    
    This certification is not deemed filed for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended (the Exchange Act), or otherwise subject to the liability of that
section. Such certification will not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the
registrant specifically incorporates it by reference. 37