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

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

Commission File Number 333-49389

Activant Solutions Inc.

(Exact name of registrant as specified in its charter)

Delaware		94-2160013
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
7683 Southfront Road
Livermore, CA (Address of principal executive offices)		94551 (Zip Code)

(925) 449-0606
(Registrant’s telephone number,
including area code)

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

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

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No 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 August 9, 2010
Common Stock, par value $0.01 per share		10 shares

 

 

ACTIVANT SOLUTIONS INC.

REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010

INDEX

		Page
Forward-Looking Statements			2
PART I – FINANCIAL INFORMATION			3
Item 1. Financial Statements (Unaudited)			3
Condensed Consolidated Balance Sheets as of June 30, 2010 and September 30, 2009			3
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2010 and 2009			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2010 and 2009			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			42
PART II – OTHER INFORMATION			43
Item 1. Legal Proceedings			43
Item 1A. Risk Factors			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3. Defaults Upon Senior Securities			43
Item 4. (Removed and Reserved)			43
Item 5. Other Information			43
Item 6. Exhibits			43
SIGNATURE			44
EXHIBIT INDEX			45
EX-31.1
EX-31.2
EX-32.1
EX-32.2

FORWARD-LOOKING STATEMENTS

This report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to safe harbors under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this report under “Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. We have based these forward-looking statements on our current expectations about future events. While we believe these expectations are reasonable, these forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those discussed in this report under “Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part I, Item 1A — Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

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

	•		the negative effect of the recent credit crisis and unfavorable market conditions on our customers and on our business;
	•		the financial situation 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, meet or respond to our customers’ needs or 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 or in the implementation of those 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.

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

PART I – FINANCIAL INFORMATION

Item 1 — Financial Statements

ACTIVANT SOLUTIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

		June 30,				September 30,
(in thousands, except share data)		2010				2009
ASSETS:
Current assets:
Cash and cash equivalents		$	68,724			$	44,573
Trade accounts receivable, net of allowance for doubtful accounts of $4,051 at June 30, 2010 and $4,446 at September 30, 2009			34,051				34,196
Inventories			4,216				4,985
Deferred income taxes			3,255				1,080
Income taxes receivable			1,387				—
Prepaid expenses and other current assets			5,748				5,482
Assets of discontinued operations (Note 10)			—				7,418
Total current assets			117,381				97,734
Property and equipment, net			6,089				5,968
Intangible assets, net			173,400				190,847
Goodwill			541,454				541,454
Deferred financing costs			7,246				8,903
Other assets			3,539				3,178
Total assets		$	849,109			$	848,084
LIABILITIES AND STOCKHOLDER’S EQUITY:
Current liabilities:
Accounts payable		$	15,879			$	18,030
Payroll related accruals			17,453				17,417
Deferred revenue			34,201				28,191
Current portion of long-term debt			—				5,886
Accrued expenses and other current liabilities			15,318				19,717
Liabilities of discontinued operations (Note 10)			—				2,278
Total current liabilities			82,851				91,519
Long-term debt, net of discount			506,895				517,009
Deferred tax liabilities			51,802				53,837
Other liabilities			16,547				19,189
Total liabilities			658,095				681,554
Commitments and contingencies			—				—
Common Stock:
Par value $0.01, authorized 1,000 shares, 10 shares issued and outstanding at June 30, 2010 and September 30, 2009			—				—
Additional paid-in capital			260,414				257,570
Accumulated deficit			(60,263	)			(80,680	)
Other accumulated comprehensive loss:
Unrealized loss on cash flow hedges			(6,133	)			(8,593	)
Cumulative translation adjustment			(3,004	)			(1,767	)
Total stockholder’s equity			191,014				166,530
Total liabilities and stockholder’s equity		$	849,109			$	848,084

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

ACTIVANT SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
(in thousands)		2010				2009				2010				2009
Revenues:
Systems		$	30,019			$	26,844			$	90,289			$	88,190
Services			60,472				62,319				183,347				187,144
Total revenues			90,491				89,163				273,636				275,334
Cost of revenues (exclusive of depreciation and amortization of $4.7 million, $4.3 million, $13.9 million, and $13.3 million for the three months ended June 30, 2010 and 2009 and nine months ended June 30, 2010 and 2009, respectively, included in amounts shown separately below):
Systems (Note 7)			15,461				15,091				49,324				48,490
Services (Note 7)			19,577				20,051				59,193				62,710
Total cost of revenues			35,038				35,142				108,517				111,200
Gross profit			55,453				54,021				165,119				164,134
Operating expenses:
Sales and marketing (Note 7)			14,456				13,399				43,010				41,054
Product development (Note 7)			8,520				8,757				25,886				27,412
General and administrative (Note 7)			6,841				6,082				19,370				17,859
Depreciation and amortization			9,831				9,272				29,613				28,508
Impairment of goodwill			—				—				—				107,000
Restructuring costs			(59	)			(40	)			1,915				4,251
Total operating expenses			39,589				37,470				119,794				226,084
Operating income (loss)			15,864				16,551				45,325				(61,950	)
Interest expense			(7,644	)			(9,722	)			(23,347	)			(32,398	)
Gain on retirement of debt			—				4,631				—				18,958
Other income (expense), net			(269	)			22				162				(604	)
Income (loss) from continuing operations before income taxes			7,951				11,482				22,140				(75,994	)
Income tax expense			1,901				5,218				7,544				14,435
Income (loss) from continuing operations			6,050				6,264				14,596				(90,429	)
Income (loss) from discontinued operations, net of income taxes (Note 10)			(315	)			1,350				(357	)			3,559
Gain from sale of discontinued operations, net of income taxes (Note 10)			6,178				—				6,178				—
Net income (loss)		$	11,913			$	7,614			$	20,417			$	(86,870	)
Comprehensive income (loss):
Net income (loss)		$	11,913			$	7,614			$	20,417			$	(86,870	)
Unrealized gain (loss) on cash flow hedges			907				2,025				2,460				(2,933	)
Foreign currency translation adjustment			(431	)			290				(1,237	)			(1,253	)
Comprehensive income (loss)		$	12,389			$	9,929			$	21,640			$	(91,056	)

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

ACTIVANT SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Nine Months Ended June 30,
(in thousands)		2010				2009
Operating activities:
Net income (loss)		$	20,417			$	(86,870	)
(Income) loss from discontinued operations, net of tax			357				(3,559	)
Gain from sale of discontinued operations, net of tax			(6,178	)			—
Income (loss) from continuing operations			14,596				(90,429	)
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:
Impairment of goodwill			—				107,000
Gain on retirement of debt			—				(18,958	)
Stock-based compensation expense			2,827				2,810
Depreciation			3,925				3,886
Amortization of intangible assets			25,688				24,622
Amortization of deferred financing costs			1,657				1,781
Provision for doubtful accounts			1,698				1,180
Deferred income taxes			(4,210	)			(1,971	)
Changes in assets and liabilities:
Trade accounts receivable			(1,553	)			7,504
Inventories			769				(499	)
Prepaid expenses and other assets			(2,014	)			(1,247	)
Accounts payable			(2,151	)			(2,856	)
Deferred revenue			6,010				2,616
Accrued expenses and other liabilities			(5,780	)			1,426
Net cash provided by operating activities – continuing operations			41,462				36,865
Net cash provided by (used in) operating activities – discontinued operations			(490	)			4,064
Net cash provided by operating activities			40,972				40,929
Investing activities:
Purchases of property and equipment			(4,051	)			(1,456	)
Capitalized computer software and database costs			(8,238	)			(6,552	)
Net cash used in investing activities – continuing operations			(12,289	)			(8,008	)
Net cash provided by (used in) investing activities – discontinued operations (including proceeds from sale of business)			11,468				(2	)
Net cash used in investing activities			(821	)			(8,010	)
Financing activities:
Repurchases of common stock			—				(189	)
Payments on long-term debt			(16,000	)			(13,512	)
Repurchases of debt			—				(39,840	)
Net cash used in financing activities			(16,000	)			(53,541	)
Net cash from continuing operations			13,173				(24,684	)
Net cash from discontinued operations			10,978				4,062
Net change in cash and cash equivalents			24,151				(20,622	)
Cash and cash equivalents, beginning of period			44,573				64,789
Cash and cash equivalents, end of period		$	68,724			$	44,167
Supplemental disclosures of cash flow information
Cash paid during the period for interest		$	24,179			$	38,288
Cash paid during the period for income taxes		$	19,602			$	6,873
Cash received during the period for income taxes		$	(127	)		$	(237	)

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

ACTIVANT SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION

The accompanying condensed consolidated balance sheets as of June 30, 2010 and September 30, 2009 and the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended June 30, 2010 and 2009 and cash flows for the nine months ended June 30, 2010 and 2009 represent our financial position, results of operations and cash flows as of and for the periods then ended.

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

In the opinion of our management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, filed with the Securities and Exchange Commission (the “SEC”) on December 14, 2009.

As further discussed in Note 10, in April 2010, we sold our productivity tools business. Accordingly, we have separately classified the results of operations, assets and liabilities, and cash flows of the discontinued operations in the accompanying condensed consolidated financial statements for all the periods presented. Unless otherwise noted, the accompanying disclosures pertain to our continuing operations.

NOTE 2 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND OTHER LEGISLATION

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (the “Act”) were enacted. The primary focus of the Act is to significantly reform health care in the United States. We have determined that this legislation does not create an immediate financial impact on our condensed consolidated financial statements, however we will continue to evaluate any prospective effects of the Act.

In January 2010, the FASB issued an ASU further clarifying disclosures regarding measurements of fair value in financial statements. This guidance clarifies existing fair value guidance as well as requires new disclosures for significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for such transfers. Additionally, it requires disclosure of the reasons for any transfers in or out of Level 3 of the fair value hierarchy. Upon adoption of this guidance in January 2010, we determined it not to have a material impact on our condensed consolidated financial statements.

In October 2009, the FASB issued an ASU that amended the accounting rules addressing revenue recognition for multiple-deliverable revenue arrangements by eliminating the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting provided the deliverables meet certain criteria. Additionally, the ASU provides for elimination of the use of the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price. A hierarchy for estimating such selling price is included in the update. This ASU will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, however early adoption and retroactive application are permitted. We plan to adopt this ASU in our fiscal year beginning October 1, 2010. We are currently evaluating whether this update will have an impact on our consolidated financial statements.

In October 2009, the FASB also issued an ASU that provides a list of items to consider when determining whether the software and non-software components function together to deliver a product’s essential functionality. This ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, however early adoption and retroactive application are permitted. We plan to adopt this ASU in our fiscal year beginning October 1, 2010. We are currently evaluating whether this update will have an impact on our consolidated financial statements.

In October 2009, we adopted authoritative accounting guidance providing clarification for measuring liabilities at fair value. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. See Note 5 for additional information.

In addition, in October 2009, we adopted revised guidance regarding business combinations. This guidance, among other things, establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

NOTE 3 – GOODWILL

The carrying amount of goodwill by reportable segments as of both June 30, 2010 and September 30, 2009 is as follows (in thousands):

Retail Distribution Group		$	207,166
Wholesale Distribution			334,288
Total		$	541,454

We account for goodwill and other intangibles in accordance with relevant authoritative accounting principles. Business acquisitions typically result in goodwill and other intangible assets, and the recorded values of those assets may become impaired in the future. 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. As a result of the global economic uncertainty and credit crisis, we determined it necessary to evaluate goodwill for impairment as of December 31, 2008 as well as during our annual impairment testing. Based on these analyses we concluded that during fiscal 2009, the fair value of the Retail Distribution Group was below its respective carrying value, including goodwill. Consequently, we recorded a goodwill impairment charge of $107.0 million related to Retail Distribution Group for fiscal year 2009, all of which was recognized during the nine months ended June 30, 2009. For the purpose of these analyses, our estimates of fair value were based on a combination of the income approach, which estimates the fair value of our reporting units based on the future discounted cash flows, and the market approach, which estimates the fair value of our reporting units based on comparable market prices. We will not be required to make any current or future cash payments as a result of these impairment charges. We will continue to monitor if conditions exist that indicate additional potential impairment has occurred. If such conditions exist, we may be required to record additional impairments in the future and such impairments, if any, may be material.

Effective October 1, 2009, we combined our Hardlines and Lumber and Automotive segments into a single segment called the Retail Distribution Group. See Note 9 for further information. We have adjusted our prior period presentation accordingly to conform to the current period presentation.

NOTE 4 – DEBT

Total debt consisted of the following (in thousands):

		June 30,				September 30,
		2010				2009
Senior secured credit facility due 2013		$	326,241			$	331,227
Senior secured credit facility (incremental term loan) due 2013			66,359				67,373
Senior subordinated notes due 2016			114,295				114,295
Revolving credit facility due 2011			—				10,000
Total debt			506,895				522,895
Current portion			—				(5,886	)
Total long-term debt, net of discount		$	506,895			$	517,009

Senior Secured Credit Agreement

We have a senior secured credit agreement that provides for (i) a seven-year term loan in the amount of $390.0 million payable on May 2, 2013, and (ii) a five-year revolving credit facility that permits loans in an aggregate amount of up to $40.0 million, which includes a $5.0 million letter of credit facility and a swing line facility. Principal amounts outstanding under the revolving credit facility are due and payable in full on May 2, 2011. In addition, subject to certain terms and conditions, the senior secured credit agreement provides for one or more uncommitted incremental term loans and/or revolving credit facilities in an aggregate amount not to exceed $75.0 million.

In August 2007, we borrowed the $75.0 million incremental term loan, which matures on May 2, 2013, as well as $20.0 million of the revolving credit facility. During the year ended September 30, 2009, we repaid $10.0 million in principal payments towards the revolving credit facility. During the nine months ended June 30, 2010, we repaid the $10.0 million remaining outstanding principal balance on the revolving credit facility. Prior to fiscal year 2009, we did not make any principal repayments towards the revolving credit facility.

We may be required each year, generally concurrent with the filing of our Annual Report on Form 10-K, to make a mandatory principal repayment for the preceding fiscal year towards term loans equal to a specified percentage of excess cash flow depending on our actually attained ratio of consolidated total debt to EBITDA (consolidated earnings before interest, taxes, depreciation and amortization, further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indenture governing the senior subordinated notes and our senior secured credit facilities), all as defined in the senior secured credit agreement. Any mandatory repayments due are reduced dollar-for-dollar by any voluntary prepayments made during the year. Prior to fiscal year 2008, we did not have to make any mandatory repayments. For the period ended September 30, 2006 and for the years ended September 30, 2007, 2008 and 2009, we repaid $1.9 million, $25.2 million, $15.8 million, and $23.5 million, respectively, in principal towards the term loans. The fiscal year 2009 payments included approximately $3.3 million of fiscal year 2008 mandatory principal repayments and approximately $20.2 million of voluntary prepayments. For the nine months ended June 30, 2010, we repaid $6.0 million in principal towards the term loans as a voluntary prepayment. As of September 30, 2009, we had classified approximately $5.9 million of term loans as current maturities resulting from our then current mandatory principal repayment calculations. Our mandatory repayment calculation as of the repayment date indicated that our earlier prepayments had fully satisfied all fiscal year 2009 excess cash flow-based payments, and, consequently, no mandatory repayment was due. As mentioned, we proceeded with a $6.0 million principal payment, all of which is considered a voluntary prepayment of fiscal year 2010 excess cash flow-based principal payments. Any future excess cash flow- based payments will be dependent upon our attained ratio of consolidated total debt to adjusted EBITDA, upon us generating excess cash flow, and/or upon us making voluntary prepayments, all as defined in the senior secured credit agreement.

In April 2010, we completed the sale of our productivity tools business for approximately $12.0 million in cash. See Note 10 for further information. The senior secured credit agreement requires us to reinvest such cash proceeds in our business within 12 months of receipt and to prepay an aggregate principal amount of term loans equal to the amount of any cash proceeds not reinvested in our business. We expect to reinvest these cash proceeds in our business within such 12-month period.

The capital and credit markets have been experiencing extreme volatility and disruption during the past several years. These market conditions have, to a degree, affected our ability to borrow under our senior secured credit facility. On September 15, 2008, Lehman Brothers Holdings Inc. (“Lehman Brothers”) and on November 1, 2009, CIT Group Inc. (“CIT”), filed petitions under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. On December 10, 2009, CIT confirmed that it had emerged from bankruptcy. A Lehman Brothers subsidiary, Lehman Commercial Paper Inc. (“Lehman CPI”) and a CIT subsidiary, The CIT Group/Equipment Financing, Inc. (“CIT Financing”), are lenders under our senior secured credit agreement, having provided commitments of $7.0 million and $7.5 million, respectively, under the revolving credit facility, of which no amounts were outstanding as of June 30, 2010. Although we have made no request for funding under the revolving credit facility since the filing of the bankruptcy petitions by Lehman Brothers or CIT, it is uncertain whether Lehman CPI or CIT Financing will participate in any future requests for funding or whether another lender might assume their commitments.

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

•		under the 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.

In addition to paying interest on outstanding principal under the senior secured credit agreement, we are required to pay a commitment fee to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. The initial commitment fee rate is

0.50% per annum. The commitment fee rate may be reduced subject to our attaining certain leverage ratios. As of June 30, 2010, our commitment fee was 0.375% per annum. We must also pay customary letter of credit fees for issued and outstanding letters of credit. As of June 30, 2010, we had $0.3 million of letters of credit issued and outstanding.

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

Derivative Instruments and Hedging Activities

Our objective in using interest rate swaps is to add stability to interest expense and to manage and reduce the risk inherent in interest rate fluctuations. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. At the time we entered into the senior secured credit agreement, we entered into four interest rate swaps to effectively convert a notional amount of $245.0 million of floating rate debt to fixed rate debt. In November 2007, 2008 and 2009, interest rate swaps with a notional amount of $25.0 million, $30.0 million and $50.0 million, respectively, matured. As of June 30, 2010, we had an outstanding interest rate swap with a notional amount of $140.0 million.

We account for these interest rate swaps as cash flow hedges in accordance with relevant authoritative accounting principles. We estimate the fair value of the interest rate swaps based on quoted prices and market observable data of similar instruments. If the interest rate swap agreements are terminated prior to maturity or no longer probable of offset, the fair value of the interest rate swaps recorded in accumulated other comprehensive income (loss) (“OCI”) may be recognized in the consolidated statements of operations based on an assessment of the agreements at the time of terminations. During the nine months ended June 30, 2010, we did not discontinue any interest rate swaps. The realized gains and losses on these instruments are recorded in earnings as adjustments to interest expense. The unrealized gains and losses are recognized in OCI. For the three and nine months ended June 30, 2010 and 2009, we recorded an unrealized gain of $1.4 million ($0.9 million net of tax), unrealized gain of $3.8 million ($2.5 million net of tax), unrealized gain of $2.5 million ($1.5 million net of tax), and an unrealized loss of $4.9 million ($2.9 million net of tax), respectively. At June 30, 2010, cumulative net unrealized losses of approximately $9.9 million, before taxes, were recorded in OCI, of which an estimated $6.7 million are expected to be reclassified to net income within the next twelve months, providing an offsetting economic impact against the underlying transaction. To the extent any of the interest rate swaps are deemed ineffective, a portion of the unrealized gains and losses is recorded in interest expense rather than OCI. As of and for the nine months ended June 30, 2010, there is no cumulative ineffectiveness related to these interest rate swaps.

The following table summarizes the derivative-related activity, excluding taxes, in OCI for the nine months ended June 30, 2010 (in thousands):

Unrealized loss in OCI at September 30, 2009		$	(13,723	)
Net increase in fair value			3,784
Unrealized loss in OCI at June 30, 2010		$	(9,939	)

The following tables summarize the fair value and realized and unrealized losses of the interest rate swaps as of and for the nine months ended June 30, 2010 (in thousands):

				Fair Value of Derivative Instruments
				Derivative Assets				Derivative Liabilities
				Location in the				Location in the
				Condensed				Condensed
				Consolidated				Consolidated
		Notional Amount		Balance Sheet		Fair Value		Balance Sheet		Fair Value
Interest rate swaps due November 2011		$140,000		Other assets		$—		Other liabilities		$(9,939)
		Effect of Derivative Instruments on Condensed Consolidated Statements of Operations and OCI
						Gain recognized		Gain/(Loss) reclassified from OCI into
		Loss recognized in earnings (1)				in OCI		earnings (2)
		Location		Amount		Amount		Location		Amount
Interest rate swaps		Interest expense		$(5,650)		$3,784		Interest expense		$—

Senior Subordinated Notes due 2016

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

During the three months ended June 30, 2009, we repurchased approximately $25.0 million in face value of our senior subordinated notes in open market transactions for an aggregate purchase price of approximately $19.9 million (including accrued interest of $0.3 million). In connection with the debt repurchase, we wrote off deferred financing costs and other transaction fees of $0.8 million. As a result of these repurchases we recorded a gain on retirement of debt in the amount of $4.6 million. During the nine months ended June 30, 2009, we repurchased approximately $60.7 million in face value of our senior subordinated notes in open market transactions for an aggregate purchase price of approximately $41.1 million (including accrued interest of $1.3 million). In connection with the debt repurchase, we wrote off deferred financing costs and other transaction fees of $1.9 million. As a result of these repurchases we recorded a gain on retirement of debt in the amount of $19.0 million. There were no repurchases of notes during the nine months ended June 30, 2010. As a result of these repurchases, senior subordinated notes representing $114.3 million in principal amount were outstanding as of June 30, 2010.

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

The terms of the senior secured credit agreement and the indenture governing the senior subordinated notes restrict certain activities by us, the most significant of which include limitations on additional indebtedness, liens, guarantees, payment or declaration of dividends, sale of assets and transactions with affiliates. In addition, the senior secured credit agreement requires us to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The senior secured credit agreement and the indenture also contain certain customary affirmative covenants and events of default. At June 30, 2010, we were in compliance with all of the senior secured credit agreement’s and the indenture’s covenants.

Compliance with these covenants is dependent on the results of our operations, which are subject to a number of factors including current economic conditions. Based on our forecast for the remainder of fiscal year 2010, we currently anticipate that we will be able to meet or exceed these financial tests and covenants during this period. This expectation is based on our cost and revenue expectations for fiscal year 2010. Should the current economic conditions cause our business or our vertical markets to deteriorate beyond our expectations or should our cost cutting initiatives prove insufficient we may not be able to satisfy these financial tests and covenants.

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

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

NOTE 5 – FAIR VALUE

We measure fair value based on authoritative accounting guidance, which defines fair value, establishes a framework for measuring fair value as well as expands on required disclosures regarding fair value measurements. In October 2009, we adopted authoritative accounting guidance providing clarification for measuring fair value when a quoted price in an active market for the identical liability is not available. It also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This guidance did not have a material impact on our fair value measurements.

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

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

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

We use derivative financial instruments, specifically interest rate swaps, for non-trading purposes. We entered into interest rate swaps to manage and reduce the risk inherent in interest rate fluctuations arising from previously un-hedged interest payments associated with floating rate debt. We account for the interest rate swaps discussed above under Note 4 as cash flow hedges. Derivative contracts with negative net fair values are recorded in other liabilities. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. We have determined that our derivative valuation in its entirety should be classified as Level 2.

We record adjustments to appropriately reflect our nonperformance risk in our fair value measurements. As of June 30, 2010, we have assessed the significance of the impact of nonperformance risk on the overall valuation of our derivative position and have determined that it is not significant to the overall valuation of the derivatives.

The fair value of our cash equivalents, deferred compensation plan assets and liabilities and interest rate swaps was determined using the following inputs as of June 30, 2010 (in thousands):

		Quoted Prices in Active				Significant Other				Significant
		Markets for Identical				Observable				Unobservable
		Assets and Liabilities				Inputs				Inputs				Total
		(Level 1)				(Level 2)				(Level 3)				Fair Value
Assets:
Cash equivalents (1)		$	15,658			$	—			$	—			$	15,658
Deferred compensation plan assets (2)			2,378				—				—				2,378
Liabilities:
Interest rate swap due 2011(3)			—				(9,939	)			—				(9,939	)
Deferred compensation plan liabilities (3)			(2,084	)			—				—				(2,084	)
Total		$	15,952			$	(9,939	)		$	—			$	6,013

Other Financial Assets and Liabilities

Financial assets and liabilities with carrying amounts approximating fair value include cash, trade accounts receivable, accounts payable, accrued expenses and other current liabilities. The carrying amount of these financial assets and liabilities approximates fair value because of their short maturities.

Long-term debt as of June 30, 2010 had a carrying amount of $506.9 million and fair value of $500.8 million. As of September 30, 2009, long-term debt, including current-portion of long-term debt, had a carrying amount of $522.9 million and fair value of $498.9 million. The

carrying amount is based on interest rates available upon the date of the issuance of debt and is reported in the consolidated balance sheets. The fair value is based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities.

NOTE 6 – INCOME TAXES

We recorded a provision for income tax expense from continuing operations of $1.9 million and $7.5 million for the three and nine months ended June 30, 2010, respectively. We recorded a provision for income tax expense from continuing operations of $5.2 million and $14.4 million for the three and nine months ended June 30, 2009, respectively. This tax provision was derived by applying an estimated worldwide tax rate against income (loss) from continuing operations before income taxes for the three and nine months ended June 30, 2010 and 2009. The estimated worldwide tax rate contemplated estimated variances from the U.S. federal statutory rate for the fiscal year ending September 30, 2010, including the impact of permanently non-deductible expenses, estimated changes in valuation allowances against deferred tax assets, and state income taxes. The provision for income tax was further adjusted by period events occurring during the quarter including unrecognized tax benefits.

Substantially all of our operating income was generated from domestic operations during the three and nine months ended June 30, 2010 and 2009. As of June 30, 2010, we had $10.9 million of federal and state loss carry-forwards that expire between 2011 and 2028 and $0.1 million of foreign loss carry-forwards that expire in 2028, if not utilized earlier and $0.2 million of U.S. federal tax credits that will expire in 2017. As of June 30, 2010, we also had foreign net operating loss carry-forwards of $16.9 million that are not subject to expiration. Undistributed earnings, if any, of our foreign subsidiaries are considered to be permanently reinvested and, accordingly, no U.S. federal or state income taxes have been provided thereon.

Our condensed consolidated balance sheets include unrecognized tax benefits (excluding interest and penalties, classified in other non-current liabilities) of approximately $2.5 million at both June 30, 2010 and September 30, 2009. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $2.2 million and $1.6 million at June 30, 2010 and September 30, 2009, respectively. The tax years 2008 and 2009 remain open to examination by the major taxing jurisdictions to which we are subject, and we are not currently under U.S. federal examination for any tax year.

We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. The balance of accrued interest and penalties was approximately $0.3 million and $0.2 million as of June 30, 2010 and September 30, 2009, respectively.

It is reasonably possible as of June 30, 2010 that the unrecognized tax benefits will decrease by approximately $0.3 million within the next twelve months, primarily due to tax positions relating to certain tax credits and positions relating to transfer pricing. A significant portion of these unrecognized tax benefits would be recorded as an adjustment to the valuation allowance.

NOTE 7 – EMPLOYEE STOCK PLANS

Stock-based Compensation Expense

The following table summarizes stock-based compensation expense from continuing operations for the three and nine months ended June 30, 2010 and 2009 and its allocation within the condensed consolidated statements of operations and comprehensive income (loss) (in thousands):

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Cost of revenues
Systems		$	18			$	7			$	44			$	24
Services			57				67				175				162
Operating expenses
Sales and marketing			336				182				1,026				582
Product development			72				75				223				220
General and administrative			438				603				1,359				1,822
Total		$	921			$	934			$	2,827			$	2,810

We also recognized a total income tax benefit in the condensed consolidated statements of operations and comprehensive income (loss) related to the total stock-based compensation expense amounts above, of approximately $0.3 million, $1.1 million, $0.4 million, and $1.1 million for the three and nine months ended June 30, 2010 and 2009, respectively.

Valuation Assumptions

We estimate the fair value of stock options using a Black-Scholes option pricing model that uses certain assumptions including expected term, expected volatility of the underlying stock, expected dividend pay-out rate and risk-free rate of return. The expected term is based on

historical data and represents the period of time that stock options granted are expected to be outstanding. Due to the fact that the common stock underlying the options is not publicly traded, the expected volatility is based on a comparable group of companies for the period. We do not intend to pay dividends on our common stock for the foreseeable future, and accordingly, use a dividend yield of zero. The risk-free rate for periods within the contractual life of the option is based on the Treasury Bill coupon rate for U.S. Treasury securities in effect at the time of the grant with a maturity approximating the expected term.

The fair value of each award granted from the Activant Group Inc. 2006 Stock Incentive Plan (the “2006 Option Plan”) during the three and nine months ended June 30, 2010 and 2009 were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

		Three Months Ended June 30,								Nine Months Ended June 30,
		2010				2009				2010				2009
Expected term		6.66		years		6.66		years		6.66		years		6.66		years
Expected volatility			41.00	%			76.00	%			44.29	%			72.69	%
Expected dividends			0.00	%			0.00	%			0.00	%			0.00	%
Risk-free rate			1.79	%			2.56	%			2.56	%			1.73	%

The weighted-average estimated grant date fair value, as defined by authoritative accounting guidance, for employee stock options granted under the 2006 Option Plans was $2.40 per share during the nine months ended June 30, 2010 and $2.80 per share and $2.87 per share during the three and nine months ended June 30, 2009, respectively. There were no grants during the three months ended June 30, 2010, therefore grant date fair value is not available for such period.

NOTE 8 — RESTRUCTURING COSTS

During the nine months ended June 30, 2010, our management approved restructuring plans for eliminating certain employee positions and consolidation of excess facilities with the intent to continue to streamline and focus our operations and to more properly align our cost structure with current business conditions and our projected future revenue streams. These plans included the elimination of approximately 130 employee positions and the consolidation of space within multiple facilities locations. As of June 30, 2010, all of the affected employees had been notified and terminated, and the facility consolidation had been completed. In accordance with relevant authoritative accounting principles, we recorded a credit to restructuring charges of approximately $0.1 million and restructuring charges of approximately $1.9 million for the three and nine months ended June 30, 2010, respectively, related to workforce reductions (comprised of severance and related benefits) and the facility consolidation, including additional charges for past actions related to certain employee termination benefits that are required to be accrued from the time of notification through the date specified in the benefit. The negative charge recorded for the three months ended June 30, 2010, is primarily due to the reversal of severance and related benefits that will no longer be paid and for revisions to the estimated net present values of remaining net lease payments associated with consolidated facilities. All restructuring charges were recorded in “Restructuring Costs” in the condensed consolidated statements of operations and comprehensive income (loss).

We also undertook certain restructuring actions in prior years. We recorded a credit to restructuring charges of less than $0.1 million and restructuring charges of approximately $4.3 million for the three and nine months ended June 30, 2009, respectively, related to workforce reductions (comprised of severance and related benefits) and consolidation of facilities. The negative charge recorded for the three months ended June 30, 2009, is primarily due to the reversal of severance and related benefits that will no longer be paid and for revisions to the estimated net present values of remaining net lease payments associated with consolidated facilities. All of the affected employees from prior years’ actions had been notified and terminated at the times of those actions.

Our restructuring liability at June 30, 2010 was approximately $0.8 million and the changes in our restructuring liabilities for the nine months then ended were as follows (in thousands):

		Balance at
		September 30,				Restructuring								Balance at
		2009				Charges				Payments				June 30, 2010
2010 Actions – Severance and Related Benefits		$	—			$	1,640			$	(1,499	)		$	141
2010 Actions – Facility Closings			—				269				(78	)			191
2009 Actions – Severance and Related Benefits			30				—				(30	)			—
2009 Actions – Facility Closings			812				6				(368	)			450
		$	842			$	1,915			$	(1,975	)		$	782

NOTE 9 – SEGMENT REPORTING

We are a leading provider of business management solutions to wholesale and retail distribution businesses. We have developed substantial expertise in serving businesses with complex distribution and retail requirements in two primary vertical markets: retail distribution and wholesale distribution, which are considered our segments for reporting purposes. These segments are determined in accordance with how our management views and evaluates our business and based on the criteria as outlined in authoritative accounting guidance regarding segments. We previously considered our segments to represent three primary vertical markets: hardlines and lumber, wholesale distribution and automotive. On October 1, 2009 we combined our Hardlines and Lumber and Automotive segments to create our Retail Distribution Group segment. We believe these segments more accurately reflect the manner in which our management views and evaluates the business. Additionally, as further discussed in Note 10, in April 2010, we sold our productivity tools business which was previously presented in Other. These amounts have been separately presented in discontinued operations in the condensed consolidated statements of operations and comprehensive income (loss). The prior periods have been reclassified to conform to the current period presentation.

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

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

	•		Retail Distribution Group segment — The retail 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 consisted of our productivity tools business, which was involved with software migration services and application development. As further discussed in Note 10, in April 2010 we sold our productivity tools business which historically represented substantially all of Other. Amounts associated with the productivity tools business have been presented as discontinued operations in our financial statements. In the fiscal 2009 periods there was an immaterial amount of remaining revenue in Other that was not allocated to the other segments. In fiscal 2010, all revenues were recorded in either the Retail Distribution Group segment or the Wholesale Distribution segment.

Segment Revenue and Contribution Margin

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

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

Our reportable segment financial information for the three and nine months ended June 30, 2010 and 2009 is as follows (in thousands):

		Three Months Ended June 30, 2010																Nine Months Ended June 30, 2010
		Retail																Retail
		Distribution				Wholesale												Distribution				Wholesale
		Group				Distribution				Other				Total				Group				Distribution				Other				Total
Revenues		$	53,621			$	36,870			$	—			$	90,491			$	161,635			$	112,001			$	—			$	273,636
Contribution margin		$	16,625			$	16,370			$	—			$	32,995			$	50,760			$	47,509			$	—			$	98,269

		Three Months Ended June 30, 2009																Nine Months Ended June 30, 2009
		Retail																Retail
		Distribution				Wholesale												Distribution				Wholesale
		Group				Distribution				Other				Total				Group				Distribution				Other				Total
Revenues		$	50,989			$	38,075			$	99			$	89,163			$	158,068			$	116,998			$	268			$	275,334
Contribution margin		$	16,597			$	15,946			$	99			$	32,642			$	51,112			$	46,795			$	268			$	98,175

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

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

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

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

		Three Months Ended June 30,								Nine Months Ended June 30,
(in thousands)		2010				2009				2010				2009
Segment contribution margin		$	32,995			$	32,642			$	98,269			$	98,175
Corporate and unallocated costs			(6,438	)			(5,925	)			(18,589	)			(17,556	)
Stock-based compensation expense			(921	)			(934	)			(2,827	)			(2,810	)
Depreciation and amortization			(9,831	)			(9,272	)			(29,613	)			(28,508	)
Impairment of goodwill			—				—				—				(107,000	)
Restructuring costs			59				40				(1,915	)			(4,251	)
Interest expense			(7,644	)			(9,722	)			(23,347	)			(32,398	)
Gain on retirement of debt			—				4,631				—				18,958
Other income (expense), net			(269	)			22				162				(604	)
Income from continuing operations before income taxes		$	7,951			$	11,482			$	22,140			$	(75,994	)

NOTE 10 – DISCONTINUED OPERATIONS

On April 16, 2010, we completed the sale of our productivity tools business for approximately $12.0 million in cash. The gain recorded on the sale was approximately $6.2 million, net of $3.0 million in taxes. Accordingly, we have separately classified the results of operations, assets and liabilities, and cash flows of the discontinued operations in the condensed consolidated financial statements for all periods presented.

Income (loss) from discontinued operations, net of income taxes, for the three and nine months ended June 30, 2010 and 2009 is summarized as follows (in thousands):

		Three months ended June 30,								Nine months ended June 30,
		2010				2009				2010				2009
Revenue from discontinued operations		$	267			$	1,762			$	6,452			$	7,810
Expenses from discontinued operations			258				1,728				4,661				5,635
Income from discontinued operations before income taxes			9				34				1,791				2,175
Income tax expense (benefit)			324				(1,316	)			2,148				(1,384	)
Income (loss) from discontinued operations, net of income taxes		$	(315	)		$	1,350			$	(357	)		$	3,559

The summarized balance sheets of discontinued operations consisted of the following (in thousands):

		June 30,				September 30,
		2010				2009
Trade accounts receivable, net of allowance for doubtful accounts		$	—			$	216
Deferred income taxes			—				3,205
Prepaid expenses and other current assets			—				42
Property and equipment, net			—				105
Intangible assets, net			—				1,547
Goodwill			—				2,264
Other assets			—				39
Assets of discontinued operations		$	—			$	7,418
Payroll related accruals		$	—			$	370
Deferred revenue			—				1,771
Accrued expenses and other current liabilities			—				137
Liabilities of discontinued operations		$	—			$	2,278

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

NOTE 11 – LITIGATION

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

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

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

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

NOTE 12 – GUARANTOR CONSOLIDATION

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

Condensed Consolidating Balance Sheet as of June 30, 2010

		Guarantor
		Principal								Non-Guarantor
(in thousands)		Operations				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS:
Current assets:
Cash and cash equivalents		$	66,211			$	7			$	2,506			$	—			$	68,724
Trade accounts receivable, net of allowance for doubtful accounts			17,730				13,403				2,918				—				34,051
Inventories			3,683				310				223				—				4,216
Deferred income taxes			2,214				1,041				—				—				3,255
Income taxes receivable			290				—				1,097				—				1,387
Prepaid expenses and other current assets			5,408				211				129				—				5,748
Total current assets			95,536				14,972				6,873				—				117,381
Property and equipment, net			5,920				60				109				—				6,089
Intangible assets, net			154,078				18,051				1,271				—				173,400
Goodwill			442,145				91,956				1,316				6,037				541,454
Investments in subsidiaries			16,769				—				—				(16,769	)			—
Intercompany receivables (payables)			(127,031	)			122,658				4,373				—				—
Deferred financing costs			7,246				—				—				—				7,246
Other assets			3,352				164				23				—				3,539
Total assets		$	598,015			$	247,861			$	13,965			$	(10,732	)		$	849,109
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	14,471			$	1,129			$	279			$	—			$	15,879
Payroll related accruals			10,982				6,130				341				—				17,453
Deferred revenue			13,091				20,095				1,015				—				34,201
Accrued expenses and other current liabilities			(1,115	)			16,357				76				—				15,318
Total current liabilities			37,429				43,711				1,711				—				82,851
Long-term debt			506,895				—				—				—				506,895
Deferred tax and other liabilities			69,775				(2,168	)			742				—				68,349
Total liabilities			614,099				41,543				2,453				—				658,095
Total stockholder’s equity (deficit)			(16,084	)			206,318				11,512				(10,732	)			191,014
Total liabilities and stockholder’s equity (deficit)		$	598,015			$	247,861			$	13,965			$	(10,732	)		$	849,109

Condensed Consolidating Balance Sheet as of September 30, 2009

		Guarantor
		Principal								Non-Guarantor
(in thousands)		Operations				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS:
Current assets:
Cash and cash equivalents		$	42,001			$	215			$	2,357			$	—			$	44,573
Trade accounts receivable, net of allowance for doubtful accounts			16,818				14,383				2,995				—				34,196
Inventories			3,576				1,185				224				—				4,985
Deferred income taxes			(137	)			1,217				—				—				1,080
Prepaid expenses and other current assets			4,886				454				142				—				5,482
Assets of discontinued operations			6				—				7,412				—				7,418
Total current assets			67,150				17,454				13,130				—				97,734
Property and equipment, net			5,337				518				113				—				5,968
Intangible assets, net			166,128				23,134				1,585				—				190,847
Goodwill			442,175				91,956				1,286				6,037				541,454
Investments in subsidiaries			16,769				—				—				(16,769	)			—
Intercompany receivables (payables)			(83,980	)			99,035				(15,055	)			—				—
Deferred financing costs			8,903				—				—				—				8,903
Other assets			3,013				181				(16	)			—				3,178
Total assets		$	625,495			$	232,278			$	1,043			$	(10,732	)		$	848,084
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	16,456			$	1,635			$	(61	)		$	—			$	18,030
Payroll related accruals			(13,178	)			29,850				745				—				17,417
Deferred revenue			7,801				19,497				893				—				28,191
Current portion of long-term debt			5,886				—				—				—				5,886
Accrued expenses and other current liabilities			16,798				1,701				1,218				—				19,717
Liabilities of discontinued operations			—				—				2,278				—				2,278
Total current liabilities			33,763				52,683				5,073				—				91,519
Long-term debt			517,009				—				—				—				517,009
Deferred tax and other liabilities			75,701				(2,723	)			48				—				73,026
Total liabilities			626,473				49,960				5,121				—				681,554
Total stockholder’s equity (deficit)			(978	)			182,318				(4,078	)			(10,732	)			166,530
Total liabilities and stockholder’s equity (deficit)		$	625,495			$	232,278			$	1,043			$	(10,732	)		$	848,084

Condensed Consolidating Statement of Operations for the Three Months Ended June 30, 2010

		Guarantor
		Principal								Non-Guarantor
(in thousands)		Operations				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Revenues:
Systems		$	17,368			$	11,874			$	777			$	—			$	30,019
Services			33,585				24,156				2,731				—				60,472
Total revenues			50,953				36,030				3,508				—				90,491
Cost of revenues:
Systems			9,186				5,626				649				—				15,461
Services			12,956				5,244				1,377				—				19,577
Total cost of revenues			22,142				10,870				2,026				—				35,038
Gross profit			28,811				25,160				1,482				—				55,453
Operating expenses:
Sales and marketing			9,091				4,914				451				—				14,456
Product development			3,776				4,351				393				—				8,520
General and administrative			6,272				356				213				—				6,841
Depreciation and amortization			7,994				1,739				98				—				9,831
Restructuring costs			(54	)			(5	)			—				—				(59	)
Total operating expenses			27,079				11,355				1,155				—				39,589
Operating income			1,732				13,805				327				—				15,864
Interest expense			(7,589	)			—				(55	)			—				(7,644	)
Other income (expense), net			(385	)			7				109				—				(269	)
Income (loss) from continuing operations before income taxes			(6,242	)			13,812				381				—				7,951
Income tax (benefit) expense			(10,675	)			14,589				(2,013	)			—				1,901
Income (loss) from continuing operations			4,433				(777	)			2,394								6,050
Income (loss) from discontinued operations, net of income taxes			290				(3	)			(602	)			—				(315	)
Gain from sale of discontinued operations, net of income taxes			(7,134	)			—				13,312				—				6,178
Net income (loss)		$	(2,411	)		$	(780	)		$	15,104			$	—			$	11,913